THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

If you are in any doubt as to any aspect of this circular or as to the action you should take, you should consult a stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your Shares in Hao Tian Resources Group Limited, you should at once hand this circular, together with the enclosed form of proxy, to the purchaser or the transferee or to the bank or stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

This circular is for information purpose only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities of the Company.

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HAO TIAN RESOURCES GROUP LIMITED 昊天能源集團有限公司

(formerly known as “Winbox International (Holdings) Limited 永保時國際（控股）有限公司”)

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 00474)

(I) MAJOR AND CONNECTED TRANSACTION; (II) RE-DESIGNATION AND RE-CLASSIFICATION OF SHARE CAPITAL, AND CREATION OF NEW CLASS OF SHARES; AND

(III) NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser to the Company

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Independent Financial Adviser to the

Independent Board Committee and the Independent Shareholders

Asia Investment Management Limited

A letter from the Board is set out on pages 10 to 66 of this circular. A letter from the Independent Board Committee is containing its advice to the Independent Shareholders in relation to the Acquisition set out on page 67 of this circular. A letter from AIML containing its advice to the Independent Board Committee and the Independent Shareholders in relation to the Acquisition, the S&P Agreement and the transactions contemplated thereunder is set out on pages 68 to 99 of this circular.

A notice convening the EGM of the Company to be held at 10:00 a.m. on 13 June 2011, at Falcon Room I, Gloucester Luk Kwok Hong Kong, 72 Gloucester Road, Wanchai, Hong Kong is set out on pages 441 to 443 of this circular. Whether or not you are able to attend the EGM, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for holding the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.

25 May 2011

		Pages
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
LETTER FROM	THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
LETTER FROM	THE INDEPENDENT BOARD COMMITTEE. . . . . . . . . . . . . . . . . .	67
LETTER FROM	THE INDEPENDENT FINANCIAL ADVISOR. . . . . . . . . . . . . . . . . .	68
APPENDIX I	– FINANCIAL INFORMATION OF THE GROUP. . . . . . . . . . . . . .	100
APPENDIX IIA	– ACCOUNTANTS’ REPORT OF
	THE VENTURE PATH GROUP. . . . . . . . . . . . . . . . . . . . . . . . . .	192
APPENDIX IIB	– ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU. . . . . .	211
APPENDIX III	– UNAUDITED PRO FORMA FINANCIAL INFORMATION OF
	THE ENLARGED GROUP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	245
APPENDIX IV	– MANAGEMENT DISCUSSION AND ANALYSIS OF
	THE TARGET GROUP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	252
APPENDIX V	– VALUATION REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	263
APPENDIX VI	– COMPETENT PERSON’S REPORT. . . . . . . . . . . . . . . . . . . . . . . .	283
APPENDIX VII	– GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	428
NOTICE OF EXTRAORDINARY GENERAL MEETING. . . . . . . . . . . . . . . . . . . . . . . .		441

– i –

DEFINITIONS

In this circular, the following expressions have the meanings set out below, unless the context requires otherwise:

“AIML” or “Independent Financial Advisor”

Asia Investment Management Limited, a licensed corporation to carry on business in type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO, which has been appointed to act as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Acquisition

“Acquisition”
the acquisition of the entire issued share capital of the Target Company by the Purchaser from the Vendor pursuant to the S&P Agreement
“associate(s)”

has the meaning ascribed to it in the Listing Rules

“Baicheng Wenzhou” means 拜城溫州礦業開發有限公司 (Baicheng Wenzhou Mining Development Co., Ltd.)**, a company established in the PRC, which is wholly-owned by West China, and which operates the Target Mine
“Baicheng Wenzhou Owners”
the persons who collectively own the entire registered capital of Baicheng Wenzhou immediately prior to the transfer of such registered capital to West China, namely, Chen Jing Lian（陳敬練）, Chen Ji Yan（陳積演）and Zhu Zhao Tan（朱招潭）
“Board”

the board of Directors

“Business Day”
a day (other than a Saturday or Sunday or public holidays or days on which a tropical cyclone warning Number 8 or above or a “black” rain warning signal is hoisted in Hong Kong at any time between 9 a.m. and 5 p.m.) on which Hong Kong clearing banks are open for the transaction of normal banking business
“BVI”

the British Virgin Islands

– 1 –

DEFINITIONS

“CB Conversion Rights” the right of Noteholder(s) (and their respective assignees or transferees) at any time on any business day before the Maturity Date, to convert the whole or part of the principal amounts of the Convertible Bond into Shares in the issued share capital of the Company
“CB Conversion Shares” Shares to be issued upon conversion of the Convertible Bond “Coal Production Permit” Coal Production Permit（煤炭生產許可證）dated 22 November 2006 (No. 206401020036) granted by the Xinjiang Coal Industry Administration Bureau in relation to, inter alia, the production capacity of the Target Mine. Such permit specifies that the Target Mine has a production capacity of 120 ktpa
“Company” or “Hao Tian” Hao Tian Resources Group Limited (formerly known as Winbox International (Holdings) Limited), a company incorporated in the Cayman Islands with limited liability, the Shares of which are listed on the Main Board of the Stock Exchange
“Competent Evaluator” a Competent Person undertaking valuations and satisfying the requirements of Rule 18.23 of the Listing Rules
“Competent Person” a person satisfying the requirements of Rules 18.21 and 18.22 of the Listing Rules
“Competent Person’s Report” the public report prepared by the Competent Person on the Target Mine in compliance with the requirements under Chapter 18 of the Listing Rules and the JORC Code
“Completion” completion of the Acquisition in accordance with the terms and conditions of the S&P Agreement

“Completion Date” the date of fulfilment of the conditions precedent or such other date as the parties may agree in writing, on which Completion shall take place in accordance with the terms of the S&P Agreement

– 2 –

DEFINITIONS

“Consideration” HK$1,550,000,000, comprising of (i) the HK$250,000,000 cash consideration; (ii) HK$725,000,000 by the issue of the Convertible Shares by the Company to the Vendor at the Issue Price; and (iii) HK$575,000,000 by the issue of the Convertible Bond by the Company to the Vendor
“connected person(s)” has the meaning ascribed thereto in the Listing Rules “Convertible Bond” the convertible bond in the principal amount of HK$575,000,000 to be issued by the Company in favour of the Vendor to satisfy part of the Consideration pursuant to the terms of the S&P Agreement with the benefit of and subject to certain convertible bond conditions
“Convertible Shares” 941,558,441 non-voting convertible shares to be issued and allotted on the CS Issue Terms and under the S&P Agreement by the Company to the Vendor as part of the Consideration
“Conversion Price” the conversion price of HK$0.77 per CB Conversion Share “CS Conversion Rights” the right of the holder(s) of the Convertible Shares (or their respective assignees or transferees) to convert any or all of the Convertible Shares held into such number of CS Conversion Shares as prescribed under the CS Issue Terms
“CS Issue” the proposed creation, issue and allotment of the Convertible Shares by the Company
“CS Conversion Shares” Shares to be issued upon conversion of the Convertible Shares “CS Issue Terms” the terms of issue of the Convertible Shares, details of which are set out in the section headed “Convertible Shares” of this circular
“Directors” the directors of the Company

– 3 –

DEFINITIONS

“EGM” an extraordinary general meeting of the Company to be convened for the Shareholders to consider and, if thought fit, to approve the Resolutions “Enlarged Group” the Group as enlarged by the Acquisition “ERM” Environmental Resources Management Shanghai Limited, an environmental consultant commissioned by the Competent Person to conduct an environmental, occupational health, safety and social compliance audit of the Target Mine and its associated facilities, the main findings of which are set out in Chapter 9 and Annexure D of the Competent Person’s Report

“Feasibility Study” a feasibility study, which is subject to relevant PRC governmental approval, completed in December 2010 in relation to the Target Mine by the Exploration Design Institute of Hami Mining Administration Bureau**, a PRC Level B qualified company certified by the provincial government, which detailed, amongst other things, the plans to increase annual production of the Target Mine to 900 kt

“Group” the Company and its subsidiaries “Hong Kong” the Hong Kong Special Administrative Region of the PRC “HK$” Hong Kong dollar(s), the lawful currency of Hong Kong “Independent Board the independent board committee of the Company formed Committee” by all the independent non-executive Directors to advise the Independent Shareholders on the terms of the Acquisition, the S&P Agreement and the transactions contemplated thereunder “Independent Shareholders” Shareholders other than Ms. Li and her associates (including TRXY and Real Power)

– 4 –

DEFINITIONS

“Indicated Resources”	has the meaning ascribed thereto under Chapter 18 of the
	Listing Rules
“Inferred Resources”	has the meaning ascribed thereto under Chapter 18 of the
	Listing Rules
“Issue Price”	HK$0.77 per Convertible Share
“JORC”	the Joint Ore Reserves Committee
“JORC Code”	the Australasian Code for Reporting of Exploration Results,
	Mineral Resources and Ore Reserves (2004 edition), as
	published by the JORC, as amended from time to time
“Last Trading Date”	28 January 2011, being the last trading day prior to the
	entering into of the S&P Agreement
“Latest Practicable Date”	20 May 2011, being the latest practicable date prior to the
	printing of this circular for ascertaining certain information
	contained herein
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange
“Maturity Date”	the maturity date of the Convertible Bond falling on the fifth
	anniversary of the issue of the Convertible Bond
“Mine No. 1”	has such meaning as ascribed thereto in the circular issued by
	the Company dated 28 December 2009
“Mining Area A”	such area in relation to the Target Mine as outlined by the
	surface co-ordinates of the Mining Licence and within such
	area from surface elevation of 2,320 m to elevation of 2,060 m
	above sea level, further details of which are set out on pages
	287 and 288 of this circular

– 5 –

DEFINITIONS

“Mining Area B” such area in relation to the Target Mine as outlined by the surface co-ordinates of the Mining Licence and within such area from elevation of 2,060 m to 1,500 m above sea level; Mining Area B includes all tonnes below the existing lower elevation limits of the current Mining Licence (i.e. 2,060 m elevation from sea level) and above 1,500 m elevation from sea level, further details of which are set out on pages 287 and 288 of this circular
“Mining Licence” Mining Licence（採礦許可證）dated 28 October 2009 (No. C6500002009101130052982) granted by 新疆維吾爾自治區國土資源廳 (Department of Land and Resources Office of Xinjiang Uygur Autonomous Region) in respect of the exclusive mining rights of the Target Mine for a period of 8 years and 1 month commencing from 28 October 2009 to 28 November 2017 (both dates inclusive). Such permit authorises the holder to produce 210,000 tonnes per annum
“Ms. Li” means Ms. Li Shao Yu（李少宇）, who, to the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, as at the Latest Practicable Date, through her controlling interests held in TRXY and Real Power held 629,759,996 Shares (representing approximately 26.12% of the issued share capital of the Company as at the Latest Practicable Date), and is a substantial shareholder and connected person of the Company
“NDRC” the National Development and Reform Commission of the PRC
“Non-compliance Issues” certain potential liabilities and non-compliance or contravention of applicable PRC laws and regulations by members of the Target Group, details of which are set out in the section “Letter from the Board – Due Diligence findings on the Target Group” in this circular
“Note Certificate(s)” the certificate(s) to be issued in respect of the Convertible Bond
“Noteholder(s)”

the holder(s) of the Convertible Bond

– 6 –

DEFINITIONS

“PRC”	the People’s Republic of China
“Probable Reserves”	has the meaning ascribed thereto under Chapter 18 of the
	Listing Rules
“Purchaser”	means Champ Universe Limited, a company incorporated in
	the BVI with limited liability, and a wholly owned subsidiary
	of the Company
“Purchaser’s Warranties”	the warranties and representations and undertaking given by
	the Purchaser under the S&P Agreement as set out in Schedule
	4 and referred in Clause 7 thereof
“Real Power”	means Real Power Holdings Limited, a company incorporated
	in the BVI, which, as at the Latest Practicable Date, held
	457,600,561 Shares (representing approximately 18.98% of the
	issued share capital of the Company as at the Latest Practicable
	Date), and is a substantial shareholder and connected person of
	the Company
“Resolutions”	means the resolutions to be put fourth to the Shareholders at
	the EGM to approve (A) the Acquisition, the S&P Agreement
	and the transactions contemplated thereunder; (B) the proposed
	re-designation and re-classification of share capital; and (C)
	the CS Issue
“S&P Agreement”	the sales and purchase agreement dated 28 January 2011
	entered into between the Company, the Purchaser and the
	Vendor in respect of the Acquisition
“Share(s)”	ordinary share(s) of HK$0.05 each in the share capital of the
	Company
“Shareholder(s)”	holder(s) of Shares

– 7 –

	DEFINITIONS
“Specific Mandate”	the specific mandate to be sought at the EGM to authorize the
	Directors to issue and allot the CS Conversion Shares and the
	CB Conversion Shares
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“substantial shareholder(s)”	has the meaning ascribed thereto under the Listing Rules
“Takeovers Code”	The Codes on Takeovers and Mergers and Share Repurchases
“Target Company” or	Venture Path Limited, a company established in the BVI with
“Venture Path”	limited liability
“Target Group”	the Target Company and all of its subsidiaries, namely, West
	China and Baicheng Wenzhou, and the Target Mine
“Target Mine”	Xinjiang Baicheng County Kueraken Mine Field No. 3 Pit
	of No. 1 Mine located at Baicheng County, Aksu Prefecture,
	Xinjiang Uygur Autonomous Region, the PRC
“Total Non-compliance	RMB8,000,000, the estimated aggregate monetary fines and
Penalty”	penalties in respect of the Non-compliance Issues currently
	identified and qualified by the Company and its advisers as at
	the Latest Practicable Date
“TRXY”	TRXY Development (HK) Ltd., a company incorporated in
	Hong Kong with limited liability, which, as at the Latest
	Practicable Date, held, directly and through its controlling
	interest in Real Power, 172,159,435 Shares (representing
	approximately 7.14% of the issued share capital of the
	Company as at the Latest Practicable Date), and is a substantial
	shareholder and connected person of the Company
“VALMIN Code”	the Code for the Technical Assessment and Valuation of
	Mineral and Petroleum Assets and Securities for Independent
	Expert Reports (2005 edition), as prepared by the VALMIN
	Committee, a joint committee of The Australasian Institute
	of Mining and Metallurgy, the Australian Institute of
	Geoscientists and the Mineral Industry Consultants
	Association, as amended from time to time

– 8 –

DEFINITIONS

“Valuation Report”	the public valuation report prepared by the Competent
	Evaluator on the Target Mine in compliance with the
	requirements of Chapter 18 of the Listing Rules and the
	VALMIN Code
“Vendor”	Tai Rong Xin Ye International Power Generation Inc.（泰融信
	業國際發電有限公司）*, a company incorporated in the BVI,
	which is wholly-owned by Ms. Li
“Vendor’s Warranties”	the warranties and representations and undertaking given by
	the Vendor under the S&P Agreement
“Venture Path Group”	the Target Company and West China
“West China”	West China Coal Mining Holdings Limited（西部煤業控股有
	限公司）, a company incorporated in Hong Kong, and a direct
	wholly-owned subsidiary of the Target Company
“%”	per cent
“km”	kilometres
“kt”	kilotonnes
“ktpa”	kilotonnes per annum
“RMB”	Renminbi yuan, the lawful currency of the PRC

Chinese names are for identification purpose only

** English names are translated for identification purpose only

– 9 –

LETTER FROM THE BOARD

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HAO TIAN RESOURCES GROUP LIMITED 昊天能源集團有限公司

(formerly known as “Winbox International (Holdings) Limited 永保時國際（控股）有限公司”)

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 00474)

Board of Directors:

Executive Directors Mr. Ma Lishan (Chairman and Chief Executive Office) Mr. Fung Ka Pun Mr. Ng Cheuk Fan, Keith Mr. Mak Yiu Tong

Non-executive Directors Ms. Fung Wing Ki, Vicky

Independent Non-executive Directors Dr. Tam Hok Lam, Tommy, J.P., Mr. Zhu Yongguang Mr. Chan William

Registered office: Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands

Principal Place of Business in Hong Kong: Unit 4803, 48/F COSCO Tower 183 Queen’s Road Central Hong Kong

Company Secretary: Mr. Fok Chi Tak

25 May 2011

To the Shareholders

Dear Sir or Madam,

(I) MAJOR AND CONNECTED TRANSACTION; (II) RE-DESIGNATION AND RE-CLASSIFICATION OF SHARE CAPITAL, AND CREATION OF NEW CLASS OF SHARES; AND

(III) NOTICE OF EXTRAORDINARY GENERAL MEETING

1. INTRODUCTION

On 30 January 2011, the Company announced that the Company, the Purchaser and the Vendor entered into the S&P Agreement dated 28 January 2011, pursuant to which the Purchaser conditionally agreed to acquire from the Vendor, and the Vendor conditionally agreed to dispose of, the entire issued share capital of the Target Company at a consideration for HK$1,550,000,000 which will be satisfied (i) as to HK$250,000,000 in cash; (ii) as to HK$725,000,000 by the issue of the Convertible Shares by the Company to the Vendor at the Issue Price; and (iii) as to HK$575,000,000 by the issue of the Convertible Bond by the Company to the Vendor.

– 10 –

LETTER FROM THE BOARD

The purpose of this circular is to:

(i) provide the Shareholders with further details of the S&P Agreement;
(ii) provide the Shareholders with further details of the Specific Mandate;
(iii) provide the Shareholders with further details of the re-designation and re-classification of share capital and the creation, allotment and issue of the Convertible Shares;
(iv) set out the recommendation of the Independent Board Committee in respect of the Acquisition, the S&P Agreement and the transactions contemplated thereunder;
(v) set out the opinion of the Independent Financial Advisor in respect of the Acquisition, the S&P Agreement and the transactions contemplated thereunder; and
(vi) give notice of the EGM to the Independent Shareholders.

2. BACKGROUND

On 28 January 2011, the Company, the Purchaser and the Vendor entered into the S&P Agreement pursuant to which the Purchaser conditionally agreed to acquire from the Vendor, and the Vendor conditionally agreed to dispose of, the entire issued share capital of the Target Company at a consideration of HK$1,550,000,000 which will be satisfied (i) as to HK$250,000,000 in cash; (ii) as to HK$725,000,000 by the issue of the Convertible Shares by the Company to the Vendor at the Issue Price; and (iii) as to HK$575,000,000 by the issue of the Convertible Bond by the Company to the Vendor.

As at the Latest Practicable Date, the Target Company is wholly-owned by the Vendor, which is in turn wholly-owned by Ms. Li. The Target Company holds the entire issued share capital of West China, which in turn holds the entire issued share capital of Baicheng Wenzhou. The Target Mine is wholly-owned and operated by Baicheng Wenzhou.

– 11 –

LETTER FROM THE BOARD

The CS Conversion Shares represent (A) approximately 39.05% of the existing issued share capital of the Company, as at the Latest Practicable Date; (B) approximately 28.08% of the issued share capital of the Company as enlarged by the allotment and issue of the CS Conversion Shares, assuming full conversion of the Convertible Shares but assuming no conversion of the Convertible Bond; and (C) approximately 22.97% of the issued share capital of the Company as enlarged by the allotment and issue of both the CS Conversion Shares and the CB Conversion Shares, assuming full conversion of the Convertible Shares, and full conversion of the Convertible Bond and the CB Conversion Shares were to be issued at the Conversion Price. Pursuant to the CS Issue Terms, the CS Conversion Rights shall not be exercised by the relevant holder(s) if, immediately following the conversion (i) the Company will be unable to meet the public float requirement under the Listing Rules; or (ii) the relevant holder(s) together with the parties acting in concert with it will hold or control such amount of the Company’s voting power at general meetings as may trigger a mandatory general offer under the Takeovers Code.

The CB Conversion Shares represent (A) approximately 30.97% of the existing issued share capital of the Company; (B) approximately 23.64% of the issued share capital of the Company as enlarged by the allotment and issue of the CB Conversion Shares, assuming full conversion of the Convertible Bond and the CB Conversion Shares were to be issued at the Conversion Price but assuming no conversion of the Convertible Shares; (C) approximately 18.21% of the issued share capital of Hao Tian as enlarged by the allotment and issue of the CB Conversion Shares and the CS Conversion Shares, assuming full conversion of the Convertible Bond and the CB Conversion Shares were to be issued at the Conversion Price, and full conversion of the Convertible Shares. Pursuant to the terms of the Convertible Bond, the CB Conversion Rights shall not be exercised by the Noteholder(s) if, immediately following the conversion (i) the Company will be unable to meet the public float requirement under the Listing Rules; or (ii) the relevant Noteholder(s) together with the parties acting in concert with it will hold or control more than 25% of the Company’s voting power at general meetings.

To facilitate the creation, allotment and issue of the Convertible Shares, the Board intends to put forward a proposal to the Shareholders to re-designate and re-classify the authorised share capital of the Company into 2,411,463,553 ordinary shares of HK$0.05 each and 941,558,441 convertible shares of HK$0.05 each. The proposed re-designation and re-classification of share capital of the Company is conditional upon the passing of an ordinary resolution by the Shareholders at the EGM. Details of the proposed re-designation and re-classification of share capital are set out in the section headed “Re-designation and Re-classification of Share Capital” in this circular.

The Acquisition is conditional on, inter alia, the proposed re-designation and re-classification of share capital and the CS Issue being approved by the Shareholders at the EGM.

– 12 –

LETTER FROM THE BOARD

3. THE S&P AGREEMENT

On 28 January 2011, the Company, the Purchaser and the Vendor entered into the S&P Agreement, a summary of the major terms of which is set out below.

Date

28 January 2011

Parties

(i) The Company;
(ii) The Purchaser (i.e. Champ Universe Limited, a wholly owned subsidiary of the Company); and
(iii) The Vendor (i.e. Tai Rong Xin Ye International Power Generation Inc., as vendor of the entire issued share capital of the Target Company).

As at the Latest Practicable Date, Ms. Li, through her controlling interests held in TRXY and Real Power, held 629,759,996 Shares (representing approximately 26.12% of the issued share capital of the Company as at the Latest Practicable Date), and is a substantial shareholder and connected person of the Company. The Vendor, being wholly-owned by, and an associate of, Ms. Li, is also a connected person of the Company under the Listing Rules.

Subject matter

Upon Completion, the Company will own the entire equity interest in Baicheng Wenzhou through the Target Company and West China, and the results of the Target Company, West China and Baicheng Wenzhou will be consolidated into the financial statements of the Group.

– 13 –

LETTER FROM THE BOARD

Immediately before Completion, the shareholding structure of the Target Group is as set out below:

==> picture [106 x 419] intentionally omitted <==

----- Start of picture text -----

Ms. Li
100%
The Vendor
100%
Target Company
100%
West China
100%
Baicheng Wenzhou
100%
Target Mine
----- End of picture text -----

– 14 –

LETTER FROM THE BOARD

Upon Completion, the shareholding structure of the Target Group is as set out below:

==> picture [106 x 419] intentionally omitted <==

----- Start of picture text -----

The Company
100%
The Purchaser
100%
Target Company
100%
West China
100%
Baicheng Wenzhou
100%
Target Mine
----- End of picture text -----

– 15 –

LETTER FROM THE BOARD

Consideration

Pursuant to the S&P Agreement, the Purchaser has conditionally agreed to acquire, and the Vendor has conditionally agreed to dispose of, the entire issued share capital of the Target Company at a consideration of HK$1,550,000,000, which will be satisfied (i) as to HK$250,000,000 in cash; (ii) as to HK$725,000,000 by the issue of the Convertible Shares by the Company to the Vendor at the Issue Price; and (iii) as to HK$575,000,000 by the issue of the Convertible Bond by the Company to the Vendor.

The Purchaser has, within three days after the signing of the S&P Agreement, paid the cash portion of HK$250,000,000 to the Vendor as deposit. The said deposit is fully refundable by the Vendor to the Purchaser within three days upon termination in the event that the Acquisition does not proceed to Completion for whatever reasons, without deducting any incidental costs of otherwise. The Company has settled the entire amount of the said deposit through its internal resources. Subject to fulfilment of the conditions precedent set forth in the paragraph headed “Conditions” below and on the Completion Date, the Purchaser shall settle the remaining Consideration by delivering to the Vendor the definitive certificate(s) for the Convertible Shares and the Note Certificate(s) for the Convertible Bond.

The Company expects the registered capital of Baicheng Wenzhou to be increased as follows: (i) the Vendor will provide a capital injection of approximately RMB30,257,000 into West China, which will in turn provide a capital injection in the same amount to Baicheng Wenzhou for the purpose of repaying outstanding shareholders’ loan owed by Baicheng Wenzhou to the Baicheng Wenzhou Owners as a condition precedent, and prior, to Completion; (ii) upon Completion, the Company intends to procure a capital injection of approximately RMB20,463,000 into Baicheng Wenzhou after Completion to be used by Baicheng Wenzhou as general working capital. The said capital injections do not constitute part of the Consideration for the Acquisition and such capital injection arrangement is not part of the S&P Agreement and no supplemental agreement will be entered into between the parties to the S&P Agreement.

In compliance with the requirements of Chapter 18 of the Listing Rules, and as part of the Company’s due diligence review, the Company has engaged BMI Appraisals Limited to prepare the Valuation Report in relation to the Target Mine, and the Competent Evaluator is Mr. C.S. Kong, a staff member of BMI Appraisals Limited. Runge Asia Limited, trading as Minarco-MineConsult, has been engaged by West China to prepare the Competent Person’s Report in relation to the Target Mine, and the Competent Person is Mr. Michael Johnson, a senior mining consultant of Runge Asia Limited, trading as Minarco-MineConsult. As confirmed by Runge Asia Limited, trading as Minarco-MineConsult, and BMI Appraisals Limited respectively, (1) the Competent Person satisfies the requirements of Rules 18.21 and

– 16 –

LETTER FROM THE BOARD

18.22 of the Listing Rules, and (2) the Competent Evaluator satisfies the requirements of Rules 18.21, 18.22 and 18.23 of the Listing Rules. To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, the Competent Evaluator and the Competent Person and their respective ultimate beneficial owners are third parties independent of the Company and its connected persons.

The Competent Person’s Report prepared by the Competent Person is set out in Appendix VI to this circular and the Valuation Report prepared by the Competent Evaluator is set out in Appendix V to this circular.

The Consideration was based on normal commercial terms and determined after arm’s length negotiations between the Vendor and the Purchaser after considering a number of factors, including but not limited to, (i) the fair market value of the Target Mine of HK$1,700,000,000 as determined by the Competent Evaluator; (ii) the quality of the Target Mine with reference to the Competent Person’s Report; and (iii) the size of the Target Mine, which, based on the Competent Person’s Report, has estimated the total coal resources of approximately 112 Mt under the recommendations of JORC, comprised of approximately 11.7 Mt and 57.6 Mt of Indicated Resources respectively from within the current Mining Licence and from below the current Mining Licence, and 42.5 Mt of Inferred Resources from below the current Mining Licence.

Conditions

Completion of the S&P Agreement is conditional on the fulfilment of the following conditions on or before 30 June 2011:

(a) completion of the acquisition by West China of the entire equity interest in Baicheng Wenzhou, whereupon West China will own the entire equity interest of Baicheng Wenzhou;
(b) the Purchaser having received a Competent Person’s Report issued from the Competent Person relating to the state and condition of the Target Mine covering such matters as may be required by the Purchaser and as required by the Listing Rules, and in form and substance acceptable to the Purchaser;
(c) the Purchaser having received a Valuation Report issued from the Competent Evaluator relating to the valuation of the Target Mine covering such matters as may be required by the Purchaser and as required by the Listing Rules, and in form and substance acceptable to the Purchaser;

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LETTER FROM THE BOARD

(d) all necessary approvals and consent from the Shareholders having been obtained in relation to the Acquisition and/or acquisition of the Target Group (including, without limitation, the passing of the Resolutions by the Shareholders in a general meeting in accordance with the relevant requirements of the Listing Rules);
(e) all requisite approvals, consent and authorisations required under all applicable laws and regulations and relevant authorities (including, without limitation, all applicable PRC and Hong Kong laws and regulations and authorities), the Stock Exchange and the Listing Rules in relation to the Acquisition, the acquisition of the Target Group and the transactions contemplated under the S&P Agreement (including, without limitation, the CS Issue) and implementation thereof and all other matters incidental thereto, having been duly obtained;
(f) the Purchaser having conducted and completed due diligence on all business, technical, legal and financial matters, and all such other matters as deemed necessary by the Purchaser in its absolute discretion, in relation to the Target Group, and the Purchaser being satisfied with the results of such due diligence in its absolute discretion;
(g) the Purchaser having received a legal opinion issued by a reputable PRC law firm in respect of the Target Group and the Target Mine, in such form and substance acceptable to the Purchaser, covering, among other things, the following (i) that the acquisition of the entire equity interest of Baicheng Wenzhou by West China from the Baicheng Wenzhou Owners, the Acquisition and/or acquisition of the Target Group complies with PRC laws and regulations; (ii) whether Baicheng Wenzhou has obtained and holds good title and ownership of the Target Mine; (iii) whether Baicheng Wenzhou has obtained all material licenses, permits, approvals and/or authorizations required for conducting its current business and (iv) such other matters as the Purchaser may require from time to time;
(h) the Purchaser having received a legal opinion issued by a reputable law firm in the BVI acceptable to the Purchaser, in such form and substance acceptable to the Purchaser covering, among other things, (i) whether Vendor is duly incorporated and existing under BVI law, has power and authority, and has taken all corporate action required, to enter into the S&P Agreement; and (ii) such other matters as the Purchaser may require from time to time;

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LETTER FROM THE BOARD

(i) the Purchaser having received a legal opinion issued by a reputable law firm in the Cayman Islands acceptable to the Purchaser, in such form and substance acceptable to the Purchaser, covering, among other things, (i) whether the Convertible Shares have been duly authorised for issue and will be validly issued, fully paid and non-assessable; and (ii) such other matters as the Purchaser may require from time to time;
(j) any and all outstanding indebtedness (including any shareholders loans) owed by each Target Group company to its shareholders, the Vendor or any third party on or before the Completion Date having been settled and discharged in full;
(k) the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the CB Conversion Shares and the CS Conversion Shares;
(l) there being no event existing or having occurred and no condition being in existence which would constitute a material breach of the Vendor’s Warranties;
(m) no relevant government, governmental, quasi-governmental, statutory or regulatory body, court or agency having granted any order or made any decision that restrict or prohibit the implementation of the transactions contemplated the S&P Agreement;
(n) the Vendor’s Warranties remaining true and not misleading in all material respects at Completion; and
(o) the Purchaser’s Warranties remaining true and not misleading in all material respects at Completion.

Neither the Vendor nor the Purchaser shall have the right to waive any of the conditions in paragraphs (a) to (e), (k) and (m) above. The Purchaser or the Company (as the case may be) may at its discretion waive any of the conditions in paragraphs (f) to (j), (l) and (n) and the Vendor may at its discretion waive the condition in paragraph (o). As of the Latest Practicable Date, the above conditions (a), (b), (c), (f), (g), (h), (j) have been completed. Conditions (l), (m), (n) and (o) are on-going conditions until Completion.

In the event of any of the above conditions not having been fulfilled (or waived) by 30 June 2011 (or such later date as the parties hereto may agree in writing), the S&P Agreement shall be terminated and no party to the S&P Agreement, save for certain obligations specified in the S&P Agreement, shall have any further liability to any other parties under or in connection with the S&P Agreement without prejudice to the rights of any such parties in respect of any antecedent breaches.

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LETTER FROM THE BOARD

Completion

Completion will take place on the second Business Day after the date on which the last of the conditions of the S&P Agreement as set out in the section headed “Conditions” of this circular is fulfilled or waived, or such other date as the parties to the S&P Agreement shall agree in writing.

4. FINANCING OF THE ACQUISITION

The Company currently has no intention to undertake any equity fund raising which will lead to a change in control of the Company (for the purposes of the Takeovers Code).

5. CONVERTIBLE SHARES

As partial settlement of the Consideration, it is proposed that the Company create a new class of non-voting convertible shares, and issue and allot the Convertible Shares to the Vendor. The proposed principal terms of the issue of the Convertible Shares are set out below:

(a)	Redemption	:	save for the right of conversion set out in paragraph (f)
			below, the Convertible Shares are not redeemable;
(b)	Transferability	:	the Convertible Shares are transferable at the option
			of the holder(s), subject to approval of the Stock
			Exchange, if required;
(c)	Voting	:	the Convertible Shares do not carry any voting right;
(d)	Dividends and	:	holder(s) of the Convertible Shares shall not be
	distributions		entitled to any dividend or other distribution whether
			in cash or otherwise;
(e)	Return on Capital	:	subject to paragraph (d) above, holder(s) of the
			Convertible Shares shall have the same rights as
			holder(s) of Shares in relation to any return of capital
			on liquidation or otherwise;
(f)	Right of Conversion	:	subject to the restrictions as set out in paragraph (g)
			below, holder(s) of the Convertible Shares is entitled
			to convert into one Share for every one Convertible
			Share;

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LETTER FROM THE BOARD

(g) Limitation on : the CS Conversion Rights shall not be exercised by conversion the relevant holder(s) if, immediately following the conversion (i) the Company will be unable to meet the public float requirement under the Listing Rules; or (ii) the relevant holder(s) together with the parties acting in concert with it will hold or control such amount of the Company’s voting power at general meetings as may trigger a mandatory general offer under the Takeovers Code; (h) Listing : no application will be made for the listing of the Convertible Shares on the Stock Exchange or any other stock exchange.

Save for the above terms, the Convertible Shares shall have attached the same rights as, and shall rank pari passu in all respects with, all other Shares. The CS Conversion Shares to be issued as a result of conversion of the Convertible Shares will rank pari passu in all respects with all other Shares in issue at the date on which such conversion rights are exercised.

The Issue Price of the Convertible Shares of HK$0.77 per Convertible Share represents the higher of:

(i) the closing price per Share as quoted on the Stock Exchange on the Last Trading Date; and
(ii) the average closing price per Share as quoted on the Stock Exchange for the last 5 trading days up to but excluding the Last Trading Date.

The Issue Price of HK$0.77 per Convertible Share was determined after arm’s length negotiations between the parties with reference to the closing price per Share as quoted on the Stock Exchange on the Last Trading Date and the average closing price per Share as quoted on the Stock Exchange for the last 5 trading days up to but excluding the Last Trading Date. Based on the above, the Directors consider the Issue Price to be fair and reasonable.

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LETTER FROM THE BOARD

Based on the issued share capital of the Company of 2,411,463,553 Shares as at the Latest Practicable Date, the CS Conversion Shares represent (A) approximately 39.05% of the existing issued share capital of the Company; (B) approximately 28.08% of the issued share capital of the Company as enlarged by the allotment and issue of the CS Conversion Shares, assuming full conversion of the Convertible Shares but assuming no conversion of the Convertible Bond; and (C) approximately 22.97% of the issued share capital of the Company as enlarged by the allotment and issue of both the CS Conversion Shares and the CB Conversion Shares, assuming full conversion of the Convertible Shares, and full conversion of the Convertible Bond and the CB Conversion Shares were to be issued at the Conversion Price. Pursuant to the CS Issue Terms, the CS Conversion Rights shall not be exercised by the relevant holder(s) if, immediately following the conversion (i) the Company will be unable to meet the public float requirement under the Listing Rules; or (ii) the relevant holder(s) together with the parties acting in concert with it will hold or control such amount of the Company’s voting power at general meetings as may trigger a mandatory general offer under the Takeovers Code. Assuming full conversion of the Convertible Shares, and full conversion of the Convertible Bond and the CB Conversion Shares were to be issued at the Conversion Price, there will be no change in control of the Company. The CS Conversion Shares will be allotted and issued pursuant to the specific mandate to be sought at the EGM and will be allotted and issued upon exercise of the CS Conversion Rights by the relevant holder(s). An application will be made to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the CS Conversion Shares and all necessary arrangements will be made to enable the CS Conversion Shares to be admitted into CCASS.

6. RE-DESIGNATION AND RE-CLASSIFICATION OF SHARE CAPITAL

To facilitate the creation, allotment and issue of the Convertible Shares, the Board intends to put forward a proposal to the Shareholders to re-designate and re-classify the authorised share capital of the Company into 2,411,463,553 ordinary shares of HK$0.05 each and 941,558,441 Convertible Shares of HK$0.05 each. The proposed re-designation and re-classification of share capital of the Company is conditional upon the passing of an ordinary resolution by the Shareholders at the EGM.

7. CONVERTIBLE BOND

To satisfy part of the Consideration, the Company will issue the Convertible Bond in the aggregate principal amount of HK$575,000,000 to the Vendor.

The following is a summary of the principal terms of the Convertible Bond:

Maturity : The date falling on the fifth anniversary of the issue of the Convertible Bond.

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LETTER FROM THE BOARD

Redemption : Unless previously cancelled, converted or redeemed, the Company shall repay such principal moneys outstanding under the Convertible Bond to the Noteholder(s) on the Maturity Date. The Convertible Bond may be redeemed by the Company at its sole option in whole or in part at any time before the Maturity Date. Interest : The outstanding principal amounts under the Convertible Bond will bear interest at 2% per annum. Status and Transferability : The Convertible Bond may be transferred or assigned in its entirety or in part at any time before the Maturity Date, subject to approval of the Stock Exchange, if required. Conversion : Upon full conversion of the Convertible Bond at the Conversion Price, an aggregate of 746,753,246 CB Conversion Shares will be issued by the Company (representing (A) approximately 30.97% of the existing issued share capital of the Company; (B) approximately 23.64% of the issued share capital of the Company as enlarged by the allotment and issue of the CB Conversion Shares, assuming full conversion of the Convertible Bond and the CB Conversion Shares were to be issued at the Conversion Price but assuming no conversion of the Convertible Shares; and (C) approximately 18.21% of the issued share capital of the Company as enlarged by the allotment and issue of the CB Conversion Shares and the CS Conversion Shares, assuming full conversion of the Convertible Bond and the CB Conversion Shares were to be issued at the Conversion Price, and full conversion of the Convertible Shares.

The Conversion Rights shall not be exercised by the Noteholder(s) if, immediately following the conversion:

(i) the Company will be unable to meet the public float requirement under the Listing Rules; or

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LETTER FROM THE BOARD

(ii) the relevant Noteholder(s) together with the parties acting in concert with it will hold or control more than 25% of the Company’s voting power at general meetings.

Conversion Price : HK$0.77 per Share.

The Conversion Price, and the number of CB Conversion Shares to be issued upon conversion, is subject to adjustment in the following events;

(i) Share consolidation or subdivision

If and whenever Shares shall be subdivided or consolidated or reclassified, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately before such alteration by the following fraction:

A

where:

A is the aggregate number of issued Shares immediately before such alteration; and
B is the aggregate number of issued Shares immediately after such alteration.

Such adjustment shall become effective on the date the alteration takes effect.

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LETTER FROM THE BOARD

(ii) Capitalisation issue of profits or reserves

If and whenever the Company shall issue any Shares credited as fully paid to the holders of the Shares by way of capitalisation of profits or reserves including Shares paid up out of distributable profits or reserves, save where Shares are issued in lieu of the whole or any part of a cash dividend, being a distribution which the holders of the Shares concerned would or could otherwise have received (a Scrip Dividend), the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately before such issue by the following fraction:

A B

where:

A is the aggregate number of issued Shares immediately before such issue; and
B is the aggregate number of issued Shares immediately after such issue.

Such adjustment shall become effective on the date of issue of such Shares or, if a date on which holders of the Shares of the Company are registered for the purpose of determining the entitlement of any issuance, grant, rights, allotment or other event ( Record Date ) is fixed therefor, the day immediately after such Record Date.

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LETTER FROM THE BOARD

(iii) Reorganization and reclassification

In the events of merger or amalgamation, or any transaction involving capital reorganization, reclassification of Shares or Share exchange pursuant to which Shares are converted into the right to receive other securities, cash or other property, the Company will at least 30 Business Days prior to effecting such transaction, execute and deliver to relevant Bondholder(s) a certificate, signed by an executive director on behalf of the Company, confirming, amongst others, that such Bondholder(s) rights will continue to be recognized and provide for relevant adjustments.

The Conversion Price of HK$0.77 per Conversion Shares represents the higher of:

(i) the closing price per Share as quoted on the Stock Exchange on the Last Trading Date; and
(ii) the average of the closing prices per Share as quoted on the Stock Exchange for the last 5 trading days up to but excluding the Last Trading Date.

The Conversion Price was determined after arm’s length negotiations between the Company and the Vendor with reference to the closing price per Share as quoted on the Stock Exchange on the Last Trading Date and the average closing price per Share as quoted on the Stock Exchange for the last 5 trading days up to but excluding the Last Trading Date.

Listing : No application will be made for the listing of the Convertible Bond on the Stock Exchange or any other stock exchange.

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LETTER FROM THE BOARD

The CB Conversion Shares will be allotted and issued pursuant to the specific mandate to be sought at the EGM and will be allotted and issued upon exercise of the CB Conversion Rights by the Noteholder(s). An application will be made to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the CB Conversion Shares and all necessary arrangements will be made enabling the CB Conversion Shares to be admitted into CCASS.

8. EFFECT ON SHAREHOLDING STRUCTURE

The following table summarizes the shareholding structure of the Company as at the date of this circular, immediately after Completion and the allotment and issue of the Convertible Shares, and immediately after Completion and assuming the full exercise of the CS Conversion Rights and the CB Conversion Rights:

Name of Shareholders Real Power TRXY The Vendor Other Shareholders Total	As at the Latest Practicable Date and before Completion No. of Shares Approximate percentage % 457,600,561 18.98 172,159,435 7.14 – 0.00 1,781,703,557 73.88 2,411,463,553 100.00	FOR ILLUSTRATIVE PURPOSE ONLY Immediately after Completion and the allotment and issue of the Convertible Shares (Notes 1 & 2) No. of Shares Approximate percentage % 457,600,561 13.65 172,159,435 5.13 941,558,441 28.08 1,781,703,557 53.14 3,353,021,994 100.00	FOR ILLUSTRATIVE PURPOSE ONLY Immediately after Completion and assuming the exercise of the CS Conversion Rights up to such limit before triggering any mandatory offer obligation on the relevant holders and their concert parties (Notes 1 & 2) No. of Shares Approximate percentage % 457,600,561 18.00 172,159,435 6.77 131,500,000 5.17 1,781,703,557 70.06 2,542,963,553 100.00	FOR ILLUSTRATIVE PURPOSE ONLY Immediately after Completion and assuming the exercise of the CB Conversion Rights up to such limit as not resulting in 25% voting rights being held or controlled by the relevant Noteholder(s) their concert parties (Notes 1, 2 & 3) No. of Shares Approximate percentage % 457,600,561 18.98 172,159,435 7.14 – 0.00 1,781,703,557 73.88 2,411,463,553 100.00	FOR ILLUSTRATIVE PURPOSE ONLY Immediately after Completion and assuming the full exercise of the CS Conversion Rights and the CB Conversion Rights (Notes 4, 5 & 6) No. of Shares Approximate percentage % 457,600,561 11.16 172,159,435 4.20 1,688,311,687 41.18 1,781,703,557 43.46 4,099,775,240 100.00	FOR ILLUSTRATIVE PURPOSE ONLY Immediately after Completion and assuming the full exercise of the CS Conversion Rights and the CB Conversion Rights (Notes 4, 5 & 6) No. of Shares Approximate percentage % 457,600,561 11.16 172,159,435 4.20 1,688,311,687 41.18 1,781,703,557 43.46 4,099,775,240 100.00
						100.00

Notes:

This column is solely for illustrative purpose. The Convertible Shares do not carry any voting rights in relation to the Company and are subject to the CS Issue Terms as set out in this circular.
Pursuant to the S&P Agreement, the Company, the Purchaser and the Vendor have agreed that the CS Conversion Rights shall not be exercised by the relevant holder(s) if, immediately following such conversion (i) the Company will be unable to meet the public float requirement under the Listing Rules; or (ii) the relevant holder of the Convertible Shares together with the parties acting in concert with it will hold or control such amount of the Company’s voting power at general meetings as may trigger a mandatory general offer under the Takeovers Code.

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LETTER FROM THE BOARD

This column is solely for illustrative purpose. The CB Conversion Rights shall not be exercised by the Noteholder(s) if, immediately following the conversion (i) the Company will be unable to meet the public float requirement under the Listing Rules; or (ii) the relevant Noteholder together with the parties acting in concert with it will hold or control more than 25% of the Company’s voting power at general meetings. As at the Latest Practicable Date, the Vendor and its concert parties (including Ms. Li, TRXY and Real Power) hold 26.12% (i.e. more than 25%) of the Company’s issued share capital. As such, as at the Latest Practicable Date, the Vendor and its concert parties (including Ms. Li, TRXY and Real Power) shall be prohibited from exercising any of the CB Conversion Rights pursuant to the Convertible Bond conditions.
This column is solely for illustrative purpose. The CB Conversion Rights are subject to limitations as set out in Note 3 above with regards to the exercise of the CB Conversion Rights by the relevant Noteholder(s) according to the Convertible Bond conditions. Moreover, the Convertible Shares are subject to limitations as set out in Note 2 above with regards to the exercise of the CS Conversion Rights by the relevant holder(s) according to the CS Issue Terms.
The number of Convertible Shares was arrived at by dividing the relevant portion of the Consideration (i.e. HK$725,000,000) by the Issue Price of HK$0.77. Subject to the limitations as set out in Note 2 above with regards to the exercise of the CS Conversion Rights, a total of 941,558,441 CS Conversion Shares will be issued to the holder(s) of the Convertible Shares upon full exercise of the CS Conversion Rights.
Subject to the limitations as set out in Note 3 above with regards to the exercise of the CB Conversion Rights, a total of 746,753,246 CB Conversion Shares will be issued to the relevant Noteholder(s) upon full exercise of the CB Conversion Rights, such number being calculated by dividing the principal amount of the Convertible Bond (i.e. HK$575,000,000) by the Conversion Price of HK$0.77.

9. INFORMATION ON THE PURCHASER

Champ Universe Limited is an investment holding company incorporated in the BVI with limited liability and a wholly owned subsidiary of the Company.

The Group is principally engaged in the mining, washing and marketing of coking coal in the PRC. The Group is also engaged in the design, manufacturing, and sales of packaging products, the major customers of which are internationally recognised branded and luxury consumer merchandise such as watches, pens, jewellery, gifts and accessories.

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LETTER FROM THE BOARD

10. INFORMATION ON THE TARGET GROUP

The Target Group is primarily engaged in exploitation of coal business, coal mining, coal sales and development of underground coking coal mine in Baicheng County, Aksu Prefecture, Xinjiang Uygur Autonomous Region, the PRC.

Each of the Target Company and West China is an investment holding company and, other than its equity interest in West China and Baicheng Wenzhou respectively, has no business and assets as at the Latest Practicable Date. Baicheng Wenzhou is a company established in the PRC which wholly owns and operates the Target Mine. As at the Latest Practicable Date, Baicheng Wenzhou is wholly owned by West China, which is in turn wholly-owned by the Target Company.

11. THE TARGET MINE

The contents of this section have been extracted from the Competent Person’s Report prepared by the Competent Person as contained in Appendix VI to this circular and must therefore be read in conjunction with and in the context of the Competent Person’s Report itself. Please refer to the Competent Person’s Report for a detailed discussion on all the technical aspects of the Target Mine. The Competent Person has confirmed that no material changes have occurred since the effective date of the Competent Person’s Report.

(a) Licences and Approvals

The total licence area of the Target Mine is 5.9178 sq km. The current licences and permits held for the Target Mine are summarized in Tables 1, 2, 3 and 4 below.

Table 1 – Mining Licence Details

Mine/Project	No. 3 Pit of No. 1 Coal Mine
Name of certificate	P.R.China Mining Licence
Certificate No.	C6500002009101130052982
Mine right holder	Baicheng Wenzhou Mining Development Co., Ltd
Location	Baicheng County, Xinjiang Autonomous Region
Name of minefield	No. 3 Pit of No. 1 Mine of
	Baicheng Wenzhou Mining Development Co., Ltd
Company category	Co., Ltd
Mine Method	Underground mining

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LETTER FROM THE BOARD

Mine/Project No. 3 Pit of No. 1 Coal Mine Production Scale 210 ktpa Minefield acreage 5.9178 sq km Excavation Elevation 2,315 – 1,800 m Validation 28th October 2009 – 28th November 2017 Issue Date 28th October 2009

Source: MMC viewed a copy of the document

Table 2 – Mining Licence Coordinates

Point		X			Y
1	4,662,359.93				27,571,802.75
2	4,663,419.91				27,571,792.75
3	4,663,429.91				27,577,282.66
4	4,662,339.93				27,577,322.66
From elevation 2,315 m to 1,800 m
Source: MMC viewed original document
Table 3 – Other related licences
			Valid Period
Licences	No.	From		To
Business	650000410003969	17th December 2004		16th	February 2041
Coal Production	206401020036	22nd December 2006		22nd December 2016
(0.12 Mtpa)
Safety Production	MK(2008)123Y1G1	2nd July	2008	2nd July 2011
(Note 1)

Note 1: As advised by the Vendor, the Vendor group is currently processing an application for renewal of the Safe Production License. As advised by the Company’s PRC legal advisers, according to applicable PRC laws and regulations, the Safety Production License of Baicheng Wenzhou may be renewed without specific approval being required to be obtained provided that certain conditions are fulfilled, including (i) compliance with applicable production safety laws and regulations (including 《煤礦企業安全生產許可證實施辦法》 (Coal Enterprise Production Safety Implementation Measures) **); (ii) strengthening the management of the day to day safety and maintain safety conditions after obtaining the Safety Production License; (iii) allow monitoring and inspection by the Safety Production License issuing authority and the coal mine safety regulatory authority; and (iv) no accidents resulting in death having occurred. As advised by the Company’s PRC legal advisers, there are no material impediments to Baicheng Wenzhou renewing its Safety Production License upon compliance with the said conditions. However, as advised by the Company’s PRC legal advisers, it is unable to ascertain with complete certainty the duration for the application process and the validity period of the new Safety Production Licence as the same is determined by the relevant PRC authority on a case by case basis in accordance with the prevailing policy and circumstances as subsisting at the time of application. As confirmed by the Company’s PRC legal advisers, the application for renewal of the relevant licences will not be affected by a change of control of the Target Mine during the application process and as advised by the Vendor group, it is currently expected that the renewed Safety Production Licence will be granted in or around May 2011 for a renewed validity period of 3 years from the date of grant.

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LETTER FROM THE BOARD

Table 4 – Coal Production Permit Details

Mine/Project

No. 3 Pit of No. 1 Coal Mine

Name of Permit Coal Production Permit Certificate No. 206401020036 Mine right holder Baicheng Wenzhou Mining Development Co., Ltd Location Baicheng County, Xinjiang Autonomous Region Name of minefield No. 3 Pit of No. 1 Mine of Baicheng Wenzhou Mining Development Co., Ltd Coal Seam levels A5, A7, A8 and A9 Mine Method Main shaft and auxiliary inclined shaft excavation Hoisting method Cage hoisting Transportation method By truck Ventilation method Sectional ventilation Mining technique Blasting technique Production Capacity 120 ktpa Proposed recovery rate of 75% (for A5 and A9 coal seam levels) and 80% mining area (for A7 and A8 coal seam levels) Validation 22 December 2006 – 22 December 2016

(b) Findings of ERM’s Environmental, Health, Safety and Social review

ERM was commissioned by the Competent Person to conduct an environmental, occupational health, safety and social compliance audit of the Target Mine and its associated facilities located in Baicheng County, Aksu Prefecture, Xinjiang Uygur Autonomous Region, the PRC.

The scope of work delivered by ERM comprises an environmental, occupational health, safety and social compliance audit of the Target Mine, including:

Project risks arising from environmental, social, and health and safety issues;
Any non-governmental organisation impact on sustainability of mineral and/or exploration projects;
Compliance with PRC laws, regulations and permits related to environmental, health and safety issues;

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LETTER FROM THE BOARD

Payments made to local PRC government authorities as follows:
to the relevant local Work Safety Bureau in the form of a safety deposit;
to the relevant PRC Land and Resources Bureau in the form of an ecological rehabilitation deposit;
Environmental liabilities of the Target Mine’s projects or properties related to temporary shut down or permanent shut down penalties and groundwater and soil contamination;
The Target Mine’s historical experience of dealing with PRC laws and practices, including management of differences between national and local practice; and
The Target Mine’s historical experience of dealing with concerns of PRC local governments and communities on the sites of its mines, exploration properties, and relevant management arrangements.

The said environmental, occupational health, safety and social compliance audit conducted by ERM relates only to above-ground installations and does not cover underground installations of the Target Mine. The Competent Person has conducted visual safety inspections as a part of site visits undertaken throughout 2010, and the review of safety features of underground installations is covered in Chapter 9 headed “Mine Safety” of the Competent Person’s Report. Moreover, due to heavy snowfall shortly before ERM’s site visit, most of the site surface was covered with snow during the site visit, and hence evidence of surface soil contamination may not have been identified by ERM during the site visit. Due to time limitations and road conditions, the areas concerning potential land subsidence could only be observed from a distance and were not accessed. The assessment of major social issues was performed mainly based on document review and description by Target Mine management.

The main findings of ERM’s environmental, occupational health, safety and social review of the Target Mine are set out as follows:

The degree of regulatory compliance of the Target Mine’s various assets is generally limited to that required to secure a PRC Production Safety Permit that enables the assets to renew operating licences and purchase explosives.

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LETTER FROM THE BOARD

ERM has identified various risks regarding environmental, occupational health and safety presently associated with the Target Mine’s assets. Most importantly, the Target Mine’s facilities do not hold all the valid environmental, health and safety approvals and permits. As such, while the likelihood of the occurrence of the following is low, the relevant authorities have the ability to halt operations until the outstanding approvals and permits are obtained, or upon repeated notification of non-compliance with these requirements could lead to request for the permanent shut down of the facilities.
The environmental mitigation measures defined in the Environmental Impact Assessment Report conducted in relation to the Target Mine and further confirmed in the related approval document were generally not implemented on the Target Mine’s site. An environmental Completion Acceptance Inspection ( CAI ) had not been conducted to confirm the compliance status with the Environmental Impact Assessment approval and other applicable requirements.
Environmental monitoring has not been completed during operation of the assets. As such it is difficult to determine whether the site’s pollutant emissions meet the applicable standards.
Although the majority of non-compliances and risks may not induce an immediate shut-down of the operation or business discontinuity, and may result in fines below the material threshold defined in the Competent Person’s Report, their accumulation may result in a cumulative impact that translates into high or even material risk to the assets.
Safety risk deposit was reported to be fully paid as per the requirement of the Baicheng County Coal Industry Management Bureau. The amount paid was considered insufficient according to the applicable national regulations.
Fire-fighting design approval or fire-fighting completion inspection approval has not been obtained from the relevant fire-fighting authority for the site.
An Occupational Disease Hazard Pre-Assessment Report and an Occupational Disease Hazard Control Effect Assessment Report have not been prepared for the site.

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LETTER FROM THE BOARD

The suitability of the safety measures implemented in the operations conducted at the site is not clearly established through regulatory compliance and a documented management system. In case of an accident, this could increase the liabilities of Baicheng Wenzhou.
Evidence of phased implementation of rehabilitation measures at the site was not observed. Field efforts to implement soil and ground water protection and rehabilitation measures established in corresponding reports were not implemented at the time of ERM’s site visit.

Please refer to Annexure D of the Competent Person’s Report for further details on the findings of ERM’s environmental, occupational health, safety and social review of the Target Mine and associated risks. To the best knowledge of the Company, the Vendor is currently in the process of addressing the said issues. However, the Company cannot ascertain with complete certainty on whether or not such issues may be resolved before Completion. The Company’s liabilities and/or contingent liabilities are set out in Annexure D to the Competent Person’s Report, a summary of which is set out below:

The issues identified by ERM are categorized as those of “material risk”, “high risk” and “medium & low risk”, which are defined as follows:
(A) issues of “material risk” are those with estimated direct cost of RMB5 million or more or that may result in immediate shutdown of facility or operation;
(B) issues of “high risk” are those that may, inter alia, affect business continuity if not addressed in the short-term;
(C) issues of “medium risk” are those that may, inter alia, result in fines but is unlikely to affect business continuity; and
(D) issues of “low risk” are those that, inter alia, in isolation do not affect business continuity in the short-term.

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LETTER FROM THE BOARD

– ERM has identified two “material risk” issues and three “high risk” issues as follows;

Material Risk

(1) Environmental Permitting

Based on Annexure D of the Competent Person’s Report, the site of the Target Mine had not engaged in the completion of the Environmental CAI. The maximum penalty for such non-compliance is the issuance of a shutdown order for the facility. However, based on Annexure D of the Competent Person’s Report, such order is generally issued only after several official notifications of non-compliance with the CAI permitting requirement.

As advised by the Company’s PRC legal advisers: (1) completion of the relevant CAI depends primarily on the construction and production circumstances of the Target Mine, and (2) there are no material legal impediments to Baicheng Wenzhou procuring such completion.

Based on Annexure D of the Competent Person’s Report, the Target Mine is currently making preparations to apply to the Xinjiang Uygur Autonomous Region Environmental Protection Bureau for the issuance of the CAI approval for the facilities.

(2) Health and Safety (Fire Fighting)

Based on Annexure D of the Competent Person’s Report, no fire-fighting design approval or fire-fighting completion inspection approval has been obtained from the applicable fire-fighting authority in relation to the above-ground facilities of the Target Mine site. The maximum applicable penalty under the PRC Fire-Fighting Law (2009) is a fine up to RMB300,000 or a shutdown order for Baicheng Wenzhou. However, based on Annexure D of the Competent Person’s Report, such order is generally issued only after several official notifications of noncompliance with the PRC Fire-Fighting Law and the PRC Regulation on Fire-fighting Supervision and Management for Construction Projects (2009).

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LETTER FROM THE BOARD

As advised by the Company’s PRC legal advisers, Baicheng Wenzhou obtaining the relevant fire-fighting design approval or firefighting completion inspection approval from the applicable fire-fighting authority depends on the construction and production circumstances of the Target Mine, and there are no material legal impediments to Baicheng Wenzhou obtaining the said approval.

Based on Annexure D of the Competent Person’s Report, the Target Mine is currently making preparations to commission the design of fire fighting installations and implement corresponding measures. The design and the installations will apply to the Public Security Bureau’s Fire Brigade in a timely manner.

High Risk

(1) Environmental (Pollutant Discharge)

Based on Annexure D of the Competent Person’s Report, while the Pollutant Discharge Registration ( PDR ) of 2007 was provided for review, PDRs from 2008 to 2010 were not provided. The Pollutant Discharge Permit issued on 29 January 2007 by the Xinjiang EPB (valid from January 2007 to December 2012) was provided for review.

Moreover, since there was no environmental monitoring report available for review, it was difficult to determine whether the Target Mine site had met its mass loading control targets. Further to a telephone interview conducted with the Baicheng Environmental Protection Bureau, the relevant official interviewed expressed concern that as an environmental CAI was not performed for the Target Mine site, pollutant generated onsite may exceed the applicable standards.

Based on Annexure D of the Competent Person’s Report, the Target Mine is currently making preparations to implement the pollutant mitigation measures described in the approved Environmental Impact Assessment report, and to commission a qualified environmental monitoring institute for regular monitoring of major pollutants.

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LETTER FROM THE BOARD

(2) Occupational Health and Safety (Occupational Health Permits)

Based on Annexure D of the Competent Person’s Report, there was no Occupational Disease Hazard Pre-Assessment report and Occupational Disease Hazard Control Effect Assessment report prepared for the Target Mine site, as required by the PRC Law of Occupational Disease Prevention and Control (2002). The maximum penalty for such non-compliance is a fine up to RMB500,000 or temporary shutdown of the Target Mine site until the reports are approved by the relevant authorities. However, it is noted that a temporary shutdown of facilities is considered to be a low probability outcome. Moreover, the management of occupational health issues at the Target Mine site appeared to be below industry standards. Potential liabilities induced by occupational diseases may be increased by the lack of regulatory compliance of the operations.

Based on Annexure D of the Competent Person’s Report, the Target Mine is currently making preparations to implement the following: (1) to commission a qualified institute to prepare Occupational Disease Hazard Control Effect Assessment report for the Target Mine site; (2) to identify the appropriate qualified medical centre to conduct occupational medical check-ups and plan for relevant personnel to undergo job-position specific examination; and (3) to maintain records of test results.

(3) Occupational Health and Safety (Safety Permitting)

Based on Annexure D of the Competent Person’s Report, while the Target Mine site has commissioned a qualified institute to prepare a Comprehensive Safety Status Assessment Report in March 2008, and obtained a Safety Production Permit in April 2008, it has yet to obtain the relevant pre-construction Safety Assessment report, Safety Assessment for Completion and its approval. While an on-site safety inspection was reported to have been conducted before the issuance of the Safety Production Permit, a record of the safety inspection was not provided for review. The suitability of the safety measures implemented in the operations conducted at the Target Mine site is not clearly established through regulatory compliance and a documented management system. In case of accident, this could increase the liabilities of Baicheng Wenzhou.

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LETTER FROM THE BOARD

Based on Annexure D of the Competent Person’s Report, Baicheng Wenzhou has stated that, since ERM’s site visit, a safety and supervision monitoring system has been established which maintain records of relevant data. However, the system and data have not been reviewed by ERM.

(c) Risk factors

Set out below are the principal risk factors which may be associated with the Target Mine and the proposed remedial actions to be undertaken upon Completion:

(i) Geological and Geotechnical issues

Complex geology and mining conditions, inclusive of vertical seams, areas of spontaneous combustion, partial to full seam extractions in proximity to adjacent seams along with the interaction of multiple mining methods inducing different stress regimes and operating within difficult strata control conditions may result in a complex mine development and scheduling process.

Upon Completion, the Group intends to assign Mr. Zhang Kesheng, a senior consultant of the Group, who has been recognized as a professor level of senior engineer by the Beijing Municipal People’s Government in the PRC, to lead a technical team to make further study of the Target Mine. Mr. Zhang Kesheng is responsible for providing consultation to the coal mining business of the Group. Mr. Zhang Kesheng graduated from the Beijing Mining Institute in 1970 and was engaged in the Beijing Mining Bureau as deputy chief engineer in 1988 and chief engineer in 1993. Mr. Zhang Kesheng is well-versed and well experienced in the coal mining and construction industry. Mr. Zhang Kesheng worked in the mine field of Beijing Mining Bureau which is one of the most geologically complicated mine fields in the PRC. It comprises gently inclined and steeply inclined shafts as well as reversed coal seams, of which two mines are made up of steeply inclined shafts only and other mines have regional steeply inclined shafts. By adopting reasonable mining procedures for managing the mining process and continually upgrading the mining methods and roadway supporting systems, its production capacity has increased substantially, and therefore, Mr. Zhang Kesheng is capable of managing complicated geological technology issues.

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LETTER FROM THE BOARD

(ii) Environmental and Safety Approvals

The Target Mine currently does not comply with all regulatory environmental, occupational health, safety and social requirements. The maximum penalty for such non compliance includes fines of up to RMB500,000 and the potential halting or suspension of operations.

Upon Completion, the Group intends to assign Mr. Zhang Kesheng to lead a technical team to undertake an environmental, occupational health, safety and social audit and rectify all non compliance issues in a timely manner. Mr. Zhang Kesheng is well-experienced in the areas of integrated environmental protection and safety control as his previous employer has strictly complied with the national laws and regulations for production and management, and its integrated measures of using rubble piles derived from mining for making bricks, re-vegetation, etc. have conformed to the environmental requirements of the municipal government. Mr. Zhang Kesheng has helped to coordinate and implement the accredited quality control system and accredited occupational health management system, and both quality and safety management have been enhanced.

(iii) Operating Profit Margins

The forecast increase in production costs (associated with the plan to increase the Target Mine’s annual coal production to 900 ktpa) will make the Target Mine more sensitive to variations in coal price.

Upon Completion, the Group intends to, re-structure the sales team in order to strengthen the sales network and establish long term coal sale contracts to minimize sensitivity of variations in the coal price.

(iv) Licensing

Baicheng Wenzhou requires a new mining licence to access resources below its current mining elevation limits and an associated licensed production increase to achieve an annual coal production of 900 ktpa.

In order to facilitate the grant of approval for the increase in the production capacity of the Target Mine by the relevant government authority, the Group has engaged qualified designers to prepare an updated preliminary design for the Target Mine in light of the proposed increase in annual production and are in the process of engaging relevant contractors for the mine construction based on the updated preliminary design.

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LETTER FROM THE BOARD

(v) Water Flooding

Flooding may occur from surrounding quaternary aquifers of the nearby river through unidentified faults and paleochannels and communication from subsidence cracks.

Upon Completion, the Group intends to assign Mr. Zhang Kesheng to lead a technical team to implement comprehensive safety inspections and equip with updated facilities to minimize the risk of flooding. Mr. Zhang Kesheng has encountered complicated hydrological problems in the past as the normal outflow rate of the base level of coal mines is 6m³/second and a maximum of 100m³/second during rainy season. Mr. Zhang Kesheng has adopted the following flood prevention and drainage measures: (i) to coordinate technicians to accurately estimate the outflow rate of wells, and the estimations have formed the correct basis for mine designs; (ii) to equip the wells with sufficient drainage facilities and equipment for securing sufficient drainage capabilities; and (iii) to control surface leakages in advance so as to prevent underground water from flowing into the wells through various channels. Therefore, during his term of employment, the relevant mines had no flooding problems by taking advantage of the integrated control measures.

(vi) Coal Seam Caving Potential

The Shortwall Top Coal Caving mining method as mentioned in the Feasibility Study require the upper levels of the coal to cave to enable recovery of the coal. If the coal caving properties are not favourable it may affect coal production rates and overall coal recovery.

Upon Completion, the Group intends to assign Mr. Zhang Kesheng to lead a technical team to have better understanding of the lithological condition of the overburden, carefully control top coal caving procedures. Mr. Zhang Kesheng has experience in working in steeply inclined shaft mines, and popular methods such as flexible shield mining, horizontal section top coal caving and single-prop intensive shield mining methods are being used. The effect of those methods relies mainly on the operation accreditations obtained during implementation. It is a general practice of the Beijing Mining Bureau to implement those methods, and the recovery and production rates are both favourable.

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LETTER FROM THE BOARD

(vii) Seam Thickness Variability

Variability in seam thickness may impact upon mining methods and therefore costs.

Upon Completion, the Group intends to assign Mr. Zhang Kesheng to lead a technical team to make further drilling and detailed mining plan. Mr. Zhang Kesheng has experience in working in unstable coal seams, and changes in coal seam thickness are a major factor for determining the mining methods, mining machinery models and production stability.

(viii) 2010 Low Production Rate

The Target Mine has recorded a production rate of 87,000 tonnes for the period from 1 January 2010 up until 30 November 2010 which is much lower than the mining licence capacity of 210 ktpa. The Target Mine’s low production rate during this period is mainly attributable to (1) certain technical construction which the Target Mine was required to implement from April to June 2010 pursuant to certain provincial PRC government initiatives on technical reform regarding mine safety; and (2) lower production rates during September to November 2010 due to operation handover phase from the Baicheng Wenzhou Owners to new ownership by West China. The Company expects the Target Mine to achieve production capacity in line with the said mining licence capacity when the Target Mine resumes normal production upon Completion.

The Target Group will carry out a detailed mining operations review to justify the low production rates and highlight potential problem areas in production.

(ix) Internal control issues

The accountant’s reports of Baicheng Wenzhou contain disclaimer opinions from the auditors which is mainly due to the inadequacy of the internal control system and defective record and documentation system adopted by the previous owners of Baicheng Wenzhou. As a result of the said internal control inadequacy and defective record and documentation system, the Company noted that (i) Baicheng Wenzhou has not documented its entity wide objective; (ii) Baicheng Wenzhou has not set up a formal risk management framework or practice, and thus there are no formal mechanisms to identify, monitor, report and follow up key risks to which it is subject; and (iii) Baicheng Wenzhou is a private company, and therefore, no internal audit department or audit committee has been formed.

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LETTER FROM THE BOARD

The Company is of the view that the risks set out above in this section headed “The Target Mine” will not affect the Company’s reasons for the Acquisition as (a) most of the identified risks are not uncommon risks in the PRC coal industry due to its specific industry nature and arose as a result of mismanagement by the previous owners of the Target Mine; (b) the Company believes that it has the necessary industry expertise to address the identified risks upon acquiring, and when it takes control of, the Target Mine; and (c) the Company plans to bring in experienced management to control the operation of the Target Mine and to implement appropriate measures to address the identified risks following the completion of the Acquisition. The Board is also of the view that such risks will not affect the operation of the Target Mine. Given that the Company plans to bring in experienced management to control the operation of the Target Mine and to implement appropriate measures to address the identified risks as stated after completion of the Acquisition, the Board is of the view that those identified risks are rectifiable after the Company has acquired, and has taken control of, the Target Mine.

In particular, the Directors note and have considered the above non-compliance issues which may lead to fines or suspension of operation as identified in the Competent Person’s Report and the Accountants’ Report and as advised by the Company’s PRC legal advisers. Based on the Board’s previous mining experience, the Board believes that the probability of the said non-compliance issues leading to suspension of operations to be rather low, and the Directors are of the view that given the estimated aggregate monetary fines and penalties arising from all non-compliance issues will not, according to the Company’s PRC legal advisors, exceed an amount of RMB8,000,000 (as set out in the section headed “Due Diligence Findings on the Target Group” below), such fines or penalties are not material in the context of the Acquisition and the operation of the Target Mine. Furthermore the Company expects revenue to be generated from the Target Mine upon completion of the Acquisition in light of increasing global demand for natural resources and increase in coal prices over the past recent years as set out in the section headed “Financial and Trading Prospects of the Group” below. Hence, the Company believes that it is in a financial position to improve the Target Group companies and to pay the applicable fines, if any, in relation to the Target Mine.

Further, in consideration of the reasons for, and benefits of, the Acquisition as set out in the section headed “Reasons for the Acquisition” below, the Board is of the view that the terms of the Acquisition are fair and reasonable and in the interest of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

(d) Overview of the Target Mine

Based on the Competent Person’s Report, the Target Mine is located at 39 km from Baicheng County and 209 km from Arkesu City in the Xinjiang Autonomous Region, China and the licenced area is 5.9178 sq km and extends approximately 5.52 km from east to west and approximately 1.06 km from north to south. The Target Mine is an underground coal mine which produced 208 kt of gas coal in 2009. The Target Mine, originally known as the No. 3 Pit of No.1 Coal Mine Baicheng Wenzhou Mining Development Co. Ltd, was constructed in 1984 and produces coal for the thermal market. The Target Mine is currently in operation and Baicheng Wenzhou is the holder of the Mining Licence. Based on the Competent Person’s Report, all of the coal from the Target Mine can be used as thermal coal or blending coking coal. A Feasibility Study, which as at the Latest Practicable Date is subject to relevant PRC governmental approval, was completed in December 2010 in relation to the Target Mine which details, amongst other things, plans to increase annual production of the Target Mine to 900 kt. Based on the Competent Person’s Report, the Feasibility Study anticipates that the expansion to full annual production of 900 kt will take approximately 1.5 years to develop. The 1.5 years stated in the Competent Person’s Report refers to the estimated time required for construction of the relevant mining infrastructure to achieve the target annual production of 900 kt, while the 6-12 months period stated in the Valuation Report refers to the estimated time required for application of the requisite mining licenses relating to achieving the target annual production of 900 kt. The 1.5 years for infrastructure construction has been taken into account by the Competent Evaluator in its valuation. Moreover, as estimated in the Feasibility Study, the total capital expenditure required for the planned increase in annual production to 900 kt, is approximately RMB296 million, the bulk of which relates to the purchase of additional mining equipment required to achieve the said production rate. The Group plans to fund such capital expenditure from internal resources and bank facilities. Based on the terms of the S&P Agreement, it was agreed between the parties thereto that the Group will bear capital expenses of up to RMB296 million in relation to procurement of facilities and constructions required for the Target Mine to achieve annual coal production of 900 kt, and in the event such capital expenses exceed RMB296 million the Vendor has undertaken to bear all further capital expenses as required for the Target Mine to achieve the said annual production of 900 kt.

A JORC Resource estimate has been completed by Minarco-Mine Consult. The Resources have been estimated and reported in two areas, namely “Mining Area A” and “Mining Area B”, further details of which are set out on pages 287 and 288 of this circular.

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LETTER FROM THE BOARD

Minarco-Mine Consult has estimated total Coal Resources of approximately 112 Mt under the recommendations of JORC, comprised of approximately 11.7 Mt and 57.6 Mt of Indicated Resources respectively from within the current Mining Licence (Mining Area A) and from below the current Mining Licence (Mining Area B), and 42.5 Mt of Inferred Resources from below the current Mining Licence (Mining Area B). Minarco-Mine Consult has also estimated Probable Reserves of approximately 38.1 Mt, comprised of approximately 5.5 Mt and 32.6 Mt of Probable Reserves respectively from within the current Mining Licence (Mining Area A) and from below the current Mining Licence (Mining Area B). The Target Mine is currently operating above its licensed coal production capacity, and may be limited to its current licensed capacity until an increased licence capacity is granted. There are seven sub-vertical dipping coal seams defined within the Mining Licence, which are considered mineable. Mining is currently underway on mining level 2,120 m and utilises an Apparent Dip Flexible Shields mining method to extract the coal. The Target Mine, from the six JORC reported seams, produces predominantly gas coal, along with 1/3 Coking Coal, 1/2 Caking Coal, and Weakly Caking Coal (Chinese Coal Classification Standard – GB 5751 – 86), all of which can be used as a thermal coal or blending coking coal.

Based on the Competent Person’s Report, Feasibility Study details, amongst other things, plans to increase annual production of the Target Mine to 900 ktpa. Furthermore, the Feasibility Study details a plan to use a modified version of the Shortwall Top Coal Caving mining method utilising drill and blasting techniques in addition to the said ADFS system. The applied mining methods, mine development, mine scheduling and safety issues are outlined in the Feasibility Study, which anticipates that the expansion to full production will take approximately 1.5 years to develop. Minarco-Mine Consult believes that there are some potential issues in the short term that could limit the ability of the Target Mine to reach the production of 900 kt per year rates outlined in the Feasibility Study (which is still subject to relevant PRC governmental approval). These issues include implementation of new mining methods (Shortwall Top Coal Caving) along with the presence of steeply dipping (near vertical) coal seams, which require a complex mine plan and schedule that involves the sequential horizontal and vertical development (mining) of multiple seams, such seams being all independently variable in thicknesses. However, after the 900 kt mine construction and ramp up phase is completed, and new mining systems and process have been established to utilise the new mining methods efficiently, and after considering that similar mining practices are used throughout China on similar deposits, the Competent Person believes that with careful management the full production capacity could be achieved.

As at the Latest Practicable Date, the Feasibility Study is subject to approval by relevant PRC government authority. In the event that the Feasibility Study is not approved by the relevant PRC governmental authority, the Company will, based on the reasons given for rejection of such study, procure modification of the relevant plan details for resubmission to the relevant authority.

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LETTER FROM THE BOARD

Based on the Competent Person’s Report, the current mining operations of the Target Mine are carried out on Level 3 (2,120 m elevation), which is divided into three mining districts. Crosscuts separate the mining districts and provide access to the coal seams. The crosscuts are spaced at 210 m, 436 m and 453 m from the shaft. Based on the Competent Person’s Report, the sulphur (St,d) content of the coal ranges between 0.09% and 1.32%, which is considered to correspond to a low to moderate sulphur rating according to China Sulphur Rating (GB/T15224.2-2004). This is particularly important as high levels of sulphur can impact on the end use of the coal and can attract price penalties. Based on the Competent Person’s Report, the coal was analysed by Xinjiang Coalfield Geological Bureau Comprehensive Testing Laboratory to determine the form of sulphur that existed in the coal seams. Sulphates and sulphides are relatively easy to remove from the coal in the washing process, while organic sulphur is difficult to remove from the coal. As a result, high levels of organic sulphur would limit the marketability and price of the coal. The analysis was based on 31 samples and showed that, despite the sulphur content ranging from 0.10% to 0.51%, sulphates (Ssd) ranged from 0.0% to 0.02%. It was also found that the level of ferric sulphides (Sp.d) ranged from 0.05% to 0.27% and the level of organic sulphur ranged from 0.07% to approximately 0.26%. These are regarded as low concentrations by Chinese standards.

Arsenic levels are important as excessive levels of arsenic would attract coal price penalties. The arsenic content (As, ad) is 3 ug/g, which is considered to be in the lowest arsenic category (first class category) according to China Arsenic Rating in Coal. Other elements such as phosphorus (Pd), chlorine (Cld) and fluorine (Fad) are considered low.

Further information in relation to the Target Mine will be provided in the Competent Persons Report as set out in Appendix VI of this circular.

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LETTER FROM THE BOARD

12. FINANCIAL INFORMATION OF THE TARGET GROUP

The original purchase cost of the Target Group by Ms. Li was RMB220 million as at 18 September 2010 and Ms. Li has agreed on 28 January 2011 to sell the Target Group to the Company at HK$1,550 million. The Company notes the Substantial Price increase in the value of the Target Mine from RMB220 million (when it was acquired by Mr. Li on 18 September 2010) to HK$1,550 million (when it was agreed to be sold by Mr. Li and the Vendor on 28 January 2011) with the four-month period, which was due to the fact that Ms. Li had managed to acquire the Target Mine at a price substantially below what it should have been. This was a result of, according to Ms. Li, her own industry background and commercial network and also her other business dealings with the previous owners of the Target Mine. On the other hand, the Consideration for the Acquisition of HK$1,550,000,000 is supported by the appraised value estimated by the Competent Evaluator (i.e. HK$1,700,000,000) whose estimation was based mainly on the amount of resources estimated by the Competent Person as stated in the Competent Person’s Report. Both the Competent Person’s Report and the Valuation Report were prepared by professional parties independent of the Company.

The Board agrees with the Valuation Report and its presumptions as the appraised value estimated by the Competent Evaluator in the Valuation Report is prepared mainly based on the amount of resources estimated by the Competent Person as stated in the Competent Person’s Report, and in view that both reports were prepared by professional parties independent of the Company. Hence, the Board agrees with the Valuation Report and its presumptions notwithstanding the substantial price increase in the value of the Target Mine during the said four-month period. Further, pursuant to discussions with the Competent Evaluator, the Board is not aware of any material factors which would cast doubt on the fairness and reasonableness of the basis for selecting the comparable companies as set out in, and used for the purpose of, the Valuation Report.

Except for investment holding, neither the Target Company nor West China has carried out any business. Based on the audited accounts for the period ended 31 December 2010, Venture Path Group recorded a net loss of approximately HK$916,000 for the period from 8 January 2010 to 31 December 2010.

Set out below is a summary of the audited results of Venture Path Group for the period from 8 January 2010 to 31 December 2010.

	As at
	31 December
	2010
	(audited)
	(HK$’000)
Total assets	60,547
Total liabilities	61,385
Net liabilities	838

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LETTER FROM THE BOARD

For the period ended 31 December 2010 (audited) (HK$’000)

Turnover	–
Net loss before and after taxation	916

Based on the audited accounts for the year ended 31 December 2008, 31 December 2009 and 31 December 2010, Baicheng Wenzhou recorded a net profit of approximately RMB2,164,000 for the year ended 31 December 2008, a net profit of approximately RMB1,535,000 for the year ended 31 December 2009 and a net loss of approximately RMB11,392,000 for the year ended 31 December 2010.

Set out below is a summary of the audited results of Baicheng Wenzhou for the year ended 31 December 2008, 31 December 2009 and 31 December 2010, respectively, prepared in accordance with Hong Kong Financial Reporting Standards.

		As at
	31 December	31 December	31 December
	2008	2009	2010
	(audited)	(audited)	(audited)
	(RMB’000)	(RMB’000)	(RMB’000)
Total assets	32,281	35,368	34,236
Total liabilities	26,331	27,883	38,143
Net assets/(liabilities)	5,950	7,485	(3,907)
		For the year ended
	31 December	31 December	31 December
	2008	2009	2010
	(audited)	(audited)	(audited)
	(RMB’000)	(RMB’000)	(RMB’000)
Turnover	23,142	30,750	16,329
Net profits/(losses) before taxation	2,619	2,838	(11,392)
Net profits/(losses) after taxation	2,164	1,535	(11,392)

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LETTER FROM THE BOARD

The decrease in revenue of Baicheng Wenzhou in 2010 as compared with 2009 is attributable to, amongst others, an extended production suspension of one month during the Chinese New Year holidays. It is noted that the one-month production suspension during the Chinese New Year holiday in 2010 is not an annual recurring event for Baicheng Wenzhou as the Company notes that the production suspension duration for Chinese New Year holidays in previous years generally lasted for approximately one week. The Company is of the view that such longer suspension period was one of the reasons for the decrease in revenue for the year ended 31 December 2010 as compared with previous years. Furthermore, the increase in revenue from 2008 to 2009 is mainly attributable to the fact that, in 2008, there were certain ongoing construction work performed and the Target Mine was in ramp up mode, whereas in 2009 the Target Mine was in full production.

The Company noted that the 2010 PRC auditor’s report of Baicheng Wenzhou were not qualified.

For the 2009 PRC auditor’s report of Baicheng Wenzhou, a qualified opinion was made on the following items:

overstatement of cost by RMB252,000 in year 2008, which in turn affected the result of 2009
corporate profits tax was underprovided by RMB100,000.

For the 2008 PRC auditor’s report of Baicheng Wenzhou, a qualified opinion was made on the following items:

overstatement of cost by RMB133,800 which in turn affected the result of 2008;
sales records are incomplete.

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LETTER FROM THE BOARD

13. FINANCIAL EFFECTS OF THE ACQUISITION OF THE ENLARGED GROUP

Upon Completion, the Company will own the entire issued share capital of Venture Path, West China and Baicheng Wenzhou, and the net assets and the results of Venture Path, West China and Baicheng Wenzhou will be consolidated into the financial statements of the Group.

(a) Overview of the business of the Group

The loss for the six-month period ended 30 September 2010 was HK$82.6 million and the profits for the six-month period ended 30 September 2009 was HK$8.7 million. Our coal mining business operation is still at the development stage and there was no revenue contribution from this business sector. The revenue from the Company’s packaging segment declined slightly period-on-period which is in line with the depressed market sentiment resulting from the financial crisis. The loss was mainly attributable to non-cash related loss during the reporting period, which was an accounting treatment from the negative effect arising from fair value adjustment in derivative component and the recognition of imputed interest expenses on the liability component of the convertible notes issued by the Company on 25 January 2010 in relation to the acquisitions announced by the Company on 7 September 2009 and 24 December 2009 respectively. The loss was also attributable to the increase of production cost of sale of plastic and paper boxes for luxury consumer goods. The Company expects the formal operations of Tianyu coal washing and Mine No. 1 to commence in June 2011 and revenue to be generated from these operations, and resulting in improvement in the Group’s cash flow position.

(b) Assets, liabilities and net assets

As at 30 September 2010, the Group had unaudited consolidated total assets of approximately HK$2,378,217,000. As shown in the section headed “Unaudited Pro Forma Financial Information on the Enlarged Group” in Appendix III to this circular, assuming that the acquisition of the entire interests of Venture Path had been completed on 30 September 2010, the pro forma total assets of the Enlarged Group would have been approximately HK$3,899,834,000, representing an increase of approximately 64.0%.

As at 30 September 2010, the Group had unaudited consolidated total liabilities of approximately HK$1,210,750,000. As shown in the section headed “Unaudited Pro Forma Financial Information on the Enlarged Group” in Appendix III to this circular, assuming that the acquisition of the entire interests of Venture Path had been completed on 30 September 2010, the pro forma total liabilities of the Enlarged Group would have been approximately HK$2,007,367,000, representing an increase of approximately 65.8%.

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LETTER FROM THE BOARD

As at 30 September 2010, the Group had unaudited consolidated net assets attributable to equity holders of the Company of approximately HK$1,167,467,000. As shown in the section headed “Unaudited Pro Forma Financial Information on the Enlarged Group” in Appendix III to this circular, assuming that the acquisition of the entire interests of Venture Path had been completed on 30 September 2010, the pro forma total net assets of the Enlarged Group attributable to equity holders of the Company would have been approximately HK$1,892,467,000, representing an increase of approximately 62.1%.

(c) Earnings

The Group recorded an audited consolidated loss of approximately HK$469,409,000 for the year ended 31 March 2010. Baicheng Wenzhou recorded an audited loss of RMB11,392,000 for the year ended 31 December 2010.

The Directors consider that it highly probable that the Target Mine would be able to generate profits for the Enlarged Group within a short period of time.

(d) Gearing positions

Assuming that the acquisition of the entire interests of Venture Path had been completed on 30 September 2010, the total liabilities and total assets of the Enlarged Group as 30 September 2010 would be approximately HK$2,007,367,000 and HK$3,899,834,000 respectively.

Based on the above pro forma financial information, and assuming that the acquisition of the entire interests of Venture Path had been completed on 30 September 2010, the pro forma gearing ratio (total liabilities-to-total assets ratio) of the Enlarged Group would be approximately 51.5%.

Shareholders should refer to Appendix III to this circular for details of the bases and assumptions adopted for the preparation of the unaudited pro forma financial information of the Enlarged Group.

(e) Fair value of the Target Group

To assess whether the mining rights acquired has impairment indication as at 30 September 2010 on a pro forma basis, the Directors have compared the assumed fair value of the mining rights stated in the unaudited pro forma financial information with the fair value stated in the Valuation Report issued by the Competent Evaluator, and concluded that there is no impairment indication as at 30 September 2010 on a pro forma basis because the fair value stated in the Valuation Report is higher than the assumed fair value as stated in the unaudited pro forma financial information.

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The reporting accountants have obtained the Valuation Report issued by the Competent Evaluator and noted that the methodology applied by the Competent Evaluator is discounted cash flow method. The reporting accountants have checked the assumed fair value of the mining rights stated in the unaudited pro forma financial information with the fair value stated in the Valuation Report issued by the Competent Evaluator and found that the amount obtained from the Valuation Report is higher than the assumed fair value stated in the unaudited pro forma financial information. On the basis that the Directors have confirmed that they have assessed the reasonableness of the assumptions on which the cash flow projection are based, the reporting accountants confirm the impairment test assessment methodology applied by the Directors is in accordance with HKAS 36 “Impairment of assets”.

14. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

The Group is in the process of completing the technical improvement of Mine No. 1 which is expected to commence trial operations in June 2011 and to commence formal operations in July 2011. The construction of Tianyu coal washing plant has completed in March 2011 and is expected to commence operations in July 2011. Revenue will be generated from these operations and thus will improve the Group’s cash flow position. Based on information released by the China Coal Resources and World Steel Association in relation to the market price of coal and the production volume of steel in the PRC, the Group anticipates that an increase in the market price of coal coupled with gradual recovery of the steel industry, the demand for domestic coking coal will pick up steadily and coking coal prices will continue to be maintained at generate profits for high level and will be expected to continue rising. The Target Mine is currently in operation and can hence contribute to the Group’s revenue upon completion of the Acquisition. Looking ahead, the Group will continue to identify potential projects for mergers and acquisition in order to provide a solid base for the consolidation of coal reserves in enhancing the long-term growth potential of the Group.

15. INFORMATION ON THE VENDOR

To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, as at the Latest Practicable Date, Ms. Li, through her controlling interests held in TRXY and Real Power holds 629,759,996 Shares (representing approximately 26.12% of the issued share capital of the Company as at the Latest Practicable Date), and is a substantial shareholder and connected person of the Company. The Vendor, being an associate of Ms. Li, is also a connected person of the Company under the Listing Rules.

The Vendor is principally engaged in investment holding.

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16. DUE DILIGENCE FINDINGS ON THE TARGET GROUP

During the course of due diligence review and investigations on the members of the Target Group conducted by the Purchaser and its advisers, the Purchaser has identified certain issues in relation to the Target Group which may be relevant to the Shareholders in considering the Acquisition. Moreover, certain Non-compliance Issues by members of the Target Group have been identified. As advised by the Company’s PRC legal advisers, and based on the Competent Person’s Report, there are, as at the Latest Practicable Date, a total of fourteen material Non-compliance Issues identified in relation to the Target Group, details of which are summarized as follows:

1. Production capacity

The Target Mine’s production in 2009 has exceeded the approved production capacity of 120 ktpa as stipulated under the Coal Production Permit. Please refer to the sub-section headed “Production capacity” below for further details.

2. Name of Baicheng Wenzhou

As advised by the Company’s PRC legal advisers, according to relevant PRC laws and regulations, as Wenzhou is an administrative division in the PRC, “Wenzhou” should not be included in the name of Baicheng Wenzhou. As advised by the PRC legal advisers, the relevant PRC authorities may request that Baicheng Wenzhou revise its registered business name.

3. Renewal of Safety Production License

As advised by the Company’s PRC legal advisers, according to relevant PRC laws and regulations, safety production licenses are required to be held by each of (1) Baicheng Wenzhou; and (2) the Target Mine.

The safety production license held by Baicheng Wenzhou was granted on 18 April 2008 and was valid up to 18 April 2011. As advised by the PRC legal advisers, based on oral communications with the Xinjiang Mine Safety Bureau（新疆煤礦安全監察局安全監察處）, the said bureau was of the view that the general practice in the Xinjiang Autonomous Region was that only enterprises with two or more land level mines are required to hold a safety production license. Hence Baicheng Wenzhou is not required to apply for renewal of its safety production license after its current license expires after 18 April 2011. Despite the

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said oral communications with the Xinjiang Mine Safety Bureau, the Company’s PRC legal advisers are of the view that Baicheng Wenzhou should renew its existing safety production license. As advised by the Company’s PRC legal advisers, the relevant penalties from nonrenewal of safety production license may include a request for suspension of production, confiscation of proceeds derived from activities during the period from expiry of license up to renewal of license and a fine in an amount ranging from RMB50,000 to RMB100,000.

As advised by the Vendor, the Vendor is currently processing an application for renewal of the Safety Production License in relation to the Target Mine. Please refer to Note 1 of Table 3 in the section headed “The Target Mine - Licences and Approvals” above for further details.

4. Updating details of Safety Production License

As advised by the Company’s PRC legal advisers, the relevant details, including enterprise nature and responsible person, of the safety production license held by Baicheng Wenzhou needs to be updated. As advised by the Company’s PRC legal advisers, the relevant penalties may include an order for renewal of safety production license and fine in an amount ranging from RMB10,000 to RMB30,000.

5. Current exploration work exceeding scope of excavation elevation level stipulated under Mining License

As advised by the Company’s PRC legal advisers, Baicheng Wenzhou has undertaken exploration activities at 1,800 m to 1,500 m, which is below the excavation elevation levels as approved in the Mining License (i.e. from 2,315 m to 1,800 m), such activities requiring an exploration permit. Baicheng Wenzhou has not applied for the said exploration permit required for such exploration activities. According to the Company’s PRC legal advisers, there are no major legal impediments to Baicheng Wenzhou obtaining the relevant exploration permit if it complies with applicable legal conditions and procedures. As advised by the Company’s PRC legal advisers, according to relevant PRC law and regulations, the said activities may lead to a request for suspension of non-compliance activities and a fine of up to RMB100,000.

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6. Transfer of Target Mine assets from Aksu Prison to Baicheng Wenzhou

As advised by the Company’s PRC legal advisers, the transfer of certain Target Mine assets, namely, certain assets and equipment relating to the operation of the east shaft（東斜井）and the middle lane shaft（中間巷井）from Aksu Prison to Baicheng Wenzhou in 2004 did not go through the open auction process and has yet to be reviewed by the Xinjiang Prison Bureau（新疆監獄局）and approved by the Xinjiang Finance Bureau（財政廳）and the Xinjiang Prison Bureau（新疆監獄局）. According to the Company’s PRC legal advisers, Baicheng Wenzhou may be requested to return the said assets or be liable for compensation in such amount not exceeding RMB3.8 million, representing the difference between (A) the original transfer price of the said assets of RMB4.47 million as stipulated in the relevant document issued by the office of the Xinjiang Uygur Autonomous Region Government dated 24 June 2004 in relation to transfer of the said assets; and (B) the actual transfer price of RMB670,000. According to the Company’s PRC legal advisers, the east shaft（東斜井） (minefield acreage of 1.747 sq km) was consolidated into the original No. 3 Pit of No. 1 Mine (minefield acreage of 4.1696 sq km) in 2009 which together constitute the current Target Mine. According to the Company’s understanding from Baicheng Wenzhou, the middle lane shaft（中間巷井）had ceased operation and production prior to the transfer of the said assets from Aksu Prison to Baicheng Wenzhou. In view of the above, the Company considers that the said assets are not material to the current operations of the Target Mine, and that any order and/or request for return of such assets will not have any material impact on the operations of Baicheng Wenzhou or the Target Mine.

7. Land use rights and unauthorized use of structures

As advised by the Company’s PRC legal advisers, there are, as at the Latest Practicable Date, eighteen structures on the Target Mine site constructed by Baicheng Wenzhou. The said structures were built at the time when the Target Mine site was owned by Aksu Prison and were constructed prior to obtaining the relevant licenses and permits. As advised by the Company’s PRC legal advisers, the relevant penalties include orders for demolition of the relevant constructions, confiscation of constructions and proceeds derived from unauthorized structures and fines in an amount of up to 10% of the relevant construction costs. According to the Company’s PRC legal advisers, given that the said structures were built in relation to the Target Mine, Baicheng Wenzhou will not be liable to the said fines but will be subject to the risk of the said structures being ordered to be demolished. The Company believes that Baicheng Wenzhou’s operations and the Target Mine’s production will not be subject to any material disruption resulting from any order for demolition of the said structures, and that such structure can be rebuilt within reasonable time and without significant costs to the Enlarged Group.

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8. Completion of Environmental Completion Acceptance Inspection

Based on Annexure D of the Competent Person’s Report, and as advised by the Company’s PRC legal advisers, the site of the Target Mine had not engaged in the completion of the environmental completion acceptance inspection. Please refer to the section headed “The Target Mine – Findings of ERM’s Environmental, Health, Safety and Social review – Material Risk – Environmental Permitting” above for further details.

9. Fire-fighting design and completion inspection approval

Based on Annexure D of the Competent Person’s Report, and as advised by the Company’s PRC legal advisers, no fire-fighting design approval or fire-fighting completion inspection approval has been obtained from the applicable fire-fighting authority in relation to the above-ground facilities of the Target Mine site. Please refer to the section headed “The Target Mine – Findings of ERM’s Environmental, Health, Safety and Social review – Material Risk – Health and Safety (Fire Fighting)” above for further details.

10. Occupational Health and Safety

Based on Annexure D of the Competent Person’s Report, and as advised by the Company’s PRC legal advisers, Baicheng Wenzhou has not prepared the relevant Occupational Disease Hazard Pre-Assessment Report and Occupational Disease Hazard Control Effect Assessment Report in relation to the Target Mine. Moreover, the relevant Occupational Disease Hazard Prevention facilities have yet to receive approval by the relevant PRC Health Administrative Department. As advised by the Company’s PRC legal advisers, the application for the said evaluation and approval depends primarily on the construction and production circumstances of the Target Mine, and there are no material legal impediments to Baicheng Wenzhou procuring the same.

11. Soil and Water Conservation Procedures

As advised by the Company’s PRC legal advisers, Baicheng Wenzhou has not implemented soil and water conservation procedures for its production and construction projects and has not received relevant completion of inspection confirmation by the relevant PRC authority before commencement of construction at the Target Mine site. As advised by the Company’s PRC legal advisers, the relevant penalties from the said noncompliance include a request for production suspension and a fine in an amount ranging from RMB50,000 to RMB500,000. As advised by the Company’s PRC legal advisers, the application for implementation of the said soil and water conservation procedures and confirmation depends primarily on the construction and production circumstances of the Target Mine, and there are no material legal impediments to Baicheng Wenzhou procuring the same.

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12. Social Insurances and Housing Fund Contributions

Baicheng Wenzhou did not make full contribution of Social Insurances and Housing Fund Contributions, the main reason for such non-compliance, according to the Company’s understanding from the Vendor, was mainly due to the high mobility of its workers. Please refer to the sub-section headed “Social Insurances and Housing Fund Contributions“ below for further details.

13. Employee Housing Provident Fund Contributions

Baicheng Wenzhou has not paid the housing provident fund for its employees. As advised by the Company’s PRC legal advisers, the relevant penalties from non-payment of housing provident fund include settlement of outstanding house provident fund payments and a fine in an amount ranging from RMB10,000 to RMB50,000.

14. Accident Insurance

Baicheng Wenzhou, as an enterprise engaged in coal mining, has not purchased any accident insurance for its workers relating to the Target Mine in accordance with the relevant PRC laws and regulations. According to the Company’s PRC legal advisers, the applicable PRC laws and regulations do not stipulate specific penalties and/or fines relating to failure to purchase workers accident insurance.

As advised by the Company’s PRC legal advisers, based on the relevant PRC laws and regulations, the estimated aggregate monetary fines and penalties in respect of the Non-compliance Issues that can be currently identified and also quantified by the Company and its advisers will not likely be more than RMB8,000,000 (the “ Total Non-compliance Penalty ”). The Directors are of the view that the estimated Total Non-compliance Penalty amount does not constitute a significant amount in relation to the Enlarged Group in view that the Enlarged Group’s total asset value as at 30 September 2010 was HK$3,899,834,000 (as set out in Appendix III to this circular), and hence the Directors do not expect the Total Non-compliance Penalty to have any significant adverse impact on the financial results of the Enlarged Group.

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In addition to the material Non-compliance Issues set out above, the key findings and issues identified during the course of the said due diligence review and investigations by the Company and its advisers and which may be relevant to the Shareholders in considering the Acquisition are set out below:

Production capacity

Based on the Competent Person’s Report, the Target Mine produced 208 kt of gas coal in 2009. As mentioned in the section headed “The Target Mine” above, the licensed production capacity of the Target Mine under the Mining Licence is 210 ktpa whereas the licensed production capacity under the Coal Production Permit is 120 ktpa. As such, the actual production capacity of the Target Mine has exceeded the approved production capacity as stipulated under the Coal Production Permit.

Baicheng Wenzhou has confirmed that it is currently in the process of renewing the Coal Production Permit to, amongst other things, increase the approved production capacity stipulated thereunder to 210 ktpa. Moreover, upon the granting of the said renewed Coal Production Permit, the Group intends to renew both the Mining Licence and the Coal Production Permit to increase the approved production capacities to satisfy applicable requirements in order to implement the planned increase of annual production of the Target Mine to 900 ktpa.

The Company’s PRC legal advisers have advised that, according to relevant PRC rules and regulations, if the actual production capacity of a coal mine exceeds the approved production capacity as stipulated under its coal production permit, the relevant coal mine may be subject to punishment. The said punishment may include suspension of production and correction of relevant activities, imposition of penalty ranging from RMB0.5 million to RMB2 million, revocation of the coal production permit, or request to local authority to implement closure of the relevant mine. The local coal industry administrative departments have discretion in imposing the said penalty.

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Expansion plan and capital commitment

As mentioned in the section headed “Background” above, a Feasibility Study, which as at the Latest Practicable Date is subject to relevant PRC governmental approval, was completed in December 2010 in relation to the Target Mine which details, amongst other things, plans to increase annual production of the Target Mine to 900 kt. Based on the Competent Person’s Report, the proposed increase in annual production is subject to, amongst other things, the application for and granting of a new mining licence to access resources below the current mining elevation limits of the Target Mine and licenses and approvals supporting a higher production capacity.

The Company’s PRC legal advisers have advised on whether there will be any legal impediments for the Target Mine to upgrade its annual production capacity to 900 kt. According to the Company’s PRC legal advisers, the rules and regulations mainly applicable to the upgrade of production capacity of coal mines are 煤礦生產能力管理辦法 (Rules on Administration of the Production Capacity of Coal Mines) and 煤礦生產能力核定標準 (Standard for Verification of the Production Capacity of Coal Mines), both of which were jointly promulgated by the NDRC, the PRC State Administration of Work Safety and the State Administration of Coal Mine Safety, and 煤礦生產能力核定的若干規定 (Relevant Provisions on Verification of the Production Capacity of Coal Mines*) which was issued by the NDRC.

According to the relevant applicable PRC rules and regulations, a coal mine shall meet several basic requirements without which the application of it for upgrading the production capacity will not be granted. Such basic requirements for the coal mine include the following: (i) possession of a valid mining permit, safety production permit, coal production permit and business license; (ii) equipment of well-found production, technology and safety management organizations and systems; (iii) employment of essential technical personnel; (iv) normal running of all production systems and safety monitoring systems; (v) compliance with the provincial coal industry policy; and (vi) maintaining of adequate mine reserves to enable the increase in production capacity. As at the Latest Practicable Date, the Company has fulfilled the requirements of (i), (iii), (v) and (vi). The Company expects the earliest feasible time to satisfy all of the above requirements to be around 4-6 months and if the Target Mine cannot meet the relevant criteria, the proposed timetable of the increase of production capacity to 900,000 tonnes will be postponed and the capital expenditure injection by the Company will be delayed. However, the Company reasonably believes that the Feasibility Study will be approved and all criteria will be met in the foreseeable future as there are currently no material issues or impediment identified proving otherwise.

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Further, a coal mine is typically required to operate for at least five years prior to receiving an increase in production capacity pursuant to a recently enacted document, namely, 關於進一步加強煤礦建設項目安全管理的通知 (the Notice for Further Strengthening the Safety Management of Coal Mine Construction Project*). Based on the Competent Person’s Report, the Feasibility Study anticipates that the expansion to full annual production of 900 kt will take approximately 1.5 years to develop (i.e. early 2013), hence, the Target Mine will be in operation for 6 years before the Target Mine can reach annual production of 900 kt and the Target Mine will have a sufficient period of length of operation to meet the requirement for increasing its production capacity. The Target Mine will also require an updated Mining Licence (permitting annual production of 900 kt).

In addition, before the government authority grants an increase in the production capacity of a coal mine, various matters need to be implemented, the majority of which are matters relevant to both technique and law and enumerated as follows:

an updated preliminary design is required to be completed by qualified designers and approved by the government authorities;
the mine construction is required to be proceeded in compliance with the approved updated preliminary design;
a final inspection and acceptance of construction shall be duly conducted following completion of the mine construction and a certificate of acceptance shall be obtained from the government authorities;
an application for renewing coal production permit shall be duly made by the coal mine after the issuance of the certificate of acceptance;
upon accepting the application of renewing coal production permit, the government authority will make a site visit to the coal mine and inspect all relevant production systems thereof;
if after the site visit the government authority confirms that all the production systems of the coal mine are in compliance with the technical standards and are adequate for the proposed upgraded production capacity, a renewed coal production permit will then be issued to the coal mine; and
other permits will be accordingly renewed.

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The Company’s PRC legal advisers advised that after complying with all the requirements and taking all the necessary steps, the Target Mine will be granted approval to increase its production capacity and there are no material legal impediments to obtaining such requisite approval. In order to facilitate the approval for the increase in the production capacity of the Target Mine by the relevant government authority, the Company has engaged qualified designers to draft up an updated preliminary design for the Target Mine in light of the proposed increase in annual production and is in the process of engaging relevant contractors for the construction of the mine based on such preliminary design. Hence, the Company is of the view that the issues of production capacity and expansion plan and capital commitment identified above will be resolved in the foreseeable future.

Environmental Impact Assessment

As advised by the Company’s PRC legal advisers to the Company, and as mentioned in the Competent Person’s Report, an environmental Completion Acceptance Inspection had not been conducted to confirm the compliance status of the Target Mine with the relevant PRC Environmental Impact Assessment approval and other applicable requirements.

As advised by the Company’s PRC legal advisers, according to applicable PRC rules and regulations, failure to procure the environmental Completion Acceptance Inspection may result in the relevant environmental protection administrative authority ordering the suspension of production or use of the relevant facilities, and levy fines and penalties of up to RMB100,000. The Company would conduct an environmental impact assessment upon completion of the Acquisition after taking control of the Target Mine.

Disclaimer opinion in the Accountant Report of the Target Group

The accountant’s reports of Baicheng Wenzhou contain disclaimer opinions from the auditors because of, among others, the incomplete records maintained by Baicheng Wenzhou at the time when it was under the control of the previous owners. Please refer to the section headed “Disclaimer Opinion in the Accountants’ Report of the Target Group” below for further details.

The Company is now wrapping up the final stages of its due diligence work as the Company is basically satisfied with the due diligence work done so far in that material issues have already been identified and disclosed in the Competent Person’s Report and this circular.

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Social Insurances and Housing Fund Contributions

Baicheng Wenzhou did not make full contribution of Social Insurances and Housing Fund Contributions, the main reason for such non-compliance is according to the Company’s understanding from the Vendor, mainly due to the high mobility of its workers. The discrepancy between actual social insurance contributions and the relevant national regulatory requirement is a common phenomenon in the PRC coal mining industry. Further, according to the Company’s understanding from the Vendor, most of the resigned workers of Baicheng Wenzhou have probably migrated to places outside Baicheng. Furthermore, Baicheng Wenzhou has not experienced any material claims from employees who had resigned. As at the Latest Practicable Date, as disclosed in Note 24 to the Accountants’ Report of Baicheng Wenzhou, no order or notification has been received from the Baicheng Social Insurance Management Bureau, and hence, no penalty has been incurred as at the Latest Practicable Date. Further, Baicheng Wenzhou has received a notification from the Baicheng Social Insurance Management Bureau in which the Baicheng Social Insurance Management Bureau confirmed that it will not require Baicheng Wenzhou to pay the outstanding Social Insurances and Housing Fund Contributions, and hence, as advised by the Company’s PRC legal advisers, the possibility of the Company being required to pay for the outstanding contribution is low.

To address potential losses and liabilities in relation to the Target Group (including losses and liabilities resulting from the Non-compliance Issues by members of the Target Group), the Vendor is subject to general indemnification provisions pursuant to which it is required to indemnify the Purchaser against, inter alia, all losses and liabilities suffered by the Purchaser resulting from any breach of the Vendor’s Warranties. The Vendor’s Warranties have been structured to cover various matters relating to the Target Group including, amongst others, legal compliance, financial matters, ownership and condition of assets, properties and litigation and disputes, and in particular provide that, (i) each Target Group company has obtained all licenses, permits and approvals required for the carrying out of the business as conducted on the date of the S&P Agreement; and (ii) each Target Group company is conducted, and has conducted at all times, its business in accordance with applicable laws and regulations. As such, the Purchaser is entitled to take appropriate legal actions, and make appropriate claims, at any time after Completion against the Vendor for any losses and liabilities if and to the extent they are suffered by the Group as a result of any breach of the Vendor’s Warranties, whether identified or unidentified as at the Latest Practicable Date, pursuant to the said indemnification provisions under the S&P Agreement.

In view of the above indemnification arrangements being in place, the Directors do not expect the Enlarged Group’s financial results to be subject to any material adverse impact from such potential losses and liabilities of the Target Group. On the above basis, and in view of the reasons for and benefits of the Acquisition as set out in the section headed “Reasons for the Acquisition”, the Directors consider the Acquisition to be fair and reasonable and in the interest of the Company and the Shareholders as a whole.

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17. DISCLAIMER OPINION IN THE ACCOUNTANTS’ REPORT OF THE TARGET GROUP

The accountants’ reports of the Target Group are set out in Appendix IIB to this circular which contain disclaimer opinions. The Directors have been given to understand that the auditors have issued a disclaimer opinion in the Accountants Report as a result of, amongst other things, the Target Group’s failure to maintain proper and complete books and records for the relevant accounting period. Due to such qualifications, Shareholders are reminded to exercise caution when making reference to the financial results of the Target Group disclosed in this circular. The Board believes that Baicheng Wenzhou’s failure to provide sufficient evidence is mainly due to the inadequacy of the internal control system and the defective record and documentation system adopted by the previous owners of Baicheng Wenzhou. In this connection, the Board plans to implement the following improvements to the internal control system on accounting and auditing and financial management of the Target Group in order to enhance the overall management standard:

(a) Sales and accounts receivable

set authorization procedures and transaction limits for sales transactions particularly for cash sales
record sales to goods dispatch note in sequential order
authorize and document all void or missing good dispatch notes
prepare sales register on regular and timely basis to ensure all sales are recorded
seek customer’s acknowledgement for the receipt of goods

(b) Inventories

perform inventory counting exercise regularly to ensure the quantities and conditions of inventories are properly recorded
quantify the error at each inventory counting date and consider whether it is significant and requires adjustment
record deliveries to goods received note in sequential order
prepare purchase orders in sequential order in order to ensure all purchases are recorded

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In light of the above measures to avoid any future mismanagement, the Directors are of the view that the assets, liabilities and future results of the Target Group can be fairly recorded and consolidated in the future results of the Group given that audited completion accounts of the Target Group would be compiled by the auditors at Completion and such set of figures would be adopted as the opening balance in the preparation of the consolidated accounts of the Enlarged Group. Further, in the opinion of the Directors, as the principal assets acquired by the Group is Baicheng Wenzhou’s mining rights in indicated resources and reserves of, the Target Mine, the Acquisition is therefore accounted for as acquisition of assets, and therefore, the fact that the auditors have issued a disclaimer opinion in the Accountants Report due to the mismanagement of the previous owners of the Target Mine will not affect the Board’s recommendation in relation to the Acquisition. Hence, the Directors consider the terms of the Acquisition to be fair and reasonable and in the interest of the Company and the Shareholders as a whole. Save as disclosed in this circular, the Board is not, as at the Latest Practicable Date, aware of any other material problems or issues in relation to Baicheng Wenzhou resulting in its said failure to provide sufficient audit evidence to the auditors.

18. REASONS FOR THE ACQUISITION

The Group is principally engaged in the mining, washing and marketing of coking coal in the PRC. The Group is also engaged in the design, manufacturing and sales of packaging products.

As mentioned in the annual report of the Company for the year ended 31 March 2010, the Company has just commenced its coal mining business operation. Upon Completion, the Target Company will become wholly-owned by the Company and the Company considers the Acquisition to be an opportunity for the Company to further develop its coal mining business operation and to provide a solid base for the consolidation of coal reserves in enhancing the long-term growth potential of the Group.

The Directors, including the independent non-executive Directors, consider that the terms of the Acquisition (including the Consideration and the payment methods thereof) are fair and reasonable and on normal commercial terms and in the interest of the Company and the Shareholders as a whole.

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19. SPECIFIC MANDATE

The Directors consider it is reasonable and would be in the interests of the Company and the Shareholders as a whole to put forward a resolution to the EGM to approve the grant of the Specific Mandate to allot and issue the CS Conversion Shares and the CB Conversion Shares. Such Specific Mandate is proposed to be granted to the Directors by the Shareholders to issue not more than 1,688,311,687 new Shares, representing (i) approximately 70.00% of the existing issued share capital of the Company as at the Latest Practicable Date; (ii) approximately 41.18% of the issued share capital of the Company on an enlarged basis immediately after Completion and assuming the full exercise of the CS Conversion Rights and the CB Conversion Rights. An application will be made by the Company to the Stock Exchange for the listing of, and permission to deal in, the CS Conversion Shares and the CB Conversion Shares.

20. CONNECTED RELATIONSHIP

Ms. Li, through her controlling interests held in TRXY and Real Power holds 629,759,996 Shares (representing approximately 26.12% of the issued share capital of the Company as at the Latest Practicable Date), and is a substantial shareholder and connected person of the Company.

21. LISTING RULES IMPLICATIONS

As one of the applicable percentage ratios (as defined under the Listing Rules) for the Acquisition exceeds 25% but is less than 100%, the Acquisition constitutes both a major and non-exempted connected transaction for the Company under Chapter 14 and Chapter 14A of the Listing Rules. As such, the Acquisition is subject to the reporting, announcement and Independent Shareholders’ approval requirements under the Listing Rules.

To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, neither the Vendor nor any of its associates (other than Ms. Li, TRXY and Real Power) holds any Shares as at the Latest Practicable Date. As Ms. Li and her associates (including TRXY and Real Power have a material interest in the Acquisition and the S&P Agreement, Ms. Li and her associates (including TRXY and Real Power) will abstain from voting at the EGM in relation to the resolutions approving the Acquisition and the S&P Agreement.

As at the Latest Practicable Date. Mr. Ma Lishan holds 25% interest in, and is a director of, Real Power, which, together with Ms. Li and TRXY, are associates of the Vendor. As such, Mr. Ma has a material interest in the Acquisition and the S & P Agreement and Mr. Ma Lishan has abstained from voting on the board meeting approving the Acquisition and the S & P Agreement.

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22. EGM

The EGM will be held at 10:00 a.m. on 13 June 2011, at Falcon Room I, Gloucester Luk Kwok Hong Kong, 72 Gloucester Road, Wanchai, Hong Kong to consider and if thought fit, approve among other matters, the S&P Agreement and the Specific Mandate.

A notice convening the EGM is set out on pages 441 to 443 of this circular. Whether or not you are able to attend the EGM, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for holding such meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the meeting should you so wish.

The Independent Board Committee comprising the independent non-executive Directors has been established to advise the Independent Shareholders in respect of the S&P Agreement. AIML has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on the Acquisition.

Save and except for Ms. Li and her associates (including TRXY and Real Power), none of the Shareholders is required to abstain from voting on the Resolutions at the EGM.

The votes at the EGM shall be taken by poll.

23. RECOMMENDATION

The Independent Board Committee, having taken into account the advice of the Independent Financial Advisor, considers that (i) the terms of the S&P Agreement are on normal commercial terms and are fair and reasonable; and (ii) the entering into the S&P Agreement is in the interests of the Company and Shareholders as a whole. Accordingly, the Board, including the Independent Board Committee, recommends the Independent Shareholders to vote in favour of the resolution concerning the S&P Agreement to be proposed at the EGM.

The Directors consider that the grant of the Specific Mandate is fair and reasonable and in the interests of the Company and its Shareholders as a whole, and therefore recommend the Shareholders to vote in favour of the relevant ordinary and special resolutions to be proposed at the EGM to approve the grant of the Specific Mandate.

– 65 –

LETTER FROM THE BOARD

24. ADDITIONAL MATTERS

Your attention is drawn to the letters from the Independent Board Committee and the Independent Financial Advisor which are respectively set out on page 67 and pages 68 to 99 of this circular, and the additional information set out in Appendix I, II, III, IV, V, VI and VII to this circular.

By Order of the Board Hao Tian Resources Group Limited Fok Chi Tak Company Secretary

– 66 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [43 x 55] intentionally omitted <==

HAO TIAN RESOURCES GROUP LIMITED 昊天能源集團有限公司

(formerly known as “Winbox International (Holdings) Limited 永保時國際（控股）有限公司”) (Incorporated in the Cayman Islands with limited liability)

(Stock code: 00474)

MAJOR AND CONNECTED TRANSACTION AND

RE-DESIGNATION AND RE-CLASSIFICATION OF SHARE CAPITAL

25 May 2011

To the Independent Shareholders

Dear Sir or Madam,

We refer to the circular dated 25 May 2011 issued by the Company of which this letter forms part of (the “ Circular ”). Capitalised terms used in this letter shall have the same meaning as those defined in the Circular unless otherwise specified.

The Independent Board Committee has been formed to advise the Independent Shareholders in respect of the terms of the Acquisition and the S&P Agreement, details of which are set out in the letter from the Board contained in the Circular. AIML had been appointed to advise us in respect of the Acquisition and the S&P Agreement and its letter of advice is set out on pages 68 to 99 of the Circular.

The Independent Board Committee, having taken into account the factors and reasons considered by AIML as the Independent Financial Adviser regarding the Acquisition and the S&P Agreement, considers that (i) the terms of the Acquisition and the S&P Agreement are on normal commercial terms and are fair and reasonable; and (ii) the entering into of the S&P Agreement is in the interests of the Company and the Shareholders as a whole. On this basis, we recommend the Independent Shareholders to vote in favour of the ordinary resolution in respect of the Acquisition and the S&P Agreement to be proposed at the EGM.

Yours faithfully, for an on behalf of the Independent Board Committee Dr. Tam Hok Lam, Tommy, J.P.

Mr. Zhu Yongguang Mr. Chan William

Independent non-executive Directors

– 67 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

The following is the full text of the letter of advice to the Independent Board Committee and the Independent Shareholders from AIML which has been prepared for the purpose of inclusion in this circular.

Asia Investment Management Limited

Room 1203, 12th Floor, Tower 2

Lippo Centre, Admiralty, Hong Kong

25 May 2011

To the Independent Board Committee and

the Independent Shareholders of

Hao Tian Resources Group Limited

Dear Sirs,

MAJOR AND CONNECTED TRANSACTION

INTRODUCTION

We refer to our engagement as the independent financial adviser to the independent board committee (the “Independent Board Committee”) and the independent shareholders (the “Independent Shareholders”) of Hao Tian Resources Group Limited (the “Company”) in relation to the proposed acquisition (the “Acquisition”) of the entire issued share capital of Venture Path Limited (the “Target Company”) contemplated under the conditional sale and purchase agreement dated 28 January 2011 (the “S&P Agreement”), details of which are contained in an announcement of the Company dated 30 January 2011 (the “Announcement”) and in the letter from the board (the “Letter from the Board”), as set out on pages 10 to 66 of the circular of the Company dated 25 May 2011 (the “Circular”) to the shareholders of the Company (the “Shareholders”) of which this letter forms part. Asia Investment Management Limited has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders as to whether or not the terms of the Acquisition are fair and reasonable so far as the Independent Shareholders are concerned. Capitalised terms used in this letter have the same meanings as defined in the Circular unless the content otherwise requires.

– 68 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

On 28 January 2011, the Company, the Purchaser and the Vendor entered into the S&P Agreement pursuant to which the Purchaser conditionally agreed to acquire from the Vendor, and the Vendor conditionally agreed to sell, the entire issued share capital of the Target Company for the Consideration of HK$1,550 million which will be satisfied as to (i) HK$250 million in cash; (ii) HK$725 million by the issue of the Convertible Shares by the Company to the Vendor at HK$0.77 per Convertible Share; and (iii) HK$575 million by the issue of the Convertible Bond by the Company to the Vendor.

As one of the relevant percentage ratios under Chapter 14 of the Listing Rules for the Acquisition exceeds 25% but is less than 100%, the Acquisition constitutes a major transaction of the Company under Chapter 14 of the Listing Rules. As at the Latest Practicable Date, Ms. Li, through her controlling interests held in TRXY and Real Power, held 629,759,996 Shares (representing approximately 26.12% of the issued share capital of the Company), and was a substantial Shareholder and a connected person of the Company; the Vendor, being wholly-owned by, and an associate of, Ms. Li, was also a connected person of the Company under the Listing Rules. Accordingly, the Acquisition also constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules. The Acquisition is subject to the reporting, announcement, and independent shareholders’ approval requirements in accordance with the requirements of the Listing Rules. As stated in the Letter from the Board, Ms. Li and her associates are required to abstain from voting on the Resolutions at the EGM.

An Independent Board Committee, comprising Dr. TAM Hok Lam, Tommy, Mr. ZHU Yongguang and Mr. CHAN William, being the independent non-executive Directors, has been formed to advise the Independent Shareholders in relation to the Acquisition.

BASIS OF OUR OPINION

In formulating our opinion and recommendations, we have reviewed, inter alia, the Announcement, the S&P Agreement, the Valuation Report and the Competent Person’s Report as respectively contained in Appendix V and Appendix VI to the Circular. We have also reviewed certain information and facts provided by the management of the Company relating to the operations, financial condition and prospects of the Group. We have reviewed the opinion and estimation in relation to the Target Mine provided by the Competent Person and the Competent Evaluator, including reviewing the terms of engagement (having particular regard to the scope of work, whether the scope of work is appropriate to the opinion required to be given and any limitations on the scope of work which might adversely impact on the degree of assurance given by the Competent Person’s Report and the Valuation Report, opinion or statement). Based on the foregoing, we consider that we have taken all the reasonable steps, which are applicable to the Acquisition, as referred to and required under Rule 13.80(2)(b) of the Listing Rules (including its annexed notes) in forming our opinion. We have also (i) considered such other information, analyses and market data as we deemed relevant; and (ii) conducted discussions with the management of the Company regarding the terms of the S&P Agreement, the businesses and the future outlook of the Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

All Directors collectively and individually accept full responsibility for the purpose of giving information with regard to the Company in the Circular and , having made all reasonable enquiries, confirm that to the best of their knowledge and belief, the information contained in the Circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matter not contained in the Circular, the omission of which would make any statement herein or in the Circular misleading. We consider that we have been provided with, and we have reviewed, all currently available information and documents which are available under present circumstances to enable us to reach an informed view regarding the terms of, and reasons for, the Acquisition and to justify reliance on the accuracy of the information contained in the Circular so as to provide a reasonable basis of our opinion. We have no reason to suspect that any material information has been withheld by the Directors or the management of the Company, or is misleading, untrue or inaccurate. We have not, however, for the purpose of this exercise, conducted any independent detailed investigation, site-visit or audit into the businesses or affairs or future prospects of the Group. Our opinion is necessarily based on financial, economic, market and other conditions in effect, and the information made available to us, at the date of the Circular and we will not be held accountable for the completion or non-completion of the Acquisition and the outcome and consequences (if any) of the completion of the Acquisition, if at all.

This letter is issued for the information for the Independent Board Committee and the Independent Shareholders solely in connection with their consideration of the Acquisition, and, except for its inclusion in the Circular, is not to be quoted or referred to, in whole or in part, nor shall this letter be used for any other purposes, without our prior written consent.

PRINCIPAL FACTORS CONSIDERED

In arriving at our opinion in respect of the terms of the S&P Agreement, we have considered the following principal factors and reasons:

1. The background to the Acquisition

The Group has been engaged in the design, manufacturing and sales of packaging products. On 7 September 2009, the Company (formerly known as Winbox International (Holdings) Limited) announced details of its proposed acquisition of various interests in coal mines situated in Wuhai City, Inner Mongolia Autonomous Region of the PRC. Such acquisitions were completed on 25 January 2010. Since then, the Group has been principally engaged in the mining, washing and marketing of coking coal in the PRC.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

With a view to further developing its coal mining business operation and providing a solid base for the consolidation of coal reserves in enhancing long-term growth potential, the Group proposed to acquire the Target Group. As advised by the Company, the Target Group has undergone a reorganisation. The Target Company is wholly-owned by the Vendor, which is in turn wholly-owned by Ms. Li. The Target Company holds the entire issued share capital of West China while the Target Mine is wholly-owned and operated by Baicheng Wenzhou. West China has entered into a sale and purchase agreement in relation to its acquisition of the entire equity interest of Baicheng Wenzhou, and the equity transfer relating to the said acquisition was completed on 17 February 2011.

2. Information on the Group

The principal businesses of the Group are (i) the mining, washing and marketing of coking coal in the PRC; and (ii) the design, manufacturing and sales of packaging products. Businesses of the Group are also discussed in the Letter from the Board on pages 10 to 66 of the Circular in which this letter forms part. Shareholders are recommended to read the rest of the Circular in conjunction with this letter.

Financial year ended 31 March 2010

For the year ended 31 March 2010, the Group recorded revenue of approximately HK$97.0 million, representing a year-on-year decrease of approximately 41.7%. Such decrease was mainly owing to the impact of the macroeconomic environment; both the European and American customers had remained conservative in confirming the packaging box orders. The Group completed the acquisitions of the two coal mines on 25 January 2010. As those two coal mines were under technical improvement and construction respectively, the coal mining segment did not provide significant contribution to the results of the Group for the year. Most of the revenues during the year were generated from the Group’s packaging box businesses. Loss attributable to the shareholders of the Company for the financial year ended 31 March 2010 was approximately HK$469.4 million, equivalent to approximately 19.5 times of the loss attributable to the shareholders of the Company of approximately HK$22.9 million as recorded for the year ended 31 March 2009. Such significant loss was mainly due to (i) negative effect arising from fair value adjustment in embedded derivatives of convertible notes (approximately HK$31.0 million) and recognition of imputed interest expense on the liability component of the convertible notes (approximately HK$6.8 million) issued by the Company on 25 January 2010; and (ii) one-off impairment loss on goodwill arising from the acquisitions and the France operation (approximately HK$421.7 million). Excluding the said non-operating and non-cashflow expenses, the adjusted loss for the year will then be approximately HK$9.9 million. Other main reasons for the incurred loss include (i) the substantial drop in turnover; (ii) the increase in cost of sales incurred for the relocation of manufacturing plant from Shenzhen to Dongguang, the PRC; and (iii) the higher direct labour costs.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

As at 31 March 2010, the audited consolidated net assets attributable to equity holders and the total liabilities of the Group amounted to approximately HK$1,098.3 million and approximately HK$1,403.9 million, respectively.

For the six months ended 30 September 2010

As the Group’s coal mining business operation was still at the development stage during the period, there was no revenue contribution made from the coal mining segment. For the six months ended 30 September 2010, the Group recorded unaudited revenue (packaging segment) of approximately HK$51.2 million, representing a year-on-year decrease of approximately 4.0% from approximately HK$53.4 million as recorded in the corresponding period of 2009. The unaudited loss attributable to the equity holders of the Company for the six months ended 30 September 2010 was approximately HK$82.6 million, as opposed to the unaudited profit attributable to equity holders of the Company of approximately HK$8.7 million as recorded in the corresponding period of 2009. Such loss was mainly attributable to (i) non-cash related loss during the period, which was a result of the accounting treatment from the negative effect arising from fair value adjustment in the derivative component and the recognition of imputed interest expenses on the liability component of the convertible notes issued by the Company on 25 January 2010 for the acquisitions; and (ii) the increase of production cost of sale of plastic and paper boxes for luxury consumer goods.

As at 30 September 2010, the unaudited consolidated net assets attributable to equity holders of the Company and the total liabilities of the Group amounted to approximately HK$1,167.5 million and approximately HK$1,210.8 million, respectively.

We have discussed with the management of the Company and were given to understand that one of the coal mines and a coal washing plant in Inner Mongolia shall commence operations in May 2011 and April 2011, respectively.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

It is mentioned in the 2010/11 interim report of the Company that the Group would adopt a proactive strategy to develop its core business. By leveraging on the central government’s national policy in developing western China and Xinjiang and taking advantage of its efficient networking channels, the Group will actively participate in the development and acquisition of coal resources. Meanwhile, the Group is poised to increase the volume of coal resources by proactively participating in the mergers and consolidations of coal resources in places where the Group’s mines are located.

3. Information on the Target Group and the Target Mine

As stated in the Letter from the Board, the Target Group is primarily engaged in exploitation of coal business, coal mining, coal sales and development of underground coking coal mine in Baicheng County, Aksu Prefecture, Xinjiang Uygur Autonomous Region, the PRC.

As mentioned in the Letter from the Board, the Target Company is wholly-owned by the Vendor, which is in turn wholly-owned by Ms. Li. The Target Company holds the entire issued share capital of West China. The Target Mine is wholly-owned and operated by Baicheng Wenzhou. Each of the Target Company and West China is an investment holding company. Other than its equity interests in West China and Baicheng Wenzhou by West China, the Target Company currently has no other business and assets.

The Target Group has undergone a reorganization. Previously, Baicheng Wenzhou was wholly-owned by the Baicheng Wenzhou Owners, who were third parties independent of the Company and its connected persons. On 18 September 2010, West China and the Baicheng Wenzhou Owners entered into a sale and purchase agreement pursuant to which the Baicheng Wenzhou Owners agreed to transfer the entire equity interest in Baicheng Wenzhou to West China with a consideration of approximately RMB220 million. Completion of the said transfer took place on 17 February 2011. Currently, the Target Company, through West China, holds the entire equity interest in Baicheng Wenzhou and the Target Mine.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

According to the Competent Person’s Report, the Target Mine is located 39 km from Baicheng County and 209 km from Arkesu city in the Xinjiang Autonomous Region, China. The licence area is 5.9178 sq km and extends approximately 5.52 km from east to west and approximately 1.06 km from north to south. The Mine is an underground coal mine located 39 km from Baicheng County, which produced approximately 260,000 tonnes of gas coal in 2009. The Target Mine, originally known as the No. 3 Pit of No.1 Coal Mine Baicheng Wenzhou Mining Development Co. Ltd, was constructed in 1984 and produces coal for the thermal market. The Target Mine has recently completed a Feasibility Study, which details a planned increase in production to 900,000 tonnes per annum. From the 6 JORC reported seams, the Target mine produces predominantly gas coal, along with 1/2 Caking Coal, 1/3 Coking Coal, and weakly caking coal (Chinese coal classification standard – GB 5751 – 86), all of which can be used as a thermal coal or blending coking coal. The Target Mine is currently in operation and Beicheng Wenzhou is the holder of the Mining Operation Permit. According to the Competent Person’s Report set out in Appendix VI to the Circular, coal resources for the Target Mine estimated by Minarco-MineConsult in accordance with the recommendations of the JORC Code are approximately 112 million tonnes, which consist of nil tonne measured, 69 million tones indicated and 43 million tonnes inferred. Coal reserves of the Target Mine are estimated to be 38 million tonnes, which consist of nil tonne proven and 38 million tonnes probable. Shareholders are recommended to read the full text of the Competent Person’s Report as set out in Appendix VI to the Circular. We understand from the Competent Person that they have carried out the estimation in compliance with all the requirements contained in Chapter 18 of the Listing Rules as well as certain related industry rules and standards such as the JORC standard. During the course of our discussions with the Competent Person, we have not identified any major factors which would lead us to cast doubt on the fairness and reasonableness of the methodology, principal bases and assumptions used in arriving at the estimation.

– 74 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

Set out below is a summary of the audited financial information of Baicheng County Wenzhou Mining Development Co., Ltd. (the major operating subsidiary of the Target Group for the three years ended 31 December 2010 as extracted from the accountants’ report as set out in Appendix IIB to the Circular:

		As at
	31 December	31 December	31 December
	2008	2009	2010
	(audited)	(audited)	(audited)
	(RMB’000)	(RMB’000)	(RMB’000)
Total assets	32,281	35,617	36,565
Total liabilities	26,331	27,883	38,143
Net assets/(liabilities)	5,950	7,734	(1,578)
		For the year ended
	31 December	31 December	31 December
	2008	2009	2010
	(audited)	(audited)	(audited)
	(RMB’000)	(RMB’000)	(RMB’000)
Turnover	23,142	30,750	16,329
Net profits/(losses)
before taxation	2,619	3,087	(9,312)
Net profits/(losses) after taxation	2,164	1,784	(9,312)

We noted from the accountants’ report of Baicheng Wenzhou that the reporting accountants have issued a disclaimer opinion as they were unable to obtain sufficient appropriate audit evidence to provide a basis for their opinion due to the evidence available to them are limited as follows:

(1) Baicheng Wenzhou recorded revenue of RMB23,142,000, RMB30,750,000 and RMB16,329,000 respectively (the "Transactions") for the relevant periods. The reporting accountants were unable to obtain sufficient information and explanations to determine the substance of the Transactions. In the absence of sufficient information and explanations to determine the substance of the Transactions, the reporting accountants have been unable to satisfy themselves as to whether the Transactions are fairly stated in the financial information for the relevant periods and, accordingly, whether the related trade receivables are fairly stated as at 31 December 2008, 2009 and 2010. Any adjustments found to be necessary to the amounts of revenue and trade receivables would affect the net assets (liabilities) of Baicheng Wenzhou as at 31 December 2008, 2009 and 2010 and the profit (loss) for the relevant periods;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

(2) Baicheng Wenzhou failed to maintain proper books and records to record the movement of its inventories. There were no other satisfactory audit procedures that the reporting accountants could adopt to confirm that the cost of sales for the relevant periods and the inventories balances were properly recorded. Any adjustment found to be necessary to costs of sales and inventories would have a consequential effect on the net assets (liabilities) of Baicheng Wenzhou as at 31 December 2008, 2009 and 2010 and the profit (loss) for the relevant periods; and
(3) Income tax expenses amounting to RMB455,000, RMB1,303,000 and nil have been recorded in the financial information for each of the years ended 31 December 2008, 2009 and 2010, respectively. Due to the limitations as mentioned in (1) and (2) above, the reporting accountants were unable to determine whether the income tax expense was fairly stated in the financial information for the relevant periods and, accordingly, whether the tax liabilities of RMB455,000, RMB1,139,000 and RMB1,139,000 were fairly stated as at 31 December 2008, 2009 and 2010.

The reporting accountants also stated in the report that because of the significance of the possible effects of the matters described in the above paragraphs, they do not express an opinion on the financial information as to whether it gives a true and fair view of the state of affairs of Baicheng Wenzhou as at 31 December 2008, 2009 and 2010 and of its results and cash flows for the relevant periods.

We have enquired with the management of the Company as to the issues of failure of the Target Group to maintain proper and complete books and records for the relevant accounting period. In order to rectifying the said issue, they propose to implement appropriate internal control systems and to improve the overall management standards in the following areas:

(a) Sales and accounts receivable

set authorization procedures and transaction limits for sales transactions particularly for cash sales;
record sales to goods dispatch note in sequential order;
authorize and document all void or missing good dispatch notes;
prepare sales register on a regular and timely basis to enqure that all sales are recorded; and
seek customers’ acknowledgement for the receipt of goods.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

(b) Inventories

perform inventory counting exercise regularly to ensure that the quantities and conditions of inventories are properly recorded;
quantity the error at each inventory counting date and consider whether it is significant to requires adjustment;
record deliveries to goods received note in sequential order; and
prepare purchase order in sequential order so as to ensure that all purchases are recorded.

In addition, the Company contemplates to appoint more experienced and professional staff to the management of the Target Group upon Completion.

In light of the above measures to avoid any future mismanagement, the Directors are of the view that the assets, liabilities and future results of the Target Group can be fairly recorded and consolidated in the future results of the Group given that audited completion accounts of the Target Group would be compiled by the auditors at Completion and such set of figures would be adopted as the opening balance in the preparation of the consolidated accounts of the Enlarged Group. Further, in the opinion of the Directors, as the principal asset acquired by the Group is Baicheng Wenzhou’s mining rights and indicated resources, the Acquisition is therefore accounted for as acquisition of assets, and therefore, the fact that the auditors have issued a disclaimer opinion in the accountants’ report due to the mismanagement of the previous owners of the Target Mine will not affect its recommendation in relation to the Acquisition. Hence, the Directors consider the terms of the Acquisition to be fair and reasonable and in the interest of the Company and the Shareholders as a whole.

Despite the aforementioned disclaimer opinion of the reporting accountants, we concur with the Directors’ view that the terms of the Acquisition are fair and reasonable and the assets, liabilities and future results of the Target Group can be fairly recorded and consolidated in the future results of the Enlarged Group given that the facts that (i) the intended implementation of appropriate internal control systems and the improvement of the overall management standards as proposed by the management of the Company as highlighted above; (ii) the principal assets acquired by the Group under the Acquisition is the mining right held by Baicheng Wenzhou and the Acquisition is therefore accounted for as acquisition of assets. As such, in determining the Consideration, the Directors based mainly on the appraised value estimated by the Competent Evaluator whose estimation was based mainly on the amount of resources estimated by the Competent Person; (iii) at the date of the completion of the Acquisition of the Target Group, all the identifiable assets and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

liabilities of the Target Group would be adjusted to their respective fair values in accordance with Hong Kong Financial Reporting Standard 3 “Business combination”, and the Company will appoint independent professional valuer to carry out valuation on the fair value of the identifiable assets and liabilities acquired. In addition, the consolidation of the Target Group will be effective since the date of the completion of the Acquisition. Therefore, the historical results of the Target Group would not be adopted as the opening balance in the preparation of the consolidated accounts of the Enlarged Group; and (iv) a set of audited completion accounts of the Target Group would be compiled by the auditors at Completion and such set of figures would be adopted as the opening balance in the preparation of the consolidated accounts of the Enlarged Group.

4. The reasons for, and the benefits of, the Acquisition

The Company is an investment holding company and its subsidiaries are engaged in (i) the mining, washing and marketing of coking coal in the PRC; and (ii) the design, manufacturing and sales of packaging products. In view of the shrinking revenue from the Group’s packaging segment as a result of increasing labour and material costs, the Directors consider that acquisitions would allow the Group to diversify its sources of income and business risks by investing in the coal exploitation business. In view of the increasing global demand for natural resources and the increase in the prices of coal over the past years, the Directors are optimistic about the future prospects and demand for coal. With the strong and sustainable growth momentum of the PRC economy and the continuous development of the cities, infrastructure and real estate sectors as well as accelerated industrialization and urbanization in the PRC, the Directors expect that the demand for coal would continue to grow. We understand from the management of the Company that one of the coal mines and a coal washing plant in Inner Mongolia shall commence operations in May 2011 and April 2011.

According to the BP Statistical Review of World Energy June 2010 (www.bp.com), the PRC, being the world’s largest coal producer, recorded higher total coal production than total coal consumption in 2009 and had a total coal production of approximately 3,050.0 million tonnes in 2009, which accounts for approximately 43.9% of the global coal production of approximately 6,940.6 million tonnes. The total coal production of the PRC has been growing from approximately 1,992.3 million tonnes in 2004, representing a compound annual growth rate (“CAGR”) of approximately 8.9%. The global coal reserves were approximately 826,001 million tonnes at the end of 2009 whereas coal reserves in the PRC were approximately 114,500 million at the end of 2009, representing approximately 13.9% of the total global reserves.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

Coal is one of the most abundant fossil fuels worldwide with various uses, including but not limited to, electricity generation, steel making, and industrial uses such as cement manufacturing. Gas coal is a type of bituminous coal and bears the characteristics of both thermal coal and coking coal. It is widely used for power generation and coke making because of its high caking index and high volatility characteristics. It is generally accepted that gas coal can be classified as either thermal coal or blending coking coal. The trend of historical price, supply, demand, import and export of gas coal will generally follow that of thermal coal and coking coal. As the market information of gas coal is not publicly available, in view of their similar use to thermal coal and coking coal respectively, it is considered to be justifiable to use the market information of thermal coal and coking coal.

The price of thermal coal is primarily determined by its energy content and affected by its level of sulphur content and volatile matter while the price of coking coal is dependent on coking characteristics including ash, sulphur, volatile matter contents and coke strength. According to China Coal Resource (“CCR”, http://en.sxcoal.com) , the global price of thermal coal in December 2010 was approximately RMB910.0 per tonne, increased by approximately 10.6% from approximately RMB823.0 per tonne in December 2009. The price of thermal coal in the PRC in December 2010 was approximately RMB627.0 per tonne, increased by approximately 13.8% from approximately RMB551.0 per tonne in December 2009. The global price of coking coal in December 2010 was approximately RMB1,688.0 per tonne, increased by approximately 31.9% from approximately RMB1,280 per tonne in December 2009. The price of coking coal in the PRC in December 2010 was approximately RMB1,393.0 per tonne, increased by approximately 22.9% from approximately RMB1,133 per tonne in December 2009.

According to the National Bureau of Statistics of China, coal consumption of the PRC has been growing from approximately 1,870.0 million tonnes in 2004 to approximately 3,020.0 million tonnes in 2009, representing a CAGR of approximately 10.1%. Thermal coal demand in the PRC is largely driven by electricity from coal fired power plants. According to information released by the U.S. Energy Information Administration, the total electricity net generation of the PRC in 2009 was approximately 3,446.0 billion kilowatthours, increased from approximately 2,103.3 billion kilowatthours in 2004, representing a CAGR of approximately 10.4%. Conventional thermal electricity, which is generated by an electric power plant using coal, petroleum or gas as its source of energy, accounted for over 80% of the total electricity net generation of the PRC during these years. The steel industry will continue to be the main driver for coking coal consumption. According to the information released by World Steel Association, the production of steel in the PRC increased from approximately 283 million metric tonnes in 2004 to approximately 548 million metric tonnes in 2009, representing a CAGR of approximately 15.0%. This has supported a significant growth in the consumption of coking coal in the PRC which increased from approximately 291.0 million tonnes to approximately 455.0 million tonnes in 2009, with a CAGR of approximately 9.4%.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

Taking into account the overall favourable outlook of the coal industry as mentioned above, we concur with the Directors’ view that the entering into of the S&P Agreement is in line with the Group’s business strategy; and we are of the view that the implementation of the Acquisition is in the interest of the Company and the Shareholders as a whole.

5. Principal terms of the S&P Agreement

Assets being acquired

The respective entire issued share capital of the Target Company, West China and Baicheng Wenzhou, which principal underlying asset is the Target Mine.

Consideration

The Consideration payable by the Purchaser of HK$1,550 million will be satisfied:–

(1) as to HK$250 million in cash payable to the Vendor as refundable deposit within 3 days after the signing of the S&P Agreement;
(2) as to HK$725 million by the issue of the Convertible Shares by the Company to the Vendor at the Issue Price of HK$0.77 per Convertible Share; and
(3) as to HK$575 million by the issue of the Convertible Bond from the Company to the Vendor.

Valuation of the Target Group and the Target Mine

As discussed in the Letter from the Board, the Consideration was based on normal commercial terms and determined after arms’ length negotiations between the Vendor and the Purchaser after considering a number of factors, inter alia, the fair market value of the entire equity interest in the Target Mine of HK$1,700 million as estimated by the Competent Evaluator. The Consideration represents a discount of approximately 8.9% of the valuation of the Target Mine as at 31 December 2010. As such, the Company consider that the terms of the Acquisition (including the Consideration) are fair and reasonable and on normal commercial terms and in the interest of the Company and the Shareholders as a whole. Shareholders are suggested to review the full text of the valuation report which is set out in Appendix V to the Circular.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

In order to assess the fairness and reasonableness of the methodology used in arriving at the said valuation, we have reviewed the valuation report and have discussed with the Competent Evaluator regarding the basis of choosing the methodology adopted for the valuation. We were given to understand that the Target Mine was valued by the Competent Evaluator by way of income approach, which provides an indication of value based on the principle that an informed buyer would pay no more than the present value of anticipated future economic benefits generated by the subject asset. The income approach was considered to be the most appropriate valuation approach in the valuation of the Target Mine as it takes the future growth potential and asset-specific issues of the Target Mine into consideration. Under the income approach, the discount cash flow (“DCF”) method was adopted. In applying the DCF method, the free cash flows for each year in the future were determined. The results were then discounted using a discount rate to determine the present value of the free cash flows. The weighted-average cost of capital comprises two components: the cost of equity and the cost of debt. It is calculated by multiplying the cost of each source of capital by its proportional weight. We have been advised that the cost of equity was developed through the application of the Capital Asset Pricing Model (“CAPM”), which indicates the relationship between risk and expected return that investors require additional return to compensate for the additional risk assumed. In calculating the cost of equity, the Competent Evaluator has adopted the risk free rate of return of 3.29% (which is the yield of the 10-year United States Treasury Bonds), the market risk premium of 6.13% (being the market risk premium of the United States and the country risk premium of the PRC), and the beta of 1.124. In determining the beta coefficient, the unlevered beta was calculated by removing the effects of the use of leverage on the capital structure of the 7 selected comparable companies (the “Comparable Companies”). The average of the unlevered betas of the Comparable Companies of 1.076 was then being relevered based on the specific corporate tax rate and the weight of debt applied in the valuation. After adjusting the relative inflation in both United States and the PRC, the cost of equity in local currency was calculated as 11.99%. In relation to the said data, we have checked supporting documents provided by the Competent Evaluator and its calculations. The cost of debt of 6.4% was determined by the expected lending rate of the Target Mine. Given the interest paid on debts are tax-deductible, the cost of obtaining debt funds is less than the required rate of return of the suppliers of the debt capital. The after-tax cost of debt of 4.8% was calculated by multiplying one minus the corporate tax rate of the PRC of 25% by the cost of debt. The weight of debt of 5.67% was determined by the average of the weights of debt of the Comparable Companies, and the weight of equity of 94.33% was calculated as one minus the weight of debt. As a result, the WACC was calculated as 11.58%. In performing the valuation, we also noted from the valuation report that a further 15% discount rate has been adopted for risk of lack of marketability.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

As noted from the valuation report, we understand the Competent Evaluator performed its valuation based on the Feasibility Study and the Competent Person’s Report prepared by the Competent Person. In performing the valuation, the Competent Evaluator has made reference to various information from a feasibility study prepared by 新疆哈密礦務局勘察設計院 in December 2010 and the Competent Person’s Report prepared by the Competent Person including, among others, (i) the coal price of RMB420 per tonne for fine coal and the coal price of RMB600 per tonne for lump coal (estimated to be around 30% of the total productions); (ii) an initial annual production capacity of 298,000 tonnes as stated in the Competent Person’s Report in 2011 and 2012 and the proposed annual production capacity of 900,000 tonnes from 2013 onward; (iii) the estimated capital expenditure of the Target Mine of RMB296 million in relation to achieving the proposed production capacity; and (iv) the estimated operating costs of approximately RMB134.25 per tonne. We also understand from the Competent Evaluator that they have carried out the valuation in compliance with all the requirements contained in Chapter 18 of the Listing Rules as well as certain related industry rules and standards such as the VALMIN Code. During the course of our discussions with the Competent Evaluator, we have not identified any major factors which would lead us to cast doubt on the fairness and reasonableness of the methodology, principal bases and assumptions used in arriving at the valuation. We wish to point out that our work performed in relation to the valuation bases, assumptions and methodologies basically comprises reviewing the data provided by the Competent Evaluator (which are mainly public information) and its calculations and procedures used. Based on our review of the valuation report and discussion with the Competent Evaluator regarding, among others, (i) the scope of work and assumptions of the valuation; (ii) the valuation bases, including the net cash flow, the applied methodology, in particular the discount rate adopted under the DCF model; and (iii) the due diligence works performed by the Competent Evaluator in preparing the valuation report, we consider that the assumptions, bases and method adopted by the Competent Evaluator are in line with the market practice of valuing tangible mining assets and are hence reasonable. We, however, express no opinion on the actual results of the net cash flow.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

We noted that there is a considerable premium when comparing the Consideration of HK$1,550 million with the original cost paid by the Vendor of RMB220 million. As stated in the Letter from the Board, the Vendor had managed to acquire the Target Mine at a price substantially below what it should have been. According to the Vendor, this was the result of her personal background, commercial network and previous personally dealings with the original owners of the Target Mine. On the other hand, the determination of the Consideration of HK$1,550 million is supported by the appraised value of HK$1,700 million estimated by the Competent Evaluator whose estimation was based mainly on the estimated amount of resources estimated by the Competent Person as stated in the Competent Person’s Report. After taking into account the facts that (i) the valuation of 100% interest in the Target Mine as at 31 December 2010 of HK$1,700 million; and (ii) the reasons for, and benefits of, the Acquisition as discussed above, we concur with the Directors that the Consideration is fair and reasonable.

Convertible Shares

As stated in the Letter from the Board, it is proposed that the Company will create a new class of non-voting convertible shares, and issue and allot the Convertible Shares to the Vendor as partial settlement of the Consideration. The proposed principal terms of the issue of the Convertible Shares are set out below:

(a) Redemption : save for the right of conversion set out in item (f) below, the Convertible Shares are not redeemable;
(b) Transferability : the Convertible Shares are transferable at the option of the holder(s), subject to approval of the Stock Exchange, if required;
(c) Voting : the Convertible Shares do not carry any voting right;
(d) Dividends and : holder(s) of the Convertible Shares shall distributions not be entitled to any dividend or other distribution whether in cash or otherwise;
(e) Return on capital : subject to item (d) above, holder(s) of the Convertible Shares shall have the same rights as holder(s) of Shares in relation to any return of capital on liquidation or otherwise;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

(f) Right of conversion : subject to the restrictions as set out in item (g) below, holder(s) of the Convertible Shares is entitled to convert into one Share for every one Convertible Shares;

(g) Limitation on : the CS Conversion Rights shall not be conversion exercised by the relevant holder(s) if, immediately following the conversion (i) the Company will be unable to meet the public float requirement under the Listing Rules; or (ii) the relevant holder(s) together with the parties acting in concert with it will hold or control such amount of the Company’s voting power at general meetings as may trigger a mandatory general offer under the Takeovers Code; (h) Listing : no application will be made for the listing of the Convertible Shares on the Stock Exchange or any other stock exchanges.

Save for the terms listed above, the Convertible Shares shall have attached the same rights as, and shall rank pari passu in all respects with all other Shares. The CS Conversion Shares to be issued as a result of conversion of the Convertible Shares will rank pari passu in all respects with all other Shares in issue at the date on which such conversion rights are exercised.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

We noted from the Letter from the Board that the Issue Price of HK$0.77 per Convertible Share was determined after arms’ length negotiations between the parties with reference to the closing price per Share as quoted on the Stock Exchange on the Last Trading Date and the average closing price per Share as quoted on the Stock Exchange for the last 5 trading days up to but excluding the Last Trading Date. Save for the features of the Convertible Shares that they do not have any voting power and that they are not entitled to any dividend distribution (either in cash or otherwise), they shall have attached the same rights as, and shall rank pari passu in all respects with, all other Shares. On the basis that the Issue Price was determined based on the prevailing market price as at the date of the Agreement, we consider the Issue Price to be fair and reasonable to the Company and the Shareholders as a whole.

Convertible Bond

The Company will issue the Convertible Bond in the aggregate principal amount of HK$575 million to satisfy part of the Consideration. Details of the Convertible Bond are summarized as follows:

Maturity	:	The date falling on the fifth anniversary of the
		issue of the Convertible Bond
Redemption	:	Unless previously cancelled, converted or
		redeemed, the Company shall repay such
		principal moneys outstanding under the
		Convertible Bond to the Noteholder(s) on the
		Maturity Date
Interest	:	The outstanding principal amounts under the
		Convertible Bond will bear interest at 2% per
		annum
Status and transferability	:	The Convertible Bond may be transferred or
		assigned in its entirety or in part at any time
		before the Maturity Date, subject to approval
		of the Stock Exchange, if required

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

Conversion : Upon full conversion of the Convertible Bond at the Conversion Price, an aggregate of 746,753,246 CB Conversion Shares will be issued by the Company (representing (A) approximately 30.97% of the existing issued share capital of the Company; (B) approximately 23.64% of the issued share capital of the Company as enlarged by the allotment and issue of the CB Conversion Shares, assuming full conversion of the Convertible Bond and the CB Conversion Shares were to be issued at the Conversion Price but assuming no conversion of the Convertible Shares; and (C) approximately 18.21% of the issued share capital of the Company as enlarged by the allotment and issue of the CB Conversion Shares and the CS Conversion Shares, assuming full conversion of the Convertible Bond and the CB Conversion Shares were to be issued at the Conversion Price, and full conversion of the Convertible Shares.

The Conversion Rights shall not be exercised by the Noteholder(s) if, immediately following the conversion:

(i) the Company will be unable to meet the public float requirement under the Listing Rules; or
(ii) the relevant Noteholder(s) together with the parties acting in concert with it will hold or control more than 25% of the Company’s voting power at general meetings.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

Conversion price : HK$0.77 per Share, subject to usual antidilution adjustments in certain events such as share consolidation, share subdivision and capitalization issue of profits or reserves. Each adjustment to the Conversion Price will be certified by an executive director of the Company. The Conversion Price of HK$0.77 per Conversion Shares represents the higher of:

(i) the closing price per Share as quoted on the Stock Exchange on the Last Trading Date; and
(ii) the average of the closing prices per Share as quoted on the Stock Exchange for the last 5 trading days up to, but excluding, the Last Trading Date.

Listing : No application will be made for the listing of the Convertible Bond on the Stock Exchange or any other stock exchange

The CB Conversion Shares to be issued as a result of the exercise of the CB Conversion Rights will rank pari passu in all respects with all other Shares in issue at the date on which the Conversion Rights are exercised. There will be no restriction on the subsequent sale of the CB Conversion Shares. The CB Conversion Shares will be allotted and issued pursuant to the specific mandate to be sought at the EGM and will be allotted and issued upon exercise of the CB Conversion Rights by the Noteholder(s). An application will be made to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the CB Conversion Shares.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

To assess the fairness and reasonableness of the Convertible Bond, we have, to the best of our effort, identified and made references to, so far as we are aware, all acquisition transactions in the past six months involving issue of convertible bonds or notes as whole or part of the respective consideration by companies listed on the Stock Exchange (the “CB Issuers”). We wish to remind the Shareholders that the CB Issuers are each unique in themselves in terms of business nature, market capitalisation, scale of operations, profitability, liquidity, and level of borrowings and the table below is solely for illustrative purpose. However, we believe that the inclusion of acquisition transactions in the past six months conducted by the CB Issuers in our analysis would provide a reasonable size of comparison basis and could reflect the recent trend of the terms of issue of convertible bonds in the market. We consider that a broader comparison of issue of convertible bonds or notes announced recently would provide a more general reference for the terms of issue of the Convertible Bond. The relevant information is tabulated below:–

				Premium/(discount)
				of the conversion
				price over/(to)
				the closing price on
	Date of			the last
Issuer	announcement	Interest	Maturity	trading day
	(dd/mm/yyyy)	(%)	(years)	(%)
Guojin Resources Holdings	25/1/2011	0	5	(24.50)
Limited (630)
Mascotte Holdings Limited	19/1/2011	5	3	6.38
(136)
China Trends Holdings Limited	7/1/2011	0	5	11.11
(8171)
Hao Wen Holdings Limited	27/12/2010	3	2	(16.67)
(8019)
Soluteck Holdings Limited	14/12/2010	0	10	(5.66)
(8111)
Golden Resorts Group Limited	14/12/2010	2	5	(3.61)
(1031)

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

				Premium/(discount)
				of the conversion
				price over/(to)
				the closing price on
	Date of			the last
Issuer	announcement	Interest	Maturity	trading day
	(dd/mm/yyyy)	(%)	(years)	(%)
Birmingham International	9/12/2010	0	5	2.04
Holdings Limited (2309)
China Uptown Group Company	3/12/2010	0	3	2.72
Limited (2330)
China Mandarin Holdings	23/11/2010	0.5	5	(19.77)
Limited (9)
National Arts Holdings Limited	18/11/2010	1	3	(15.40)
(8228)
Mayer Holdings Limited (1116)	12/11/2010	5	3	3.77
Solargiga Energy Holdings	9/11/2010	0	2	6.08
Limited (757)
Zhongda International Holdings	4/11/2010	0	1.5	28.21
Limited (909)
Sino Dragon New Energy	4/11/2010	0	5	(15.09)
Holdings Limited (395)
King Stone Energy Group	4/11/2010	0	5	(10.26)
Limited (663)
North Asia Resources Holdings	29/10/2010	8	3	24.09
Limited (61)
Hua Lien International (Holdings)	25/10/2010	0	5	(14.29)
Company Limited (969)

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

				Premium/(discount)
				of the conversion
				price over/(to)
				the closing price on
	Date of			the last
Issuer	announcement	Interest	Maturity	trading day
	(dd/mm/yyyy)	(%)	(years)	(%)
Soluteck Holdings Limited	18/10/2010	0	1	(7.41)
(8111)
China Healthcare Holdings	13/10/2010	0	10	(52.94)
Limited (673)
Sino-Tech International	8/10/2010	0	5	(16.67)
Holdings Limited (724)
Chinasoft International Limited	5/10/2010	4.25	3	(2.90)
(354)
Sewco International Holdings	29/9/2010	2	3	29.81
Limited (209)
Pacific Plywood Holdings	24/9/2010	0	1.25	(19.60)
Limited (767)
Greenfield Chemical Holdings	21/9/2010	3	3	(8.69)
Limited (582)
Hengdeli Holdings Limited	21/9/2010	2.5	5	23.50
(3389)
China Properties Investment	20/9/2010	0	2	Floating conversion
Holdings Limited (736)				price
Maoye International Holdings	20/9/2010	2	1	9.29
Limited (848)
Tidetime Sun (Group) Limited	12/9/2010	0	5	(56.50)
(307)

– 90 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

				Premium/(discount)
				of the conversion
				price over/(to)
				the closing price on
	Date of			the last
Issuer	announcement	Interest	Maturity	trading day
	(dd/mm/yyyy)	(%)	(years)	(%)
North Asia Resources	8/9/2010	8	3	20.00
Holdings Limited (61)
Info Communication	5/9/2010	0	1	(36.60)
Holdings Limited (8082)
Info Communication	5/9/2010	3	2	(36.60)
Holdings Limited (8082)
China Precious Metal Resources	2/9/2010	6	3	22.09
Holdings Co., Ltd. (1194)
Climax International Company	1/9/2010	0	3	(60.00)
Limited (439)
China Golden Development	1/9/2010	3	5	(22.54)
Holdings Limited (162)
Haier Electronics Group	28/8/2010	0	2	12.20
Co., Ltd. (1169)
China Properties Investment	27/8/2010	3	3	32.81
Holdings Limited (736)
Kiu Hung Energy	20/8/2010	0	3	(11.11)
Holdings Limited (381)
Vitar International	16/8/2010	0	5	0.00
Holdings Limited (195)
Suncorp Technologies Limited	4/8/2010	0	5	(30.90)
(1063)

– 91 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

				Premium/(discount)
				of the conversion
				price over/(to)
				the closing price on
	Date of			the last
Issuer	announcement	Interest	Maturity	trading day
	(dd/mm/yyyy)	(%)	(years)	(%)
Chevalier Pacific	2/8/2010	0	10	(7.09)
Holdings Limited (508)
China Asean Resources Limited	29/7/2010	0	5	(21.40)
(8186)
Maximum				32.81
Minimum				(60.00)
Mean				(7.51)
Median				(7.25)
The Company	30/1/2011	2	5	0.00

Source: Data extracted from the website of the Stock Exchange (www.hkex.com.hk)

As illustrated above, the conversion prices of the CB Issuers to their respective closing prices as at the last trading day immediately preceding the relevant announcement dates ranged from a discount of approximately 60.0% to a premium of approximately 32.8%, with mean and median premia of approximately 7.51% and approximately 7.25% respectively. We consider that the setting of the Conversion Price based on the prevailing market price to be reasonable.

We noted that the Convertible Bond will bear interest at a rate of 2% per annum which falls within the range of the coupon rates of the CB Issuers from zero coupon to 8% per annum. Accordingly, we consider the coupon rate of the Convertible Bonds to be acceptable.

We also noted that the maturity period of the Convertible Bond of 5 years falls within the range of maturity period for the CB Issuers of 1 year to 10 years and the maturity period for most of the CB Issuers is 5 years. We consider that the maturity period of 5 years for the Convertible Bond is fair and reasonable so far as the Independent Shareholders are concerned.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

Having considered that (i) the Conversion Price represents no discount the closing price of HK$0.77 per Share as quoted on the Stock Exchange on the Last Trading Day; (ii) the coupon rate and the maturity of the Convertible Bond is in line with market practice, we are of the view that the terms of the Convertible Bond are on normal commercial terms, fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Historical non-compliance to various issues of the Target Group

We noted that the Target Group has not fully complied with various rules and regulations in relation to environmental, health and safety and production capacity and the risks associated therewith were set out in and Letter from the Board as well as to the Competent Person’s Report. As advised by the management of the Company, the Vendor is currently in the process of addressing such issues. Set out below are the details of certain major non-compliance issues:

(i) Environmental permitting and health and safety (fire-fighting) – The site of the Target Mine had not engaged in the completion of the Environmental Completion Acceptance Inspection (“CAI”). The maximum penalty for such non-compliance is the issuance of a shutdown order for the facility. Such order is generally issued only after several official notifications of non-compliance with the CAI permitting requirement. In addition, no fire-fighting approval or fire-fighting design approval or fire-fighting completion inspection approval has been obtained from the applicable fire-fighting authority in relation to the Target Mine site. The maximum applicable penalty under the PRC Fire-fighting Law (2009) is a fine up to RMB300,000 or shutdown of the Target Mine site until the relevant approvals are granted by the relevant authorities. As advised by the Company’s PRC legal advisers: (1) completion of the relevant CAI depends primarily on the construction and production circumstances of the Target Mine, and there are no material legal impediments to Baicheng Wenzhou procuring such completion; and (2) Baicheng Wenzhou obtaining the relevant fire-fighting design approval or fire-fighting completion inspection approval from the applicable fire-fighting authority depends on the construction and production circumstances of the Target Mine, and there are no material legal impediments to Baicheng Wenzhou obtaining the said approval. As mentioned in the Competent Person’s Report, in order to address the aforementioned issues, the Target Mine site is currently making preparations to (i) implement the pollutant mitigation measures as described in the approved Environmental Impact Assessment report relating to the Target Mine; and (ii) commission a qualified environmental monitoring institute for regular monitoring of major pollutants.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

(ii) Production capacity and proposed expansion plan – The Target Mine produced 208,000 tonnes of gas coal in 2009. As mentioned in the Letter from the Board, the licensed annual production capacity of the Target Mine under the Mining Licence is 210,000 tonnes whereas the licensed annual production capacity under the Coal Production Permit is 120,000 tonnes. As such, the actual production capacity of the Target Mine has exceeded the approved annual production capacity as stipulated under the Coal Production Permit. Baicheng Wenzhou has confirmed that it is currently in the process of renewing the Coal Production Permit to, among others, increase the approved annual production capacity stipulated thereunder to 210,000 tonnes. Moreover, upon the granting of the said renewed Coal Production Permit, the Group intends to renew both the Ming Licence and the Coal Production Permit to increase the approved production capacities to satisfy applicable requirements in order to implement the planned increase of annual production of the Target Mine to 900,000 tonnes. The PRC legal advisers to the Company have advised that, according to relevant PRC rules and regulations, if the actual production capacity of a coal mine exceeds the approved production capacity as stipulated under its coal production permit, the relevant coal mine may be subject to punishment. The said punishment may include suspension of production and correction of relevant activities, imposition of penalty ranging from RMB0.5 million to RMB2 million, or revocation of coal production permit, request to local authority to implement closure of the relevant mine. The local coal industry administrative departments have discretion in imposing the said penalty.

The PRC legal advisers to the Company have advised on whether there will be any legal impediments for the Target Mine to upgrade its annual production capacity to 900 kt. According to the PRC legal advisers, the rules and regulations mainly applicable to the upgrade of production capacity of coal mines are 煤礦生產能力管理辦法 (Rules on Administration of the Production Capacity of Coal Mines), 煤礦生產能力核定標準 (Standard for Verification of the Production Capacity of Coal Mines), both of which were jointly promulgated by the NDRC, the PRC State Administration of Work Safety and the State Administration of Coal Mine Safety, and 煤礦生產能力核定的若干規定 (Relevant Provisions on Verification of the Production Capacity of Coal Mines*) which was issued by the NDRC. According to the relevant applicable PRC rules and regulations, a coal mine shall meet several basic requirements without which the application of it for upgrading the production capacity will not be granted. Such basic requirements for the coal mine include the following: (i) possession of a valid mining permit, safety production permit, coal production permit and business

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

license; (ii) equipment of well-found production, technology and safety management organizations and systems; (iii) employment of essential technical personnel; (iv) normal running of all production systems and safety monitoring systems; (v) compliance with the provincial coal industry policy; and (vi) maintaining of adequate mine reserves to enable the increase in production capacity. Further, a coal mine is typically required to operate for at least five years prior to receiving an increase in production capacity pursuant to a recently enacted document, namely, 關於進一步加強煤礦建設項目安全管理的通知 (the Notice for Further Strengthening the Safety Management of Coal Mine Construction Project*).

In addition, before the government authority grants an increase in the production capacity of a coal mine, a series of activities shall be carried on, the majority of which are matters relevant to both technique and law and enumerated as follows:

an updated preliminary design is required to be completed by qualified designers and approved by the government authorities;
the mine construction is required to be proceeded in compliance with the approved updated preliminary design;
a final inspection and acceptance of construction shall be duly conducted following completion of the mine construction and a certificate of acceptance shall be obtained from the government authorities;
an application for renewing coal production permit shall be duly made by the coal mine after the issuance of the certificate of acceptance;
upon accepting the application of renewing coal production permit, the government authority will make a site visit to the coal mine and have an inspection at all the production systems thereof;
if after the site visit the government authority confirms all the production systems of the coal mine are in compliance with the technical standards and are adequate for the proposed upgraded production capacity, a renewed coal production permit will then be issued to the coal mine; and
other permits will be accordingly renewed.

The PRC legal advisers to the Company advised that after complying with all the requirements and taking all the necessary steps, the Target Mine will be granted approval to increase its production capacity.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

As confirmed by the PRC legal advisers to the Company, subject to the compliance of the aforesaid requirements and procedures, the rectification of the historical non-compliance of the Target Group is a procedural matter and they are not aware of any legal impediments for Baicheng Wenzhou obtaining such necessary approval.

We have been advised by the Company that the relevant documentation in relation to application for requisite licenses and permits relating to achieving the target 900,000 tonnes annual production has already been submitted to the relevant Xinjiang government authorities. Baicheng Wenzhou has consulted the relevant authorities and was informed by such authorities that the estimated time for obtaining the requisite licenses and permits will be around 6 to 12 months.

We have further enquired with the management of the Company about the historical non-compliance issues which may lead to fines or suspension of operation as identified in the Competent Person’s Report and the accountants’ report. Based on their previous mining experience, they believe that the probability of the said noncompliance issues leading to suspension of operations to be rather low, and they are of the view that given the Total Non-compliance Penalty in respect of the Noncompliance Issues that can be currently identified and also quantified by the Company and its advisers will not likely be more than RMB8 million, such fine/penalty are immaterial in the context of the Acquisition and the operation of the Target Mine and to implement appropriate measures to address the identified risks after completion of the Acquisition, the Board reasonably believes that the said Non-compliance Issues will be rectifiable after the Company has acquired, and has taken control of the Target Mine.

6. Potential dilution effect on the shareholding interests of the Shareholders

Upon full conversion of the Convertible Shares at the Issue Price, an aggregate of approximately 941,558,441 CS Conversion Shares will be issued by the Company, representing (i) approximately 39.05% of the existing issued share capital of the Company; (ii) approximately 28.08% of the issued share capital of the Company as enlarged by the allotment and issue of the CS Conversion Shares, assuming no conversion of the Convertible Bond; and (iii) approximately 22.97% of the issued share capital of the Company as enlarged by the allotment and issue of both the CS Conversion Shares and the CB Conversion Shares. However, Shareholders are reminded to note that, pursuant to the CS Issue Terms, the CS Conversion Rights shall not be exercised by the relevant holder(s) if, immediately following the conversion: (a) the Company will be unable to meet the public float requirement under the Listing Rules; or (b) the relevant holder(s) together with the parties acting in concert with it will hold or control such amount of the Company’s voting power at general meetings as may trigger a mandatory general offer under the Takeovers Code.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

Upon full conversion of the Convertible Bond at the Conversion Price, an aggregate of approximately 746,753,246 CB Conversion Shares will be issued by the Company, representing (i) approximately 30.97% of the existing issued share capital of the Company; (ii) approximately 23.64% of the issued share capital of the Company as enlarged by the allotment and issue of the CB Conversion Shares, assuming no conversion of the Convertible Shares; and (iii) approximately 18.21% of the issued share capital of the Company as enlarged by the allotment and issue of both the CS Conversion Shares and the CB Conversion Shares. However, Shareholders are reminded to note that the Conversion Rights shall not be exercised by the Noteholder(s) if, immediately following the conversion: (a) the Company will be unable to meet the public float requirement under the Listing Rules; or (b) the Noteholder(s) together with the parties acting in concert with it will hold or control more than 25% of the Company’s voting power at general meeting.

Despite the possible dilution effects by the conversions of the Convertible Shares and the Convertible Bond, taking into account that the Acquisition would enable the Group to further develop its coal mining business operation and provide a solid base for the consolidation of coal reserves in enhancing the long-term growth potential, we consider the possible dilution effects on the Shareholders to be acceptable.

7. Expected financial impact on the Group as a result of the Acquisition

Assets and liabilities

As stated in the interim report of the Company for the six months ended 30 September 2010, the unaudited consolidated total assets and total liabilities of the Group as at 30 September 2010 were approximately HK$2,378.2 million and approximately HK$1,210.8 million, respectively.

On the basis of the assumptions set out in the unaudited pro forma financial information of the Enlarged Group as set out in Appendix III to the Circular, it is noted that the unaudited pro forma adjusted consolidated total assets of the Enlarged Group as at 30 September 2010 would be approximately HK$3,789 million, the unaudited pro forma adjusted consolidated total liabilities of the Group as at 30 September 2010 would be approximately HK$2,001 million, respectively upon Completion. Shareholders should refer to the “Unaudited pro forma financial information of the Enlarged Group” as set out in Appendix III to the Circular.

It is stated as a condition precedent of the S&P Agreement that any and all outstanding indebtedness (including any shareholders loans) owed by each member of the Target Group to its shareholders, the Vendor or any third party on or before the Completion Date having been settled and discharged in full.

– 97 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

As advised by the management of the Company, they are not aware of any contingent liability and/or other tax exposure except for the stamp duty, if any.

Earnings

Upon Completion, the financial results of the Target Group will be consolidated into the financial statements of the Group. It appears that the Acquisition may lead to deterioration of the Company’s financial position given the fact that the Target Group suffered a loss for the year ended 31 December 2010. However, Shareholders should be aware of the fact that the auditors have disclaimed to issue any opinion on the accounts of Baicheng Wenzhou due to insufficient audit evidence as a result of, among others, the absence of independent evidence to determine the substance of the transactions of the Baicheng Wenzhou and its failure to maintain books and records for inventories.

In light of the potential future prospects of the Target Mine as highlighted under paragraph headed “The reasons for, and benefits of, the Acquisition” above, we concur with the Directors’ view that the Acquisition would be able to have a positive impact on the future revenue potential subsequent to the commencement of the coal mines of the Enlarged Group.

Gearing and working capital

We noted from the interim report of the Company for the six months ended 30 September 2010 that the Group had gearing ratio of approximately 13.9% as at 30 September 2010 (31/3/2010: 15.1%). Upon Completion, the gearing ratio of the Enlarged Group as calculated based on the unaudited pro forma financial information of the Enlarged Group as set out in Appendix III to the Circular, will be approximately 20.7%.

We understand that the cash portion of the Consideration will be financed by internal resources, it is expected that the working capital of the Group would decrease as a result of the Acquisition.

– 98 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

OPINION

In arriving at our opinion, we have considered the principal factors and reasons discussed above, in particular,

(i) the reasons for, and benefits of, the Acquisition;
(ii) the terms of the S&P Agreement; and
(iii) the expected financial impact on the Group as a result of the Acquisition.

Having considered the above principal factors and based on the information provided and the representations made to us, we are of the opinion that the S&P Agreement is on normal commercial terms; in the ordinary and usual course of business and its terms are fair and reasonable, and that the Acquisition is in the interests of the Company and the Shareholders as a whole. Accordingly, we advise the Independent Board Committee to recommend to the Independent Shareholders to vote in favour of the resolution(s) to be proposed at the EGM to approve the Acquisition and the matters incidental thereto.

Yours faithfully, For and on behalf of

Asia Investment Management Limited Alice Kan

Managing Director

– 99 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

Set out below is a summary of the audited financial results for the Group for the three years ended 31 March 2008, 2009 and 2010 as extracted from the respective published audited financial statements.

Financial Summary

	Year	ended 31st March,
	2008	2009	2010
	HK$’000	HK$’000	HK$’000
RESULTS
Revenue	176,803	166,505	97,029
Profit (loss) for the year attributable
to equity holders of the Company	22,180	(22,871)	(469,409)
		As at 31st March,
	2008	2009	2010
	HK$’000	HK$’000	HK$’000
ASSETS AND LIABILITIES
Total assets	251,724	198,029	2,502,224
Total liabilities	(44,313)	(20,932)	(1,403,942)
Equity attributable to equity
holders of the Company	207,411	177,097	1,098,282

– 100 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31st March, 2010

NOTES Revenue 7 Cost of sales Gross profit Other income, gain and loss 9 Distribution and selling costs Administrative expenses Change in fair value of investments held for trading Change in fair value of derivative financial instruments Impairment loss recognised in respect of available-for-sale investments Impairment loss recognised in respect of property, plant and equipment and investment property Impairment loss recognised in respect of goodwill 22 Finance costs 10 Loss before taxation Taxation 11 Loss for the year attributable to owners of the Company 12 Other comprehensive income Exchange difference on translation of foreign operations Available-for-sale investments: – fair value changes during the year – reclassified adjustment to profit or loss on disposal Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to owners of the Company Loss per share – Basic and diluted (HK cents) 16	2010 HK$’000 97,029 (85,641) 11,388 8,509 (2,347) (28,293) 4,003 (30,974) (780) (912) (421,732) (6,886) (468,024) (1,385) (469,409) 1,045 853 (130) 1,768 (467,641) (74.65)	2009 HK$’000 166,505 (128,560) 37,945 (451) (3,708) (28,622) (7,941) 855 (19,076) (185) – (157) (21,340) (1,531) (22,871) (5,203) 5,627 – 424 (22,447) (5.57)

– 101 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31st March, 2010

NOTES Non-current assets Property, plant and equipment 17 Prepaid lease payments 18 Investment property 19 Goodwill 20 Mining rights 21 Available-for-sale investments 23 Pledged bank deposits 24 Deposits for acquisition of property, plant and equipment Deferred tax assets 25 Current assets Inventories 26 Trade receivables 27 Bills receivable 27 Other receivables, deposits and prepayments 27 Investments held for trading 28 Prepaid lease payments 18 Tax recoverable Restricted bank deposits 29 Bank balances and cash 27 Current liabilities Trade payables 30 Other payables, deposits received and accruals 30 Bank borrowing 31 Tax payable Net current assets Total assets less current liabilities	2010 HK$’000 67,415 28,686 1,058 – 1,903,116 21,457 – 79,286 205 2,101,223 21,189 8,915 399 10,216 303 1,081 1,641 54,586 302,671 401,001 5,901 148,485 9,080 2,078 165,544 235,457 2,336,680	2009 HK$’000 14,847 3,382 1,090 10,523 – 34,156 5,317 – 205
		69,520
		29,417 15,876 1,557 12,112 12,500 – 2,388 – 54,659
		128,509
		6,700 12,802 – 373
		19,875
		108,634
		178,154

– 102 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Non-current liabilities Retirement benefits obligations 32 Convertible notes 33 Embedded derivatives 33 Deferred tax liabilities 25 Net assets Capital and reserves Share capital 34 Reserves 35 Equity attributable to owners of the Company NOTES	1,138 369,294 392,765 475,201 1,238,398 1,098,282 84,309 1,013,973 1,098,282 2010 HK$’000	1,057 – – – 2009 HK$’000
		1,057
		177,097

		20,574 156,523
		177,097

– 103 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31st March, 2010

At 1st April, 2008 Loss for the year Other comprehensive income Total comprehensive income for the year Issue of new shares due to exercise of share options Transfer upon exercise of share options Transfer Recognition of equity-settled share-based payments Dividend paid (note 15) At 31st March, 2009 Loss for the year Other comprehensive income Total comprehensive income for the year Issue of new shares due to exercise of share options Issue of new shares upon placing Issue of new shares for acquisition of subsidiaries (note 36) Issue of new shares upon conversion of convertible notes (note 33) Transaction costs attributable to issue of new shares upon placing Transfer upon exercise of share options Transfer Recognition of equity-settled share-based payments Dividend paid (note 15) At 31st March, 2010	Share capital HK$’000 20,281 – – – 293 – – – – 20,574 – – – 462 27,710 16,185 19,378 – – – – – 84,309	Share premium HK$’000 2,514 – – – 1,026 1,531 – – – 5,071 – – – 2,332 670,602 387,634 297,836 (28,560) 2,469 – – – 1,337,384	Statutory surplus reserve HK$’000 (note a) 2,100 – – – – – 181 – – 2,281 – – – – – – – – – 1,258 – – 3,539	Share option reserve HK$’000 3,094 – – – – (1,531) – 1,101 – 2,664 – – – – – – – – (2,469) – 275 – 470	Asset revaluation reserve HK$’000 (3,711) – 5,627 5,627 – – – – – 1,916 – 723 723 – – – – – – – – – 2,639	Special reserve HK$’000 (note b) (5,754) – – – – – – – – (5,754) – – – – – – – – – – – – (5,754)	Translation reserve HK$’000 13,659 – (5,203) (5,203) – – – – – 8,456 – 1,045 1,045 – – – – – – – – – 9,501	Retained profits (accumulated loss) HK$’000 175,228 (22,871) – (22,871) – – (181) – (10,287) 141,889 (469,409) – (469,409) – – – – – – (1,258) – (5,028) (333,806)	Total equity attributable to owners of the Company HK$’000 207,411
									(22,871) 424
									(22,447)
									1,319 – – 1,101 (10,287)
									177,097
									(469,409) 1,768
									(467,641)
									2,794 698,312 403,819 317,214 (28,560) – – 275 (5,028)
									1,098,282

– 104 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(a) As stipulated by the relevant laws and regulations of the People’s Republic of China (“PRC”), before distribution of the net profit each year, a subsidiary, Winbox Plastic Manufacturing (Shenzhen) Company Limited (“Winbox Plastic Manufacturing (Shenzhen)”) established in the PRC shall set aside 10% of its net profit after taxation to the statutory surplus reserve. During the year ended 31st March, 2010, the board of directors of Winbox Plastic Manufacturing (Shenzhen) approved the transfer of approximately HK$1,258,000 (2009: HK$181,000) from retained profits to the statutory surplus reserve, which representing 10% of the accumulated net profit after taxation (as determined in accordance with the relevant accounting principles and financial regulations applicable to companies established in the PRC) for the years ended 31st March, 2002, 2003 and 2007 (2009: for the period from 1st January, 2004 (date of establishment) to 31st December, 2006). The reserve fund can only be used, upon approval by the board of directors of Winbox Plastic Manufacturing (Shenzhen) and by the relevant authority, to offset accumulated losses or increase capital.
(b) Special reserve of HK$5,754,000 represents the difference between the nominal amount of share capital issued by Winbox (BVI) Limited and the Company and the nominal amount of the share capital of the acquired subsidiaries and Winbox (BVI) Limited respectively arisen from a group reorganisation occurred in prior years.

– 105 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31st March, 2010

Note OPERATING ACTIVITIES Loss before taxation Adjustments for: Dividend income from available-for- sale investments Interest income Finance costs Depreciation of property, plant and equipment and investment property Release of prepaid lease payments Share-based payments Gain on disposal of available-for-sale investments Change in fair value of investments held for trading Change in fair value of derivative financial instruments Impairment loss recognised in respect of goodwill Impairment loss recognised in respect of available-for-sale investments Impairment loss recognised in respect of property, plant and equipment and investment property Operating cash flows before movements in working capital Decrease in inventories Decrease in trade receivables Decrease (increase) in bills receivable Decrease in other receivables, deposits and prepayments Decrease in investments held for trading Decrease in trade payables Increase (decrease) in other payables, deposits received and accruals Cash generated from operations Income tax refund (paid) NET CASH FROM OPERATING ACTIVITIES	2010 HK$’000 (468,024) (847) (481) 6,886 1,909 275 275 (6,738) (4,003) 30,974 421,732 780 912 (16,350) 8,617 7,026 1,185 6,280 16,200 (837) 7,545 29,666 1,024 30,690	2009 HK$’000 (21,340) (59) (2,329) 157 1,650 87 1,101 – 7,941 (855) – 19,076 185 5,614 3,465 9,518 (1,072) 5,962 9,128 (7,384) (5,890) 19,341 (3,274) 16,067

– 106 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Note INVESTING ACTIVITIES Purchases of property, plant and equipment Purchases of available-for-sale investments Proceeds from disposal of available-for- sale investments Cash return from available-for-sale investment due to capital reduction Interest received Dividends received from available-for- sale investments Decrease (increase) in pledged bank deposits Acquisition of subsidiaries 36 NET CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES Dividend paid Interest paid Repayment of borrowing Proceeds from exercise of share options Transaction costs attributable to issue of new shares upon placing Decrease in other payables, deposits received and accruals Proceeds from placement of new shares NET CASH FROM (USED IN) FINANCING ACTIVITIES NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR EFFECT OF FOREIGN EXCHANGE RATE CHANGES CASH AND CASH EQUIVALENTS AT END OF THE YEAR, REPRESENTED BY Bank balances and cash	2010 HK$’000 (2,178) (613) 19,993 – 481 847 5,317 (192,457) (168,610) (5,028) (121) – 2,794 (28,560) (282,240) 698,312 385,157 247,237 54,659 775 302,671	2009 HK$’000 (770) (20,474) 1,904 1,113 1,939 59 (5,317) – (21,546) (10,287) (157) (4,853) 1,319 – – – (13,978) (19,457) 75,564 (1,448) 54,659

– 107 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31st March, 2010

1. General

The Company was incorporated in the Cayman Islands on 30th September, 2005 as an exempted company with limited liability under the Companies Law, Cap. 22 (Laws 3 of 1961, as consolidated and revised) of the Cayman Islands. The Company is a public limited company and its shares are listed on the Stock Exchange of Hong Kong Limited (the “Stock Exchange”). The addresses of the registered office and principal place of business of the Company are disclosed in the “Corporation Information” section to the annual report.

Pursuant to the special resolution of the Company dated 7 May, 2010, the name of the Company has been changed from Winbox International (Holdings) Limited to Hao Tian Resources Group Limited with effect from 7 May, 2010.

The principal activities of the Company are investment holding and provision of management service to its subsidiaries. The principal activities of its subsidiaries are set out in note 43.

On 1st September, 2009, Win Team Investments Limited (“Win Team”), a wholly owned subsidiary of the Company entered into a sale and purchase agreement (“S&P Agreement”) with Real Power Holdings Limited and TRXY Development (HK) Limited (collectively referred to as the “Vendors”), both of which are independent third parties, to acquire the entire issued share capital of Merrymaking Investments Limited and Pleasing Results Limited (the “Acquisitions”), which are investment holding company with its subsidiaries principally engaged in coal mining business in Inner Mongolia Autonomous Region, the PRC. The transaction was completed on 25th January, 2010 (the “Completion Date”). Details of the Acquisitions are set out in note 36.

The Group’s consolidated financial statements are presented in Hong Kong dollars (“HK$”), which is also the functional currency of the Company.

– 108 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. Application of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”)

In the current year, the Group has applied the following new and revised standards, amendments and interpretations (“new and revised HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

HKAS 1 (Revised 2007) Presentation of financial statements HKAS 23 (Revised 2007) Borrowing costs HKAS 32 & 1 (Amendments) Puttable financial instruments and obligations arising on liquidation HKFRS 1 & HKAS 27 Cost of an investment in a subsidiary, jointly (Amendments) controlled entity or associate HKFRS 2 (Amendment) Vesting conditions and cancellations HKFRS 7 (Amendment) Improving disclosures about financial instruments HKFRS 8 Operating segments HK (IFRIC) 9 & HKAS 39 Embedded derivatives (Amendments) HK (IFRIC) – INT 13 Customer loyalty programmes HK (IFRIC) – INT 15 Agreements for the construction of real estate HK (IFRIC) – INT 16 Hedges of a net investment in a foreign operation HK (IFRIC) – INT 18 Transfers of assets from customers HKFRSs (Amendments) Improvements to HKFRSs issued in 2008, except for the amendment to HKFRS 5 that is effective for annual periods beginning or after 1st July, 2009 HKFRSs (Amendments) Improvements to HKFRSs issued in 2009 in relation to the amendment to paragraph 80 of HKAS 39

Except as described below, the adoption of the new and revised HKFRSs has had no material effect on the consolidated financial statements of the Group for the current or prior accounting periods.

New and revised HKFRSs affecting presentation and disclosure only

HKAS 1 (Revised 2007) Presentation of financial statements

HKAS 1 (Revised 2007) has introduced terminology changes (including revised titles for the financial statements) and changes in the format and content of the financial statements.

– 109 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

HKFRS 8 Operating segments

HKFRS 8 is a disclosure standard that has resulted in a redesignation of the Group’s operating segments (see note 8) and changes in the basis of measurement of segment profit or loss, segment assets and segment liabilities.

Improving disclosures about financial instruments (amendments to HKFRS 7 Financial instruments: Disclosures)

The amendments to HKFRS 7 expand the disclosures required in relation to fair value measurements in respect of financial instruments which are measured at fair value. The Group has not provided comparative information for the expanded disclosures in accordance with the transitional provision set out in the amendments.

Standards and interpretations in issue but not yet effective

The Group has not early applied the following new and revised standards, amendments or interpretations that have been issued but are not yet effective.

HKFRSs (Amendments)	Amendment to HKFRS 5 as part of Improvements
	to HKFRSs 20081
HKFRSs (Amendments)	Improvements to HKFRSs 20092
HKFRSs (Amendments)	Improvements to HKFRSs 20108
HKAS 24 (Revised)	Related party disclosures6
HKAS 27 (Revised)	Consolidated and separate financial statements1
HKAS 32 (Amendment)	Classification of right issues4
HKAS 39 (Amendment)	Eligible hedged items1
HKFRS 1 (Amendment)	Additional exemptions for first-time adopters3
HKFRS 1 (Amendment)	Limited exemption from comparative HKFRS 7
	disclosures for first-time adopters5
HKFRS 2 (Amendment)	Group cash-settled share-based payments
	transactions3
HKFRS 3 (Revised)	Business combinations1
HKFRS 9	Financial instruments7
HK(IFRIC) – INT 14	Prepayments of a minimum funding requirement6
(Amendment)
HK(IFRIC) – INT 17	Distributions of non-cash assets to owners1
HK(IFRIC) – INT 19	Extinguishing financial liabilities with equity
	instruments5

1 Effective for annual periods beginning on or after 1st July, 2009.

2 Amendments that are effective for annual periods beginning on or after 1st July, 2009 and 1st January, 2010, as appropriate.

3 Effective for annual periods beginning on or after 1st January, 2010.

4 Effective for annual periods beginning on or after 1st February, 2010.

5 Effective for annual periods beginning on or after 1st July, 2010.

6 Effective for annual periods beginning on or after 1st January, 2011. 7 Effective for annual periods beginning on or after 1st January, 2013.

8 Effective for annual periods beginning on or after 1st July, 2010 and 1st January, 2011, as appropriate.

– 110 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The application of HKFRS 3 (Revised) may affect the Group’s accounting for business combination for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1st April, 2010. HKAS 27 (Revised) will affect the accounting treatment for changes in a parent’s ownership interest in a subsidiary.

HKFRS 9 “Financial instruments” introduces new requirements for the classification and measurement of financial assets and will be effective from 1st January, 2013, with earlier application permitted. The Standard requires all recognised financial assets that are within the scope of HKAS 39 “Financial instruments: Recognition and measurement” to be measured at either amortised cost or fair value. Specifically, debt investments that (i) are held within a business model whose objective is to collect the contractual cash flows and (ii) have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost. All other debt investments and equity investments are measured at fair value. The application of HKFRS 9 might affect the classification and measurement of the Group’s financial assets.

In addition, as part of Improvements to HKFRSs issued in 2009, HKAS 17 “Leases” has been amended in relation to the classification of leasehold land. The amendments will be effective from 1st January, 2010, with earlier application permitted. Before the amendments to HKAS 17, lessees were required to classify leasehold land as operating leases and presented as prepaid lease payments in the consolidated statement of financial position. The amendments have removed such a requirement. Instead, the amendments require the classification of leasehold land to be based on the general principles set out in HKAS 17, that are based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee. The application of the amendments to HKAS 17 might affect the classification and measurement of the Group’s leasehold land.

The directors of the Company anticipate that the application of the other new and revised standards, amendments or interpretations will have no material impact on the consolidated financial statements.

– 111 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. Significant accounting policies

The consolidated financial statements have been prepared under the historical cost basis, except for certain financial instruments, which are measured at fair value, as explains in the accounting policies set out below.

The consolidated financial statements have been prepared in accordance with HKFRSs issued by the HKICPA. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Business combinations

The acquisition of businesses is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combinations. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under HKFRS 3 Business Combinations are recognised at their fair values at the acquisition date.

– 112 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.

Goodwill

Goodwill arising on an acquisition of a subsidiary is carried at cost less any accumulated impairment losses and is presented separately in the consolidated statement of financial position.

For the purposes of impairment testing, goodwill arising from an acquisition is allocated to each of the relevant cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the acquisition. A cashgenerating unit to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired. For goodwill arising on an acquisition in a financial year, the cash-generating unit to which goodwill has been allocated is tested for impairment before the end of that financial year. When the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of any goodwill allocated to the unit first, and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss for goodwill is not reversed in subsequent periods.

On subsequent disposal of the relevant cash-generating unit, the attributable amount of goodwill capitalised is included in the determination of the amount of profit or loss on disposal.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods sold and services provided in the normal course of business, net of discounts and sales related taxes.

Revenue from sales of goods is recognised when the goods are delivered and title has passed.

– 113 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

Rental income from operating leases is recognised in profit or loss on a straight-line basis over the term of relevant lease.

Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.

Property, plant and equipment

Property, plant and equipment including land and buildings held for use in the production or supply of goods or services, or for administrative purposes (other than freehold land and construction in progress) are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.

Depreciation is provided to write off the cost of items of property, plant and equipment, other than freehold land, construction in progress and mining structures, over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method.

Freehold land is carried at cost less any recognised impairment loss.

Construction in progress includes property, plant and equipment in the course of construction for production or for its own use purposes. Construction in progress is carried at cost less any recognised impairment loss. Cost comprises direct costs of construction including borrowing costs attributable to the construction during the period of construction. Construction in progress is classified to the appropriate category of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

– 114 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the profit or loss in the year in which the item is derecognised.

Investment properties

Investment properties are properties held to earn rentals and/or for capital appreciation.

On initial recognition, investment properties are measured at cost, including any directly attributable expenditure. When an owner-occupied property becomes an investment property, the cost and accumulated depreciation of the owner-occupied property at the date of transfer are transferred to investment property. Subsequent to initial recognition, investment properties are stated at cost less subsequent accumulated depreciation and any accumulated impairment losses. Depreciation is charged so as to write off the cost of investment properties over their estimated useful lives and after taking into account of their residual values, using the straight-line method.

An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposals. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the profit or loss in the year in which the item is derecognised.

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

– 115 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group as lessor

Rental income from operating leases is recognised in profit or loss on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense on a straight-line basis over the lease term.

The Group as lessee

Operating leases are recognised as expenses on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straight-line basis.

Leasehold land and building

The land and building elements of a lease of land and building are considered separately for the purpose of lease classification, unless the lease payments cannot be allocated reliably between the land and building elements, in which case, the entire lease is generally treated as a finance lease and accounted for as property, plant and equipment. To the extent the allocation of the lease payments can be made reliably, leasehold interests in land are accounted for as operating leases and amortised over the lease term on a straight-line basis.

Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

– 116 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for exchange differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in other comprehensive income, in which cases, the exchange differences are also recognised directly in other comprehensive income.

For the purpose of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Group (i.e. HK$) at the rate of exchange prevailing at the end of the reporting period, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity (the translation reserve). Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed of.

Goodwill and fair value adjustments on identifiable assets acquired and liabilities assumed arising on an acquisition of a foreign operation are treated as assets and liabilities of that foreign operation and retranslated at the rate of exchange prevailing at the end of the reporting period. Exchange differences arising are recognised in the translation reserve.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

– 117 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Retirement benefit costs

Payments to the Group’s defined contribution retirement benefit plans are charged as an expense when employees have rendered service entitling them to the contributions.

The Group also operates a defined benefit retirement benefit plan. The cost of providing benefits is dependent on the length of services and the obligation arises when the services are rendered. Measurement of that obligation reflects the probability that payment will be required and the length of time of which payment is expected to be made.

The amount recognised in the consolidated statement of financial position represents the present value of the defined benefit obligation.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of comprehensive income because it excludes items of income and expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary difference to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

– 118 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is recognised in profit or loss, except when it relates to items that are recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity respectively.

Mining rights

Mining rights acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the acquisition date.

Subsequent to initial recognition, intangible assets with finite useful lives are carried at costs less accumulated amortisation and any accumulated impairment losses. Amortisation for intangible assets with finite useful lives is provided on the units of production method utilising only recoverable coal reserves as the depletion base. Alternatively, intangible assets with indefinite useful lives are carried at cost less any subsequent accumulated impairment losses (see the accounting policy in respect of impairment losses on non-financial assets other than goodwill below).

– 119 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Impairment losses on non-financial assets other than goodwill (see the accounting policy in respect of goodwill above)

At the end of the reporting period, the Group reviews the carrying amounts of its non-financial assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. In addition, intangible assets with indefinite useful lives are tested for impairment annually, and whenever there is an indication that they may be impaired. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing, selling and distribution.

Financial instruments

Financial assets and financial liabilities are recognised on the consolidated statement of financial position when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

– 120 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Financial assets

The Group’s financial assets are classified into one of three categories, including financial assets at fair value through profit or loss (“FVTPL”), loans and receivables and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Interest income is recognised on an effective interest basis for debt instruments.

Financial assets at FVTPL

Financial assets at FVTPL of the Group comprise of investments held for trading.

A financial asset is classified as held for trading if:

it has been acquired principally for the purpose of selling in the near future; or
it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or
it is a derivative that is not designated and effective as a hedging instrument.

– 121 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Financial assets at FVTPL are measured at fair value, with changes in fair value arising from remeasurement recognised directly in profit or loss in the period in which they arise. The net gain or loss recognised in profit or loss excludes any dividend or interest earned on the financial assets.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including trade receivables, bills receivable, other receivables, deposits, pledged bank deposits, restricted bank deposits and bank balances and cash) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment loss on financial assets below).

Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated or not classified as financial assets at FVTPL, loans and receivables or held-tomaturity investments. Available-for-sale financial assets are measured at fair value. Changes in fair value are recognised in other comprehensive income and accumulated in asset revaluation reserve, until the financial asset is disposed of or is determined to be impaired, at which time, the cumulative gain or loss previously accumulated in asset revaluation reserve is removed from equity and recognised in profit or loss (see accounting policy on impairment loss on financial assets below).

For available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, they are measured at cost less any identified impairment losses at the end of the reporting period (see accounting policy on impairment loss on financial assets below).

– 122 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of the reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been affected.

For an available-for sale equity investment, a significant or prolonged decline in the fair value of that investment below its cost is considered to be objective evidence of impairment.

For all other financial assets, objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; or
default or delinquency in interest or principal payments; or
it becoming probable that the borrower will enter bankruptcy or financial re-organisation.

For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 30 to 60 days, observable changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortised cost, an impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods.

– 123 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.

For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Impairment losses on available-for-sale equity investments will not be reversed in profit or loss in subsequent periods. Any increase in fair value subsequent to impairment loss is recognised directly in other comprehensive income and accumulated in asset revaluation reserve. For available-for-sale debt investments, impairment losses are subsequently reversed to profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss.

Financial liabilities and equity

Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The Group’s financial liabilities are generally classified into financial liabilities at FVTPL and other financial liabilities.

– 124 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Interest expense is recognised on an effective interest basis.

Convertible notes contains liability component and conversion option derivative

Convertible notes issued by the Group that contain both liability and conversion option components are classified separately into respective items on initial recognition. Conversion option that will be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Company’s own equity instruments is a conversion option derivative. At the date of issue, both the liability and conversion option components are recognised at fair value.

In subsequent periods, the liability component of the convertible notes is carried at amortised cost using the effective interest method. The conversion option derivative is measured at fair value with changes in fair value recognised in profit or loss.

Transaction costs that relate to the issue of the convertible notes are allocated to the liability and conversion option components in proportion to their relative fair values. Transaction costs relating to the conversion option derivative is charged to profit or loss immediately. Transaction costs relating to the liability component are included in the carrying amount of the liability portion and amortised over the period of the convertible loan notes using the effective interest method.

Other financial liabilities

Other financial liabilities including trade payables, other payables and accruals, deposits received and bank borrowing are subsequently measured at amortised cost, using the effective interest method.

– 125 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Derivative financial instruments

Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured at their fair value at the end of the reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

Embedded derivatives

Derivatives embedded in non-derivative host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised directly in other comprehensive income is recognised in profit or loss.

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

– 126 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Share-based payment transactions

Equity-settled share-based payment transactions

Share options granted to employees and others providing similar services

The fair value of services received determined by reference to the fair value of share options granted at the grant date is expensed on a straight-line basis over the vesting period, with a corresponding increase in equity (share option reserve).

At the end of the reporting period, the Group revises its estimates of the number of options that are expected to ultimately vest. The impact of the revision of the estimates during the vesting period, if any, is recognised in profit or loss, with a corresponding adjustment to share option reserve.

At the time when the share options are exercised, the amount previously recognised in share option reserve will be transferred to share premium. When the share options are forfeited after the vesting date or are still not exercised at the expiry date, the amount previously recognised in share option reserve will be transferred to retained profits.

Provisions

Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect is material).

Provisions for the Group’s restoration, rehabilitation and environmental expenses are based on estimates of required expenditure at the mines in accordance with PRC rules and regulations. The Group estimates its liabilities for final reclamation and mine closure based upon detailed calculations of the amount and timing of the future cash expenditure to perform the required work. Spending estimates are escalated for inflation, then discounted at a discount rate that reflects current market assessments of the time value of money and the risks specific to the liability such that the amount of provision reflects the present value of the expenditures expected to be required to settle the obligation.

– 127 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, 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.

Estimated impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. Where the actual cash flows are less than expected, a material impairment loss may arise. As at 31st March, 2010, the carrying amount of goodwill is fully impaired with impairment loss of approximately HK$421,732,000 (2009: nil) recognised. Details of the recoverable amount calculation are disclosed in note 22.

Renewal of mining right permits

The Group’s mining right permits will be expired in December 2010, the renewal is subject to the approval by the relevant PRC authority. In addition, the Group is in the process to carry out various technical and quality improvements at the Group’s coal mine to attain the safety standard in accordance with the new regulations imposed by the PRC authority in 2009. In the opinion of the directors, after obtaining opinion from its legal counsel, the Group is able to continuously renew its mining rights at minimal costs before its expiry and as the directors expect that the technical and quality improvements works will be completed in 2010, these technical and quality improvements works will have no adverse impact to the renewal of the mining rights permits.

When determining the fair value of the mining rights at business combination and when considering the impairment of the mining rights, the directors estimate the cash flow generated from the relevant cash generating unit on the basis that the Group is able to fully utilise all the ore resources in a period of 23 to 24 years (see note 22).

In addition, when considering the impairment of the Group’s mining structures, the directors did not take into account the possibility of non-renewal of mining right permits.

– 128 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

If the Group is not able to obtain approval for renewal in December 2010 and each future expiry dates, the fair value of the mining rights of approximately HK$1,903,116,000 might be significant reduced and the Group will increase amortisation charges of mining rights and depreciation charges where useful lives are less than previously estimated lives, or it will write off or write down the carrying amount of the mining rights and mining structures, which significant impairment loss might be recognised.

Estimation of coal reserves

The process of estimating quantities of reserves is inherently uncertain and complex. It requires significant judgments and decisions based on available geological, geophysical, engineering and economic data. These estimates may change substantially as additional data from ongoing development activities and production performance becomes available and as economic conditions impacting mineral prices and costs change. Reserve estimates are based on current production forecasts, prices and economic conditions. The directors exercise their judgment in estimating the total proved and probable reserves of the ore mines. If the quantities of reserves are different from current estimates, it will result in a material impairment loss in respect to the mining rights and mining structures.

Fair value of convertible bonds and embedded derivative financial instruments

The directors use their judgments in selecting an appropriate valuation technique for financial instruments not quoted in an active market. Valuation techniques commonly used by market practitioners are applied. In determining the fair value of convertible bonds and its embedded derivatives, assumptions are made based on quoted market rates adjusted for specific features of the instrument (see note 33 for details).

– 129 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. Capital risk management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from prior year.

The capital structure of the Group consists of debt, which include bank borrowing disclosed in note 31, convertible notes disclosed in note 33 and equity attributable to owners of the Company, comprising issued share capital, reserves and set off with accumulated loss.

The directors of the Company review the capital structure on a continuous basis. As part of this review, the directors consider the cost of capital and the risks associates with each class of capital. Based on recommendations of the directors, the Group will balance its overall capital structure through the payment of cash dividends, new share issues, as well as the issue of new debts or the redemption of existing debt.

6. Financial instruments

(a) Categories of financial instruments

Financial assets Financial assets at FVTPL – Held for trading Loans and receivables (including cash and cash equivalents) Available-for-sale investments Financial liabilities Financial liabilities at FVTPL – Embedded derivatives Amortised cost	2010 HK$’000 303 373,626 21,457 395,386 392,765 532,760 925,525	2009 HK$’000 12,500 86,858 34,156
		133,514

		– 19,502
		19,502

– 130 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Financial risk management objectives and policies

The Group’s financial instruments include trade receivables, bills receivable, other receivables, pledged bank deposits, restricted bank deposits, bank balances and cash, trade payables, other payables and accruals, bank borrowing, available-for-sale investments, investments held for trading, convertible notes and embedded derivatives. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the polices on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

There has been no significant change to the Group’s exposure to market risks or the manner in which it manages and measures the risk from prior year.

Market risk

Foreign currency risk management

Several subsidiaries of the Company have foreign currency sales and purchases, which expose the Group to foreign currency risk. The Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arises.

The carrying amounts of the Group’s foreign currency denominated monetary assets and liabilities excluding intra-group balances at the reporting date are as follows:

	Assets		Liabilities	Liabilities
	2010	2009	2010	2009
	HK$’000	HK$’000	HK$’000	HK$’000
HK$	175,177	–	327	–
United States Dollars
(“US$”)	74,511	33,374	762,289	710
Euro	6,550	9,335	6	92
Australian Dollars	60	6,028	–	–
Others	1,180	2,437	93	248

– 131 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

In addition, as at 31st March, 2010, the directors considered that the Group’s exposure to foreign currency risk arisen from intra-group loan from foreign operation of approximately HK$33,292,000 (2009: intra-group loans to foreign operation of approximately HK$23,432,000), which were not denominated in the functional currency of the Company. These intra-group loans do not form part of the Group’s net investment in foreign operations.

Sensitivity analysis

The directors considered that, as HK$ is pegged to US$, the subsidiaries with HK$ as functional currency are not subject to significant foreign currency risk from change in foreign exchange rate of HK$ against US$ and hence only consider the sensitivity of the change in foreign exchange rate of HK$ against currencies other than US$. 5% is the sensitivity rate used by directors in the assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis below demonstrated the effect of the foreign exchange differences by 5% change in exchange rate of the functional currencies against the relevant foreign currencies of the Company and respective subsidiaries, other than US$, assuming all other variables were held constant. A positive number below indicates a decrease in post-tax loss where the functional currencies weaken 5% against the relevant foreign currencies of the Company and respective subsidiaries, other than US$. For a 5% strengthening of the functional currencies of the Company and respective subsidiaries, there would be an equal and opposite impact on the loss for the year.

	2010	2009
	HK$’000	HK$’000
Decrease in loss for the year	10,825	1,602

– 132 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Interest rate risk management

The Group is exposed to cash flow interest rate risk in relation to bank balances, restricted bank deposits, pledged bank deposits and bank borrowing carried prevailing market interest rate. The interest rate risk on bank balances, restricted bank deposits, pledged bank deposits and bank borrowing are limited because of the short maturity. In the opinion of the directors, the expected change in interest rate on bank deposits will not have a significant change in the coming year, hence sensitivity analysis is not disclosed.

The Group is also exposed to fair value interest rate risk in relation to convertible notes as at 31st March, 2010.

The Group currently does not have an interest rate hedging policy. However, the management monitors interest rate exposure and will consider hedging significant interest rate exposure should the need arises.

Price risk management

Price risk on debt and equity securities

The Group is exposed to other price risk through its available-for-sale investments and investments held for trading. The directors of the Company manage the exposure by maintaining a portfolio of equity investments with different risk profiles.

– 133 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Sensitivity analysis

The sensitivity analysis below have been determined based on the exposure to other price risks at the end of the reporting period. The sensitivity analysis included those available-for-sale investments and held for trading investments carried at fair values. For available-for-sale investments measured at cost less impairment as the fair value could not be measured reliably, they have not been included in the sensitivity analysis. If the prices of the respective available-for-sale investments and held for trading investments had been 10% higher, assuming all other variables were held constant, the impact to the Group would be:

Decrease in loss for the year Increase in other comprehensive income for the year	2010 HK$’000 30 408	2009 HK$’000 1,250

		1,377

If the prices of respective available-for-sale investments and held for trading investments had been 10% lower, assuming all other variables were held constant, the impact to the Group would be:

Increase in loss for the year Decrease in other comprehensive income for the year	2010 HK$’000 30 408	2009 HK$’000 2,627

		–

10% change in price represents the directors’ assessment of the reasonably possible change in price.

– 134 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Price risk on embedded conversion option

The Group is required to estimate the fair value of the conversion option embedded in the convertible notes at the end of the reporting period with changes in fair value to be recognised in the profit or loss as long as the convertible notes are outstanding. The fair value adjustment will be affected either positively or negatively, amongst others, by the changes in market interest rate, the Company’s share market price and share price volatility.

Sensitivity analysis

The sensitivity analyses below have been determined based on the exposure to the Company’s share price risk at the reporting date only. If the Company’s share price had been 10% higher/lower and all other variables were held constant, the Group’s post-tax loss for the year (as a result of changes in fair value of conversion option component of convertible notes) would increase/ decrease by approximately HK$47,296,000.

In directors’ opinion, the sensitivity analysis is unrepresentative of the inherent price risk as the year end exposure does not reflect the exposure during the year.

Credit risk

The Group’s maximum exposure to credit risk in the event of the counterparties failure to perform their obligations as at 31st March, 2010 in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the consolidated statement of financial position. The Group has concentration of credit risk in respect of the trade receivables. As at 31st March, 2010 and 2009, five customers comprised over 75% of the Group’s trade receivables respectively. In order to minimise the credit risk, the Group has monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade debt at the end of the reporting period to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced.

– 135 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

During the year, the Group recognised impairment loss in respect of available-for-sale investments of HK$780,000, due to the increase in default risk of the counterparty. Details are set out in note 23.

The Group has a concentration of credit risk on liquid funds deposited with a few major banks. The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.

Liquidity risk

The Group manages its liquidity risk by monitoring and maintaining a level of cash and cash equivalents deemed adequate by the management to finance the Group’s operations and mitigate the effects of fluctuations in cash flows. The management monitors the utilisation of bank borrowing and ensures compliance with loan covenants.

The following table details the Group’s remaining contractual maturity for its financial liabilities (including embedded derivatives of the convertible notes). It has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows.

Weighted average effective interest rate % 2010 Trade payables – Other payables, deposits received and accruals – Bank borrowing 7.965 Convertible notes 8.520 2009 Trade payables – Other payables, deposits received and accruals –	Between 1 to 3 months HK$’000 5,901 148,485 181 – 154,567 6,700 12,802 19,502	Between 4 to 12 months HK$’000 – – 9,442 – 9,442 – – –	Over one year HK$’000 – – – 709,297 709,297 – – –	Total undiscounted cash flows HK$’000 5,901 148,485 9,623 709,297 873,306 6,700 12,802 19,502	Total carrying amount at 31 March HK$’000 5,901 148,485 9,080 762,059
					925,525

					6,700 12,802
					19,502

– 136 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(c) Fair value

The fair value of financial assets and financial liabilities are determined as follows:

the fair value of held-for-trading investments and available-for-sale investments with standard terms and conditions and traded in active liquid markets are determined with reference to quoted market bid prices;
the fair value of club debentures is determined by reference to the quoted prices in the secondary markets;
the fair value of option-based derivative instruments (embedded derivative as included in convertible notes), is estimated using option pricing model; and
the fair value of other financial assets and financial liabilities (excluding derivative financial instruments) is determined in accordance with generally accepted pricing models based on discounted cash flow analysis.

The directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate to their fair values.

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable.

Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active market for identical assets or liabilities.
Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Financial liabilities at FVTPL Embedded conversion option of convertible notes Available-for-sale investments Investment held for trading	Level 1 HK$’000 – 1,367 303 1,670	31st March, 2010 Level 2 Level 3 HK$’000 HK$’000 – 392,765 6,610 – – – 6,610 392,765	Total HK$’000 392,765 7,977 303
			401,045

There were no transfer between Level 1 and 2 in the current year.

Reconciliation of level 3 fair value measurements of financial liabilities

At 1st April, 2009 Issued during the year Conversion during the year Total gain or loss – Change in fair value At 31st March, 2010	HK$’000 – 500,339 (138,548) 30,974
	392,765

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. Revenue

Revenue represents the amounts received and receivable for goods sold by the Group to outside customers, less sales tax and sales returns during the year. An analysis of the Group’s revenue for the year is as follows:

Sale of plastic and paper boxes for luxury consumer goods Sale of coal	2010 HK$’000 96,968 61 97,029	2009 HK$’000 166,505 –
		166,505

8. Segment information

The Group has adopted HKFRS 8 “Operating Segments” with effect from 1st April, 2009. HKFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker, represented by the board of directors, in order to allocate resources to segments and to assess their performance.

In contrast, the predecessor Standard (HKAS 14 “Segment Reporting”) requires an entity to identify two sets of segments (business and geographical) using a risks and returns approach, with the entity’s “system of internal financial reporting to key management personnel” serving only as the starting point for the identification of such segments. In the past, the Group’s primary reporting format was geographical segment (based on location of customers). However, information reported to the chief operating decision maker for the purpose of resources allocation and performance assessment focuses more specifically on the operation of individual subsidiary or group of subsidiaries, which are engaged in manufacturing and sale of plastic and paper boxes for luxury consumer goods in different countries.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

During the year ended 31st March, 2010, the Group acquired subsidiaries which mainly engage in developing of underground coking coal mine, coal production and sale of coal in the PRC. The directors of the Company considered the acquired subsidiaries as a separate operating segment, as a result, an additional segment on coal mining operation has been presented.

The Group’s operating segments under HKFRS 8 are therefore as follows:

(1) Sale of plastic and paper boxes for luxury consumer goods:
(i) France Operation – Dardel S.A.S. (“Dardel”)
(ii) China Operation – Winbox Company Limited, Winbox Plastic Manufacturing (Shenzhen), First Light Investments Limited and Winpac Trading Co. Limited
(2) Developing of underground coking coal mine, coal production and sale of coal:
(iii) Coal Mining Operation – Tianyu Coal Company Limited and Tianyu Gongmao Company Limited

Information regarding the above segment is reported below. Amounts reported for the prior year have been restated to conform to the requirements of HKFRS 8.

Segment revenue and results

The following is an analysis of the Group’s revenue and results by operating segment.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

For the year ended 31st March, 2010

Revenue Segment results Other income, gain and loss Central administration costs Change in fair value of investments held for trading Change in fair value of derivatives financial instruments Impairment loss recognised in respect of available-for-sale investments Finance costs Loss before taxation	Sale of plastic and paper boxes for luxury consumer goods France Operation China Operation HK$’000 HK$’000 25,156 71,812 (11,971) (8,882)	Coal Mining Operation HK$’000 61 (412,987)	Consolidated HK$’000 97,029 (433,840) 8,509 (8,056) 4,003 (30,974) (780) (6,886) (468,024)

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

For the year ended 31st March, 2009

Revenue Segment results Other income, gain and loss Central administration costs Change in fair value of investments held for trading Change in fair value of derivative financial instruments Impairment loss recognised in respect of available-for-sale investments Finance costs Loss before taxation	Sale of plastic and paper boxes for luxury consumer goods France Operation China Operation HK$’000 HK$’000 30,390 136,115 2,885 18,012	Coal Mining Operation HK$’000 – –	Consolidated HK$’000 166,505 20,897 (451) (15,467) (7,941) 855 (19,076) (157) (21,340)

All of the segment revenue reported for both years were from external customers. The accounting policies of the operating segments are the same as the Group’s accounting policies described in note 3.

Segment results represent the profit or loss earned by each segment without allocation of other income, gain and loss, central administration costs, change in fair value of investments held for trading, derivative financial instruments, impairment loss recognised in respect of available-for-sale investments and finance costs. This is the measure reported to the board of directors for the purpose of resource allocation and performance assessment.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The following is an analysis of the Group’s assets and liabilities by operating segment.

At 31st March, 2010

Segment assets Property, plant and equipment Prepaid lease payments Available-for-sale investments Investments held for trading Bank balances and cash Other assets Consolidated total assets Segment liabilities Bank borrowing Tax payable Convertible notes Embedded derivatives Other liabilities Consolidated total liabilities	Sale of plastic and paper boxes for luxury consumer goods France Operation China Operation HK$’000 HK$’000 13,006 27,969 4,774 13,334	Coal Mining Operation HK$’000 2,122,235 603,659	Consolidated HK$’000 2,163,210 10,326 3,296 21,457 303 302,671 961
			2,502,224

			621,767 9,080 2,078 369,294 392,765 8,958
			1,403,942

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

At 31st March, 2009

Segment assets Property, plant and equipment Prepaid lease payments Available-for-sale investments Investments held for trading Pledged bank deposits Bank balances and cash Other assets Consolidated total assets Segment liabilities Tax payable Other liabilities Consolidated total liabilities	Sale of plastic and paper boxes for luxury consumer goods France Operation China Operation HK$’000 HK$’000 18,724 45,847 5,364 14,278	Coal Mining Operation HK$’000 – –	Consolidated HK$’000 64,571 10,490 3,382 34,156 12,500 5,317 54,659 12,954
			198,029

			19,642 373 917
			20,932

For the purposes of monitoring segment performances and allocating resources between segments:

all assets are allocated to operating segments, other than property, plant and equipment and prepaid lease payments for Group administrative purpose, available-for-sales investments, investments held for trading, pledged bank deposits, bank balances and cash and other assets including prepayments for corporate administration costs.
all liabilities are allocated to operating segments, other than bank borrowing, tax payable, convertible notes, embedded derivatives and other liabilities including other payable and accruals in relation to corporate administration costs.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Other segment information

For the year ended 31st March, 2010 Amounts included in the measure of segment profit or loss or segment assets: Additions to non-current assets (note) Depreciation of property, plant and equipment and investment property (note) Impairment loss recognised in respect of goodwill Impairment loss recognised in respect of property, plant and equipment Release of prepaid lease payments (note) Amounts regularly provided to the chief operating decision maker but not included in the measure of segment profit or loss: Finance cost Taxation (credit) charge	Sale of plastic and paper boxes for luxury consumer goods France Operation China Operation HK$’000 HK$’000 100 1,439 200 1,268 10,574 – – 912 – – – – (356) 1,784	Coal Mining Operation HK$’000 2,472,803 262 411,158 – 188 121 (43)	Segment total HK$’000 2,474,342 1,730 421,732 912 188 121 1,385	Unallocated HK$’000 – 179 – – 87 6,765 –	Consolidated HK$’000 2,474,342 1,909 421,732 912 275

					6,886 1,385

– 145 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

For the year ended 31st March, 2009 Amounts included in the measure of segment profit or loss or segment assets: Additions to non-current assets (note) Depreciation of property, plant and equipment and investment property (note) Impairment loss recognised in respect of investment property Release of prepaid lease payments (note) Amounts regularly provided to the chief operating decision maker but not included in the measure of segment profit or loss: Finance cost Taxation charge (credit)	Sale of plastic and paper boxes for luxury consumer goods France Operation China Operation HK$’000 HK$’000 61 709 261 1,241 – 185 – – 157 – 1,620 (89)	Coal Mining Operation HK$’000 – – – – – –	Segment total HK$’000 770 1,502 185 87 157 1,531	Unallocated HK$’000 – 148 – 87 – –	Consolidated HK$’000 770 1,650 185 87

					157 1,531

Note: Non-current assets excluded available-for-sale investments, pledged bank deposits, deferred tax asset and those property, plant and equipment and prepaid lease payments for administrative purpose. Accordingly, depreciation of property, plant and equipment and release of prepaid lease payments for administrative purpose were excluded.

– 146 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Geographical information

The Group’s customers are located in Hong Kong, the PRC, North America, Europe and other region.

The Group’s revenue from external customers by geographical location of markets, or customer irrespective of the origin of the good/service are detailed below:

Sale of plastic and paper boxes for luxury goods Hong Kong France Germany Italy Switzerland United Kingdom North America Other region Developing of underground coking coalmine, coal production and sale of coal The PRC Total	Revenue from external customers 2010 2009 HK$’000 HK$’000 31,611 52,998 28,245 47,705 12,862 24,024 5,062 2,485 4,625 9,920 3,401 8,560 2,896 9,687 8,266 11,126 96,968 166,505 61 – 97,029 166,505	Revenue from external customers 2010 2009 HK$’000 HK$’000 31,611 52,998 28,245 47,705 12,862 24,024 5,062 2,485 4,625 9,920 3,401 8,560 2,896 9,687 8,266 11,126 96,968 166,505 61 – 97,029 166,505
		166,505

		–
		166,505

– 147 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The information about the Group’s non-current assets by geographic area in which of the assets are located is detailed below:

Hong Kong The PRC France	Non-current 2010 HK$’000 11,463 2,061,160 6,938 2,079,561	assets(note) 2009 HK$’000 12,295 – 17,547
		29,842

Note: Non-current assets excluded available-for-sale investments, pledged bank deposits and deferred tax assets.

Information about major customers

Revenue from customers of the year ended 31st March, 2010 and 2009 contributing over 10% of total sales of the Group, each deriving revenue from sales of plastic and paper boxes for luxury consumer goods segment, are as follows:

	2010	2009
	HK$’000	HK$’000
Customer A	31,124	51,224
Customer B	12,169	22,612
Customer C (note)	11,836	N/A

Note: The corresponding revenue did not contribute over 10% of the total sales of the Group in the year ended 31st March, 2009.

Customer A is located in Hong Kong. Customer B and customer C are located in Europe.

– 148 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

9. Other income, gain and loss

Dividend income from listed investments held-for-trading Dividend income from listed available-for-sale investments Dividend income from unlisted available-for-sale investments Gain on disposal of available-for-sale investments Interest earned on bank deposits Interest earned on unlisted available-for-sale investments Interest earned on listed debt securities held for trading PRC government tax refund from reinvestment of a subsidiary (note) Net foreign exchange gain (loss) Sundry income	2010 HK$’000 – 381 466 6,738 251 – 230 – 252 191 8,509	2009 HK$’000 766 59 – – 1,376 390 563 1,540 (5,757) 612 (451)

Note: According to a letter issued by the PRC local tax authority dated 27th May, 2008, Grant Cast Limited was eligible to receive tax refund of RMB1,362,000 (equivalent to approximately HK$1,540,000) due to the additional investment of HK$18,000,000 made to its subsidiary, Winbox Plastic Manufacturing (Shenzhen), by utilising the dividend from the retained profits of Winbox Plastic Manufacturing (Shenzhen) for the three years ended 31st December, 2006.

– 149 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10. Finance costs Interest on bank borrowing wholly repayable within five years Imputed interest expense on convertible notes (note 33) 11. Taxation Current tax: Hong Kong Other jurisdictions Under(overprovision) in prior years: Hong Kong Other jurisdictions Deferred tax: Current year (note 25) Taxation for the year	2010 HK$’000 121 6,765 6,886 2010 HK$’000 22 – 22 2,061 (655) 1,406 (43) 1,385	2009 HK$’000 157 – 157 2009 HK$’000 99 2,036 2,135 (399) – (399) (205) 1,531

– 150 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

On 26th June, 2008, the Hong Kong Legislative Council passed the Revenue Bill 2008 which reduced corporate profits tax rate from 17.5% to 16.5% effective from the year of assessment 2008/2009. Therefore, Hong Kong Profits Tax is calculated at 16.5% of the estimated assessable profit for both years.

Taxation arising in other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.

Under the Law of the PRC on Enterprise Income Tax (the “EIT Law”) and Implementation Regulations of the EIT Law, the tax rate is 25% from 1st January, 2008 onwards. Pursuant to the Implementation Regulations of the EIT Law, the Company’s wholly owned subsidiary, Winbox Plastic Manufacturing (Shenzhen) is entitled to use a tax rate of 20% for the period from 1 April 2009 to 31 December 2009 and 22% for the period from 1 January 2010 to 31 March 2010 (1.4.2008 to 31.12.2008: 18%; 1.1.2009 to 31.3.2009: 20%), being the applicable tax rate for foreign invested enterprise in the area of Shenzhen Special Economic Zone 深圳經濟特區 for the year.

French profits tax is calculated at 33.3% of the estimated assessable profit of Dardel for both years.

During the year ended 31st March, 2010, the Inland Revenue Department (“IRD”) initiated a tax audit on certain group companies and has issued estimated additional assessments for the year of assessment 2003/2004. Total amount of tax demand in respect to these additional tax assessments for these companies is approximately HK$5.4 million, and HK$2.1 million was recognised as income tax expense during the year ended 31st March, 2010. Subsequent to the end of the reporting period, the Group has applied hold over for the full amount and purchased tax reserve certificate of approximately HK$1.3 million. Since the tax audit is still at a fact-finding stage with different views being and will be exchanged with the IRD, in the opinion of the directors, no further provision is required at this stage.

There may be a possibility that estimated additional assessments for subsequent years be issued by the IRD to these group companies, depending on the result of the tax audit.

– 151 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The taxation for the year can be reconciled to the loss before taxation per the consolidated statement of comprehensive income as follows:

Loss before taxation Tax at Hong Kong Profits Tax rate of 16.5% Tax effect of expenses not deductible for tax purposes Tax effect of income not taxable for tax purposes Effect of different tax rate of subsidiaries operating in other jurisdiction Under(overprovision) in respect of prior years Tax effect of estimated tax losses not recognised Income tax concession Deferred tax on withholding tax arise from PRC subsidiary Taxation for the year	2010 HK$’000 (468,024) (77,224) 77,155 (3,043) 514 1,406 2,577 – – 1,385	2009 HK$’000 (21,340) (3,521) 5,248 (940) 881 (399) 44 33 185 1,531

– 152 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

12. Loss for the year

	2010	2009
	HK$’000	HK$’000
Loss for the year has been arrived
at after charging:
Auditor’s remuneration	980	780
Cost of inventories recognised as an expense	85,641	128,560
Depreciation of property, plant and
equipment and investment property	1,909	1,650
Release of prepaid lease payments	275	87
Operating lease rentals in respect of
rented premises	7,413	4,775
Staff costs:
Directors’ emoluments (note 13)	2,062	2,650
Other staff costs
– salaries, bonus and other allowances	40,876	43,499
– retirement benefit scheme contributions	3,655	4,345
– share-based payments	136	498
	46,729	50,992

– 153 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

13. Directors’ emoluments

The emoluments paid or payable to each of the eight (2009: six) directors were as follows:

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2010 2009
Retirement Retirement
Salaries benefit Share- Salaries benefit Share-
and other scheme based and other scheme based
Fee allowances Bonus contributions payments Total Fee allowances Bonus contributions payments Total
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
(Note a) (Note a)
Choi Hon Hing (Note c) – 672 – 12 25 709 – 546 550 12 177 1,285
Fung Wing Ki, Vicky – 265 – 11 18 294 – 195 200 9 132 536
Fung Wing Yee, Wynne
(Note c) – 274 – 11 18 303 – 215 100 10 132 457
Ng Cheuk Fan, Keith
(Note b) – 220 – 7 – 227 – – – – – –
Mok Chiu Kuen (Note b) 105 – – – – 105 – – – – – –
Tam Hok Lam, Tommy 118 – – – 26 144 70 – – – 54 124
Hui Ka Wah, Ronnie 118 – – – 26 144 70 – – – 54 124
Leung Man Chun, Paul 110 – – – 26 136 70 – – – 54 124
451 1,431 – 41 139 2,062 210 956 850 31 603 2,650
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Notes:
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(a) Bonus was determined by the remuneration committee having regard to the performance of directors and the Group’s operating result.
(b) On 1st September, 2009, Mr. Ng Cheuk Fan, Keith and Mr. Mok Chiu Kuen were appointed as directors of the Company.
(c) On 1st April, 2010, Ms. Choi Hon Hing and Ms. Fung Wing Yee, Wynne were resigned as directors of the Company.

During the year, no emoluments were paid by the Group to any of the directors as an inducement to join or upon joining the Group or as compensation for loss of office. None of the directors has waived any emoluments during the year.

– 154 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14. Employee’s emoluments

Of the five individuals with the highest emoluments in the Group, one (2009: one) was director of the Company whose emoluments is included in the disclosures in note 13 above. The emoluments of the remaining four individuals (2009: four individuals) were as follows:

Salaries and other allowances Bonus Retirement benefit scheme contributions Share-based payments	2010 HK$’000 3,400 162 228 30 3,820	2009 HK$’000 3,456 165 235 87
		3,943

The emoluments were within the following bands:

	2010	2009
	No. of	No. of
	employees	employees
Nil to HK$1,000,000	2	2
HK$1,000,001 to HK$1,500,000	1	1
HK$1,500,001 to HK$2,000,000	1	1

During the year, no emoluments or discretionary bonus were paid by the Group to the above highest paid individuals as an inducement to join or upon joining the Group or as compensation for loss of office.

– 155 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15. Dividends

	2010	2009
	HK$’000	HK$’000
Dividends recognised as distribution
– HK$0.012 (2009: HK$0.025) per share	5,028	10,287

No final dividend for the year ended 31st March, 2010 (2009: HK$0.012 per share) has been proposed by directors.

16. Loss per share

The calculation of the basic and diluted loss per share attributable to the owners of the Company is based on the following data:

Loss Loss for the purpose of basic and diluted loss per share Number of shares Weighted average number of ordinary shares for the purpose of basic and diluted loss per share	2010 HK$’000 (469,409) ’000 628,855	2009 HK$’000 (22,871)

		’000 410,335

Note: No diluted loss per share is presented, as the exercise of the conversion rights of the Company’s outstanding convertible notes and/or share options would result in a decrease in loss per share.

– 156 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

17. Property, plant and equipment

COST At 1st April, 2008 Exchange adjustments Additions At 31st March, 2009 Exchange adjustments Additions Acquired on acquisition of subsidiaries (note 36) At 31st March, 2010 DEPRECIATION AND IMPAIRMENT At 1st April, 2008 Exchange adjustments Provided for the year At 31st March, 2009 Exchange adjustments Provided for the year Impairment loss recognised in profit or loss At 31st March, 2010 CARRYING VALUES At 31st March, 2010 At 31st March, 2009	Freehold land HK$’000 598 (101) – 497 10 – – 507 – – – – – – – – 507 497	Buildings on freehold land HK$’000 8,305 (1,406) – 6,899 135 – – 7,034 667 (116) 174 725 14 170 – 909 6,125 6,174	Buildings HK$’000 7,346 – – 7,346 – – 2,800 10,146 1,945 – 147 2,092 – 204 – 2,296 7,850 5,254	Mining structures HK$’000 – – – – – – 39,546 39,546 – – – – – – – – 39,546 –	Construction in progress HK$’000 – – – – – – 1,391 1,391 – – – – – – – – 1,391 –	Leasehold improvements HK$’000 4,091 – – 4,091 – 1,247 – 5,338 3,049 – 293 3,342 – 401 912 4,655 683 749	Plant and machinery HK$’000 7,138 (16) 196 7,318 – 136 7,334 14,788 6,501 (9) 221 6,713 – 379 – 7,092 7,696 605	Furniture, fixtures, and equipment HK$’000 3,522 (249) 224 3,497 91 439 693 4,720 2,108 (207) 516 2,417 68 498 – 2,983 1,737 1,080	Moulds HK$’000 8,064 2 109 8,175 – 66 – 8,241 7,670 1 202 7,873 – 132 – 8,005 236 302	Motor vehicles HK$’000 11 – 241 252 – 290 1,261 1,803 1 – 65 66 – 93 – 159 1,644 186	Total HK$’000 39,075 (1,770) 770
											38,075 236 2,178 53,025
											93,514
											21,941 (331) 1,618
											23,228 82 1,877 912
											26,099
											67,415

											14,847

– 157 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Depreciation is provided to write off the cost of items of property, plant and equipment, other than freehold land, mining structures and construction in progress, over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method, at the following rates per annum:

Freehold land Nil Buildings on freehold land 2% Buildings 2% to 10% Construction in progress Nil Leasehold improvements 20% Plant and machinery 6[2] /3% to 33[1] /3% Furniture, fixtures and equipment 20% Moulds 20% Motor vehicles 10% to 25%

Mining structures (including the main and auxiliary mine shafts and underground tunnels) are depreciated on the units of production method utilising only recoverable coal reserve as the depletion base. For the year ended 31st March, 2010, no depreciation on mining structures was charged to profit or loss as there was no production since the date of acquisition of subsidiaries to the end of the reporting period. The Group is in the process to carry out various technical and quality improvements at the Group’s coal mine in the PRC to attain the safety standard in accordance with the new regulations imposed by the PRC authority in 2009.

The freehold land and buildings on freehold land of the Group are located outside Hong Kong.

As at the end of the reporting period, buildings of HK$3,228,000 (2009: HK$499,000) are located outside Hong Kong and remaining buildings of HK$4,622,000 (2009: HK$4,755,000) are located in Hong Kong. The buildings of the Group are held under medium-term lease.

– 158 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. Prepaid lease payments

Analysed for reporting purpose as Current asset Non-current asset The Group’s prepaid lease payments comprise: Leasehold land in Hong Kong Leasehold land outside Hong Kong	2010 HK$’000 1,081 28,686 29,767 2,575 27,192 29,767	2009 HK$’000 – 3,382
		3,382

		2,643 739
		3,382

The leasehold land of the Group is held under medium-term lease and charged to profit or loss on a straight-line basis over the lease terms.

Included in leasehold land outstanding Hong Kong with medium-term are land use rights with carrying amount of HK$14,060,000 (2009: nil) which are located in the PRC. The Group is in the process of obtaining the land use right certificates.

– 159 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

19. Investment property

COST At 1st April, 2008, 31st March, 2009 and 2010 DEPRECIATION AND IMPAIRMENT At 1st April, 2008 Provided for the year Impairment loss recognised At 31st March, 2009 Provided for the year At 31st March, 2010 CARRYING VALUES At 31st March, 2010 At 31st March, 2009	HK$’000 1,624
	317 32 185
	534 32
	566
	1,058

	1,090

The fair value of the Group’s investment property at 31st March, 2010 was HK$1,058,000 (2009: HK$1,090,000). The fair value as at 31st March, 2010 and 2009 had been arrived at based on a valuation carried out by RHL Appraisal Ltd., independent valuer not connected with the Group. RHL Appraisal Ltd. are members of Institute of Valuers. The valuation was determined by reference to recent market evidence of transaction prices for similar properties.

The above investment property is located in Hong Kong, held under medium lease term and depreciated on a straight-line basis over the term of the lease of 50 years.

– 160 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

20. Goodwill

COST At 1st April Exchange adjustments Arising on acquisition of subsidiaries (note 36) At 31st March IMPAIRMENT At 1st April Impairment loss recognised in the year At 31st March CARRYING VALUES At 31st March	2010 HK$’000 10,523 51 411,158 421,732 – 421,732 421,732 –	2009 HK$’000 12,670 (2,147) – 10,523 – – – 10,523

Particulars regarding impairment testing on goodwill are disclosed in note 22.

– 161 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

21. Mining rights

COST At 1st April, 2008 and 31st March, 2009 Acquisition of subsidiaries (note 36) At 31st March, 2010 AMORTISATION At 1st April, 2008 and 31st March, 2009 and 2010 CARRYING VALUES At 31st March, 2010 At 31st March, 2009	HK$’000 – 1,903,116
	1,903,116
	–
	1,903,116

	–

The mining rights will be expired in December 2010. Based on the advice from the Company’s legal counsel, the Group will be entitled to renew the mining rights upon the expiration at minimal cost.

Mining rights are amortised based on the units of production method utilising only recoverable coal reserves as the depletion base. For the year ended 31st March, 2010, no amortisation on mining rights were charged to profit or loss as there were no production since the date of acquisition of subsidiaries to the end of the reporting period. The Group is in the process to carry out various technical and quality improvements at the Group’s coal mine in the PRC to attain the safety standard in accordance with the new regulations imposed by the PRC authority in 2009.

– 162 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

22. Impairment test on goodwill and mining rights

For the purposes of impairment testing, goodwill and mining rights have been allocated to the cash generating units (“CGUs”) arising from Dardel, a subsidiary in France principally engaged in sales of quality plastic and paper boxes for luxury consumer goods (“Unit A”) and subsidiaries acquired from the Acquisitions, principally engaged in coal mining business (“Unit B”). The carrying amounts of goodwill and other intangible assets as at 31st March, 2010 and 2009 allocated to these CGUs are as follows:

Sales of quality plastic and paper boxes for luxury consumer goods (Unit A) Coal mining (Unit B) Total	Goodwill 2010 2009 HK$’000 HK$’000 – 10,523 – – – 10,523	Mining rights 2010 2009 HK$’000 HK$’000 – – 1,903,116 – 1,903,116 –	Total 2010 2009 HK$’000 HK$’000 – 10,523 1,903,116 – 1,903,116 10,523	Total 2010 2009 HK$’000 HK$’000 – 10,523 1,903,116 – 1,903,116 10,523
				10,523

Management of the Group considers cashflow projections which was prepared based on financial budgets and determined that there was no impairment of the CGUs containing goodwill as at 31st March, 2009. During the year ended 31st March, 2010, the Group recognised an impairment loss of HK$10,574,000 and HK$411,158,000 in relation to goodwill allocated to Unit A and Unit B respectively.

As a result of the pessimistic market condition in Europe, the management expects that the demand of the Group’s products produced by Unit A will be decreased in the near future, hence impairment is required.

The goodwill arising from the Acquisitions amounted to HK$411,158,000, representing the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of the acquired subsidiaries. In accordance with HKFRS 3 “Business combinations” issued by the HKICPA, the cost of the Acquisitions were determined based on the fair values of the consideration at the acquisition date, including convertible notes and the Company’s shares which were determined by reference to the market value of the ordinary shares of the Company with adjustments to take into account the terms and conditions upon which shares were issued. The Group has performed an impairment test assessment on the carrying amount of Unit B based on value in use calculations.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The directors expected the operation scale of Unit B after the Acquisitions would be further expanded by incorporating the resources of the Group, including the construction of coal washing plant. However, such expectations are not incorporated as assumptions in preparing the cash flow forecasts for impairment testing purpose as actual economic benefit has not been realised as at 31st March, 2010 and therefore not included in the value in use calculations. Since the carrying amount of the Unit B is significantly above its recoverable amount, the Group fully impaired the amount of goodwill of HK$411,158,000 in the current year.

The basis of the recoverable amount of the above CGUs and the major underlying assumptions are summarised below:

Unit A

The recoverable amount of the Unit A is determined based on value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the year. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the Unit A. The growth rates are based on industry growth forecast. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.

The Group prepares cash flow forecast derived from the most recent financial budget approved by management for the next five years, assuming negative growth of 5% (2009: positive 4%) per annum. Cash flows for further five years are extrapolated at zero growth rate, which is determined based on past performance and management’s expectations for the market development.

The rate used to discount the forecast cash flow is 14% (2009: 14%).

Due to the unfavourable market situation in Europe, the carrying value of Unit A exceeds its value in use based on the cash flow projections. Accordingly, an impairment loss of approximately HK$10,574,000 is recognised during the year ended 31st March, 2010.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Unit B

The recoverable amount of Unit B is determined on the basis of value in use calculations. Value in use calculation is based on a discount rate of 19.27% and cash flow projections prepared from financial forecasts approved by the directors of the Group covering a period of 23 to 24 years until the mine reserve run out. Other key assumptions for the value in use calculations relate to the estimation of cash inflows/ outflows which include budgeted sale and gross margin, such estimation is based on the past performance and the directors’ expectations for the market development.

23. Available-for-sale investments

Available-for-sale investments include: Equity securities listed in Hong Kong, at fair value Equity securities listed outside Hong Kong, at fair value Unlisted equity securities, at cost Club debentures, at fair value Unlisted debt securities, at fair value	2010 HK$’000 1,253 114 13,480 2,710 3,900 21,457	2009 HK$’000 9,036 2,025 15,705 2,710 4,680
		34,156

Fair values of listed equity securities are based on quoted market bid price.

The unlisted equity securities are measured at cost less impairment at the end of the reporting period because the range of reasonable fair value estimates is so significant that the directors of the Company are of the opinion that their fair values cannot be measured reliably. During the year ended 31st March, 2010, the Group disposed of certain unlisted equity securities with an aggregate carrying value of approximately HK$2,225,000 to an independent third party at cost, which had been carried at cost less impairment before the disposal. During the year ended 31st March, 2009, the Group received cash return of HK$1,113,000 due to capital reduction of a private company, which represented a recovery of part of the cost of the unlisted equity securities.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Club debentures are stated at fair values which have been determined by reference to the quoted prices in the secondary markets.

Unlisted debt securities represent debt securities in the principal amount of US$500,000 (or equivalent to HK$3,900,000) issued by a private company incorporated in Cayman Islands. The debt securities can be converted into shares of this private company if the initial public offering of shares of this private company is successful. The debt securities carry interest at 10% per annum and expected to be settled together with the principal amount on 1st January, 2012. In the opinion of the directors, the amount of the embedded conversion option is insignificant.

During the year ended 31st March, 2010, the counterparty notified the Group, its intention to cease its initial public offering plan and started to negotiated with its investors on the settlement plan of the debt securities issued. In view of the increase in default risk, the Group actively identify potential buyer for its investment and has identified an independent third party as potential buyer of the debt securities, at a consideration of not less than HK$3,900,000. In the opinion of the directors, the transaction is likely to be completed in the coming year, as a result, the difference between the carrying value and the expected consideration of HK$780,000 was recognised as an impairment loss during the year ended 31st March, 2010.

24. Pledged bank deposits

As at 31st March, 2009, pledged bank deposits represented deposits pledged to banks to secure undrawn banking facilities granted to the Group carried average interest rate of 2.2% per annum.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25. Deferred taxation

The following are the major deferred tax assets (liabilities) recognised and movements thereon during the current and prior reporting periods:

At 1st April, 2008 (Charge) credit to profit or loss (note 11) At 31st March, 2009 Arising on acquisition of subsidiaries (note 36) Credit to profit or loss (note 11) At 31st March, 2010	Mining rights HK$’000 – – – (471,876) – (471,876)	Withholding tax arise from PRC subsidiaries (note) HK$’000 – (185) (185) – – (185)	Revaluation of property, plant and equipment and prepaid lease payments HK$’000 – – – (3,368) 43 (3,325)	Tax losses HK$’000 – 390 390 – – 390	Total HK$’000 – 205
					205 (475,244) 43
					(474,996)

Note: Under the New Law of the PRC, withholding tax is imposed on dividends declared in respect of profits earned by PRC subsidiaries from 1st January, 2008 onwards.

For the purposes of consistent presentation in the consolidated statement of financial position, certain deferred tax assets and liabilities have been offset.

At 31st March, 2010, the Group had unused estimated tax losses of HK$18,473,000 (2009: HK$2,855,000) available to offset against future profits. A deferred tax asset has been recognised in respect of HK$2,364,000 (2009: HK$2,364,000) of such losses. No deferred tax asset has been recognised in respect of the remaining tax losses of HK$16,109,000 (2009: HK$491,000) due to the unpredictability of future profit streams. The tax losses may be carried forward indefinitely.

– 167 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26. Inventories

Raw materials Work in progress Finished goods	2010 HK$’000 10,989 5,508 4,692 21,189	2009 HK$’000 14,748 4,941 9,728
		29,417

27. Other current financial assets

Trade and bills receivables

Trade receivables Bills receivable	2010 HK$’000 8,915 399 9,314	2009 HK$’000 15,876 1,557
		17,433

Included in the Group’s trade and bills receivables are receivables of approximately HK$5,890,000 (2009: HK$12,444,000) denominated in US$ which is the currency other than the functional currency of the respective group entities.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group allows an average credit period of 30 to 60 days (2009: 30 to 60 days) to its customers. The aged analysis of trade and bills receivables is stated as follows:

0 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days	2010 HK$’000 7,349 1,816 149 – 9,314	2009 HK$’000 13,276 3,060 468 629
		17,433

In determining the recoverability of trade and bills receivables, the Group considers any change in the credit quality of the trade receivables from the date credit was initially granted up to the report date. The Group considers the trade and bills receivables are determined to be impaired if they are aged for more than 180 days based on the management past experience. The directors believe that there is no further credit provision required as at the end of the reporting period.

Included in the Group’s trade receivable balance are debtors with aggregate carrying amount of approximately HK$1,838,000 (2009: HK$3,109,000) as at 31st March, 2010, which are past due at the reporting date for which the Group has not provided for impairment loss as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral over these balances. The average age of these trade receivables is 46 days (2009: 62 days) in the year of 2010.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Ageing of trade receivables which are past due but not impaired

Overdue by 1 to 30 days Overdue by 31 to 60 days Overdue by 61 to 180 days	2010 HK$’000 1,795 43 – 1,838	2009 HK$’000 1,758 590 761
		3,109

Other receivables, deposits and prepayments

Other receivables and deposits comprise amounts receivable from third parties and recoverable within one year.

Included in the Group’s other receivables are receivables of approximately HK$5,384,000 (2009: HK$8,332,000) denominated in currencies other than the functional currency of the respective group entities.

Bank balances and cash

Bank balances and cash comprise cash held by the Group and short-term bank deposits carrying effective interest at approximate 0.17% (2009: 1.4%) per annum.

The bank balances and cash of approximately HK$191,851,000 (2009: HK$21,034,000) are denominated in currencies other than the functional currency of the respective group entities.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. Investments held for trading

Investments held for trading include: Equity securities listed in Hong Kong, at fair value Equity securities listed outside Hong Kong, at fair value Unlisted debt securities, at fair value	2010 HK$’000 300 3 – 303	2009 HK$’000 3,229 1,033 8,238
		12,500

Fair values of listed investments held for trading are based on quoted market bid price.

As at 31st March, 2009, the investments in debt securities offered the Group the opportunity for return through interest income and trading gains. These debt securities have fixed maturity and was matured in year 2010 and fixed coupon rate ranged from 3.625% to 6.25% per annum.

The investments held for trading of approximately HK$3,000 (2009: HK$9,364,000) are denominated in currencies other than the functional currency of the respective group entities.

29. Restricted bank deposits

In respect of the Acquisitions, the Company, Win Team and the Vendors entered into a supplemental agreement on 22nd December, 2009 (the “Supplemental Agreement”). Pursuant to the Supplemental Agreement, the Vendors have provided a specific indemnity to the Group against all or any loss or damages that may be incurred or suffered by the Group, as a result of certain outstanding litigations, fines and penalties, breaches of representations and warranties or certain liabilities uncovered during the due diligence review and investigation in respect to the Acquisitions (“Indemnity Obligations”). The estimated total losses and liabilities in respect to the Indemnity Obligations is amounted to US$16.81 million (equivalent to approximately HK$131.12 million).

– 171 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Pursuant to the Supplemental Agreement, a bank account is opened, which is used solely to retain part of the cash consideration payable for the Acquisitions of US$14.48 million (equivalent to approximately HK$112.94 million) to the Vendors (“Special Purpose Account”). The Group is entitled to set off any sums due to it by the Vendors in connection to the Indemnity Obligations against the monies in the Special Purpose Accounts, and to the extent that the balance in the Special Purpose Account is not sufficient to keep the Group fully indemnified, the Group have the right to set off any sums against the amount outstanding in the convertible notes issued as part of the considerations for the Acquisitions (as set out in note 33) at its discretion, subject to a maximum cap of US$2.33 million (equivalent to approximately HK$18.17 million).

As at 31st March, 2010, HK$54,586,000 was retained in the restricted bank deposits for the future settlement of the remaining balance of the Indemnity Obligations.

30. Other current financial liabilities

Trade payables

Trade payables principally comprise amounts outstanding for trade purchases. The average credit period taken for trade purchases is 30 to 60 days. The aged analysis of trade payables is stated as follows:

0 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days	2010 HK$’000 2,963 1,133 652 1,153 5,901	2009 HK$’000 3,879 1,660 765 396
		6,700

Included in the Group’s trade payables are payables of HK$2,529,000 (2009: HK$1,049,000) denominated in currencies other than the functional currency of the respective group entities.

– 172 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Other payables, deposits received and accruals

Other payables principally comprise amounts outstanding for ongoing costs.

As at 31st March, 2010, included in other payables, deposits received and accruals, HK$65,450,000 represented the unsettled portion of the Indemnity Obligations, of which HK$54,586,000 will be settled by balance deposited in the Special Purpose Account and HK$10,864,000 will be settled by cancellation of convertible notes.

31. Bank borrowing

	2010	2009
	HK$’000	HK$’000
Bank borrowing – secured	9,080	–

At 31st March, 2010, bank borrowing is denominated in Renminbi, carrying interest at 80% above the benchmark interest rate announced by the People’s Bank of China and repayable on 29th October, 2010. The effective interest rates range from 7.965% to 9.5% per annum. The loan is secured by a leasehold land in the PRC of the Group and a corporate guarantee executed by an independent third party to the extent of RMB8,000,000 (equivalent to approximately HK$9,080,000) with deposit placed with the third party amounted to RMB2,000,000 (equivalent to approximately HK$2,270,000). At 31st March, 2010, carrying value of land charged in favour of the bank is approximately HK$12,600,000.

32. Retirement benefit schemes

The Group operated a pension scheme under rules and regulations of Mandatory Provident Fund Schemes Ordinance (“MPF Scheme”). The assets of the MPF Scheme are held separately in an independently administrated fund. The Group has chosen to follow the minimum statutory contribution requirement of 5% of eligible Hong Kong employees’ monthly relevant income but limited to the cap of HK$1,000 per month. The contributions are charged to profit or loss.

– 173 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The employees of the Group’s subsidiaries in the PRC and a subsidiary in France are members of state-managed retirement benefit schemes operated by respective local governments. The subsidiaries are required to contribute a specific percentage of their payroll costs to the retirement benefit schemes. The only obligation of the Group with respect to the retirement benefit scheme is to make the specified contributions.

During the year, the total amounts contributed by the Group to the schemes and cost charged to the profit or loss of HK$3,696,000 (2009: HK$4,376,000) represents contribution paid or payable to the schemes by the Group at rates specified in the rules of the schemes.

Defined benefit plan

The Group operates an unfunded defined benefit plan for qualifying employees of its subsidiary in France. Under the scheme, the employees are entitled to retirement benefits which is based on the estimated final salary and the length of the service to the retirement. No other post-retirement benefits are provided.

33. Convertible notes and embedded derivatives

As part of the consideration for the Acquisitions, convertible notes with principal amount of US$135.51 million (equivalent to approximately HK$1,050,345,000) were issued at par with conversion price of HK$0.88 per share (the “Convertible Notes”) to the Vendors on the Completion Date.

The Convertible Notes are denominated in US$ and non-interest bearing. The holders of the Convertible Notes are entitled to convert the notes into 1,193,573,947 ordinary shares aggregately of the Company (“Conversion Shares”) at conversion price of HK$0.88 at any time from the date of issue to 24th January, 2018 (the “Maturity Date”) subject to the restriction stated as below. The Conversion Shares shall rank pari passu in all respects with all other existing shares outstanding at the date of the conversion.

The Company has the right to cancel the Convertible Notes up to US$2.33 million (equivalent to approximately HK$18.17 million) (the “Redemption Cap”) at its option at any time prior to the Maturity Date if any Indemnity Obligations, as set out in note 29, arise or incur that the monies in the Special Purpose Account is not sufficient to keep the Group fully indemnified. As at 31st March, 2010, remaining Indemnity Obligations was amounted to HK$65,450,000, as the Special Purpose Account are not sufficient to indemnified the Group for such liabilities, the HK$10,864,000 will be settled through cancellation of the Convertible Notes.

– 174 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The conversion rights shall not be exercised by the Vendors if, immediately following the conversion (i) the Company will be unable to meet the public float requirement under the Listing Rules; (ii) the Vendors together with the parties acting in concert with it will hold or control such amount of the Company’s voting power at general meetings as may trigger a mandatory general offer under The Code on Takeovers and Mergers issued by the Securities and Future Commission (“Takeover Code”); or (iii) the outstanding amount of the Convertible Notes will be less than the Redemption Cap.

In addition, the Convertible Notes holders shall not, without the prior written consent of the Group, transfer or otherwise dispose of all or any of the Convertible Notes or the Conversion Shares (i) as to an amount representing two-thirds of the face value of the Convertible Notes within the first twelve-month period following completion; and (ii) as to an amount representing one-third of the face value of the Convertible Notes within the second twelve-month period following completion.

On 9th and 11th February, 2010 (the “Conversion Dates”), principal amounts of approximately HK$69,760,000 and HK$271,288,000 of the Convertible Notes were converted into 79,272,614 shares and 308,282,380 shares of the Company respectively at the conversion price of HK$0.88 per share. As at 31st March, 2010, the outstanding principal amount of the Convertible Notes was HK$709,297,000.

The Convertible Notes contain the following components that are required to be separately accounted for in accordance with HKAS 39 “Financial instruments: Recognition and Measurement”:

(a) Liability component of the Convertible Notes represents the present value of the contractually determined stream of future cash flows discounted at the rate of interest at that time 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 option. The effective interest rate of the liability component is 8.52% per annum.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Embedded derivatives comprise of embedded conversion option of the Convertible Notes represents the option to convert the liability into equity of the Company but the conversion will be settled other than by the exchange of a fixed number of the Company’s own equity.

At 1st April, 2008 and 2009 Issued during the year, net of issue costs Conversion during the year Imputed interest charged (note 10) Loss arising from change in fair value recognised in profit or loss At 31st March, 2010	Liability HK$’000 – 541,195 (178,666) 6,765 – 369,294	Embedded conversion option HK$’000 – 500,339 (138,548) – 30,974 392,765	Total HK$’000 – 1,041,534 (317,214) 6,765 30,974
			762,059

The fair value of the embedded conversion option is calculated using the Binomial Option Pricing Model. The inputs into the model at the Completion Date, the Conversion Dates and 31st March, 2010 were as follows:

Share price Conversion price Expected life (note a) Risk free rate (note b) Expected volatility (note c)	Completion Date HK$1.35 HK$0.88 8 years 2.550% 75.972%	9th February, 2010 HK$1.03 HK$0.88 7.96 years 2.556% 75.813%	11th February, 2010 HK$1.03 HK$0.88 7.96 years 2.638% 75.830%	31st March, 2010 HK$1.21 HK$0.88 7.83 years 2.544% 75.318%

Notes:

(a) Expected life was the expected remaining life of the embedded conversion option.
(b) The risk free rate is determined by reference to the Hong Kong Exchange Fund Note.
(c) Expected volatility for embedded conversion option was estimated by calculating the historical weekly share price volatility of the comparable companies engaged in similar businesses as the Group’s various business segments.

– 176 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

34. Share capital

Ordinary shares of HK$0.05 each Authorised: At 1st April, 2008 and 31st March, 2009 Increase during the year At 31st March, 2010 Issued and fully paid: At 1st April, 2008 Exercise of share options (note a) At 31st March, 2009 Exercise of share options (note b) Placing of shares (note c) Issue of shares for acquisition of subsidiaries (note d) Shares issued upon conversion of Convertible Notes (note e) At 31st March, 2010	Number of shares 2,000,000,000 3,000,000,000 5,000,000,000 405,626,144 5,866,582 411,492,726 9,232,535 554,216,000 323,696,505 387,554,994 1,686,192,760	Share capital HK$’000 100,000 150,000
		250,000

		20,281 293
		20,574 462 27,710 16,185 19,378
		84,309

– 177 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Details of the changes in the Company’s share capital for the year ended 31st March,
2009 and 2010 are as follows:
(a) On 12th June, 2008, share options for 5,866,582 of HK$0.05 each were exercised at the exercise price of HK$0.225. Details of options outstanding and movements during the year are set out in note 39.
(b) On 24th July, 2009, 21st and 23rd September, 2009, share options for 8,062,535, 90,000 and 1,080,000 of HK$0.05 each were exercised at the exercise price of HK$0.225, HK$0.536 and HK$0.860 respectively. Details of options outstanding and movements during the year are set out in note 39.
(c) On 25th January, 2010, private placements to independent private investors of 554,216,000 new shares of HK$0.05 each in the Company were completed, at placing price of HK$1.26 per share.
(d) On 25th January, 2010, the Company issued 323,696,505 shares (“Consideration Shares”) to the Vendors as part of the consideration for the acquisition of subsidiaries.
(e) On 9th and 11th February, 2010, 79,272,614 and 308,282,380 new ordinary shares of the Company of HK$0.05 each were issued upon the partial conversion of the Convertible Notes (see note 33) respectively. Convertible Notes with principal amounts of approximately HK$69,760,000 and HK$271,288,000 of the Convertible Notes were converted into 79,272,614 shares and 308,282,380 shares of the Company at the conversion price of HK$0.88 per share respectively.

All the shares which were issued during the year rank pari passu with the then existing shares in all respects.

– 178 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

35. Reserves Statutory surplus reserve At the beginning of year Transfer from retained profits At the end of year Share option reserve At the beginning of year Transfer to share premium upon exercise of share options Recognition of equity-settled share-based payments At the end of year Asset revaluation reserve At the beginning of year Fair value changes on available-for sale- investments Reclassified adjustment to profit or loss on disposal At the end of year	2010 HK$’000 2,281 1,258 3,539 2010 HK$’000 2,664 (2,469) 275 470 2010 HK$’000 1,916 853 (130) 2,639	2009 HK$’000 2,100 181 2,281 2009 HK$’000 3,094 (1,531) 1,101 2,664 2009 HK$’000 (3,711) 5,627 – 1,916

– 179 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Special reserve

At the beginning and the end of year Translation reserve At the beginning of year Exchange differences arising on translation of foreign operations At the end of year	2010 HK$’000 (5,754) 2010 HK$’000 8,456 1,045 9,501	2009 HK$’000 (5,754) 2009 HK$’000 13,659 (5,203) 8,456

Translation reserve

36. Acquisition of subsidiaries

For the year ended 31st March, 2010

On 25th January, 2010, the Group acquired 100% of the entire equity interest in Merrymaking Investments Ltd. and Pleasing Results Ltd. from the Vendors, with their subsidiaries principally engaged in exploitation of coal business, coal mining and development of underground coking coal mine in the PRC. The fair value of the aggregate net consideration for the Acquisitions was HK$1,638,618,000. These transactions have been accounted for using the purchase method. The amount of goodwill as a result of the Acquisitions was HK$411,158,000.

– 180 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The net assets acquired in the transaction are as follows:

Net assets acquired: Property, plant and equipment Prepaid lease payments Mining rights Deposit paid for acquisition of property, plant and equipment Inventories Other receivables, deposits and prepayments Bank balances and cash Other payables, deposits received and accruals (note e) Bank borrowing Deferred tax liabilities Goodwill from acquisition Total consideration Total consideration satisfied by: Cash (note a) Shares issued (note b) Convertible notes issued (note c) Direct attributable cost in respect to business combination Less: Cash consideration retained in the Special Purpose Account for settlement of the Indemnity Obligations (note d) Net cash outflow arising on acquisition: Net cash consideration paid Bank balances and cash acquired	Acquiree’s carrying amount before combination HK$’000 53,025 26,660 1,356,905 79,286 261 4,370 808 (355,742) (9,080) (338,691) 817,802	Fair value adjustments HK$’000 – – 546,211 – – – – – – (136,553) 409,658	Fair value HK$’000 53,025 26,660 1,903,116 79,286 261 4,370 808 (355,742) (9,080) (475,244) 1,227,460 411,158 1,638,618 293,994 403,819 1,041,534 12,215 (112,944) 1,638,618 (193,265) 808 (192,457)

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(a) Pursuant to the Supplemental Agreement, out of the cash portion of the consideration for the Acquisitions of HK$293,994,000, US$15.52 million (equivalent to HK$121,056,000), shall be payable by the Group directly to a former minority shareholder of a subsidiary on the Completion Date.
(b) As part of the consideration for the Acquisitions, 323,696,505 ordinary shares of the Company with par value of HK$0.05 each were issued to the Vendors. The fair value of the Consideration Shares, determined using the published market bid price available at the date of the acquisition with adjustments to take into account the terms and conditions upon which the shares were issued, amounted to approximately HK$403,819,000.
(c) As part of the consideration for the Acquisitions, Convertible Notes and embedded derivatives with fair value as at the Completion Date amounted to HK$1,041,534,000 were issued to the Vendors. Details are set out in note 33.
(d) Details of the Indemnity Obligations are set out in note 29.
(e) At the Completion Date, included in the Group’s acquired other payables, deposits received and accruals, approximately HK$123,808,000 represented the Indemnity Obligations indemnified by the Vendors, of which HK$112,944,000 will be settled by deposited in the Special Purpose Account and HK$10,864,000 will be settled by cancellation of the Convertible Notes. As at 31st March, 2010, HK$58,358,000 of the Indemnity Obligations was settled by the cash retained in the Special Purpose Account.

The consideration of the Acquisitions was satisfied by cash, issue of new shares and issue of convertible notes. In accordance with S&P Agreement, the Vendors are not able to exercise the convertible rights if, immediately following the conversion, the Vendors together with the parties acting in concert with it will hold or control such amount of the Company’s voting power at general meetings as may trigger a mandatory general offer under the Takeover Code.

The subsidiaries acquired are mainly engage in exploitation of coal business, coal mining, and development of underground coking coal mine in the PRC. Full impairment loss on goodwill arising from the Acquisitions of HK$411,158,000 was recognised for the year ended 31st March, 2010, details are set out in note 22.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The acquired subsidiaries contributed net loss of approximately HK$1,944,000 to the Group’s loss for the period between the date of acquisition and the end of the reporting period.

If the Acquisitions had been completed on 1st April, 2009, total group revenue for the year would have been approximately HK$112 million, and loss for the year would have been approximately HK$502 million. The pro forma information is for illustrative purposes only and is not necessarily an indication of revenue and results of operations of the Group that actually would have been achieved had the Acquisitions been completed on 1st April, 2009, nor is it intended to be a projection of future results.

37. Pledge of assets

At 31st March, 2010, other than the pledged bank deposits as disclosed in note 24, the Group has pledged its leasehold land and buildings with carrying values of HK$12,600,000 (2009: nil) to secure the outstanding bank borrowing and HK$3,118,000 (2009: HK$3,220,000) to secure the unutilised general banking facilities granted to the Group.

38. Commitments

(a) Operating lease commitments

At the end of the reporting period, the Group had commitments for future minimum lease payments under non-cancellable operating leases in respect of rented premises which fall due as follows:

Within one year In the second to fifth year inclusive	2010 HK$’000 5,302 10,969 16,271	2009 HK$’000 5,657 6,546
		12,203

Operating lease payments represent rentals payable by the Group for certain of its office and factory premises. Leases are negotiated for lease term of two to five years and rentals are fixed over the relevant lease term.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Capital commitments

Capital expenditure in respect of addition of property, plant and equipment contracted for but not provided in the consolidated financial statements Capital expenditure in respect of addition of property, plant and equipment authorised but not contracted for	2010 HK$’000 108,347 407,783	2009 HK$’000 –

		–

39. Share option schemes

The Company had two share option schemes, including pre-listing share option scheme (the “Pre-Listing Scheme”) and share option scheme (the “Post-Listing Scheme”), which were both adopted on 16th May, 2006. The terms and conditions of the Pre-Listing Scheme and Post-Listing Scheme are set out below.

(A) Pre-Listing Scheme

The major terms of the Pre-Listing Scheme are summarised as follows:

(i) The purpose was to provide incentives to the participants;
(ii) The participants included directors of the Company or its subsidiaries, senior management and other employees of the Group;
(iii) The maximum number of shares in respect of which options might be granted under the Pre-Listing Scheme shall not exceed 19,555,261 shares;

– 184 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(iv) In relation to each grantee of the options granted under Pre-Listing Scheme, the right of the grantee to exercise the option shall vest in three stages: 30% of share options granted (rounded down to the nearest whole number of shares) will vest from the expiry of one year from the listing date (6th June, 2006) up to the day immediately before the fourth anniversary of the listing date; 30% of share options granted (rounded down to the nearest whole number of shares) will vest from the expiry of two years from the listing date up to the day immediately before the fifth anniversary of the listing date; and 40% of the share options granted (round down to the nearest whole number of shares) will vest from the expiry of three years from the listing date up to the day immediately before the sixth anniversary of the listing date;
(v) The exercise price of an option is HK$0.225 per share; and
(vi) No further options will be granted under the Pre-Listing Scheme after the day immediately prior to the date of listing of the Company’s shares.

(B) Post-Listing Scheme

The major terms of the Post-Listing Scheme are summarised as follows:

(i) The purpose was to provide incentives to the participants;
(ii) The participants included any full-time or part-time employees, executives and officers of the Company and any of its subsidiaries (including executive, non-executive directors and independent nonexecutive directors of the Company and any of its subsidiaries) and business consultants and legal and other professional advisors of the Company or its subsidiaries which, in the opinion of the Company’s board of directors, has or had made contribution to the Group;

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(iii) The maximum number of shares in respect of which options might be granted under the Post-Listing Scheme must not exceed 30% of the issued share capital of the Company from time to time. The number of shares issued and to be issued in respect of which options granted and may be granted to any individual in any 12 months period is not permitted to exceed 1% of the shares of the Company in issue at any point in time, without prior approval from the Company’s shareholders. Options granted to a substantial shareholder or an independent nonexecutive director in excess of 0.1% of the Company’s share capital or with a value in excess of HK$5 million must be approved in advance by the Company’s shareholders;
(iv) In relation to each grantee of the options granted under the Post-Listing Scheme, the right of the grantee to exercise the option shall vest in three stages: 30% of share options granted (rounded down to the nearest whole number of shares) will vest from the expiry of one year from the acceptance date of the option (the “Acceptance Date”) up to the day immediately before the fourth anniversary of the Acceptance Date; 30% of share options granted (rounded down to the nearest whole number of shares) will vest from the expiry of two years from the Acceptance Date up to the day immediately before the fifth anniversary of the Acceptance Date; and 40% of the share options granted (round down to the nearest whole number of shares) will vest from the expiry of three years from the Acceptance Date up to the day immediately before the sixth anniversary of the Acceptance Date;
(v) The exercise price of an option will be determined by the board of directors of the Company and will not be less than the highest of:
the closing price of the share on the date of grant;
the average closing price of the share for the 5 business days immediately preceding the date of grant;
the nominal value of the share; and

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(vi) A consideration of HK$1 is payable on acceptance of the offer of grant of options.

Details of the share options outstanding and movements during the two years were as follows:

	Number of	share options
Exercised during the year (Note a) (1,333,294) – (999,979) – (999,979) – – – – – – – – – – – – – (240,438) (2,292,892) – – – – – – – (5,866,582) 0.225	Lapsed during the year – – – – – – – – – – – – – – – – – – – – – (45,000) (45,000) (60,000) – – – (150,000) 0.860	Outstanding at 31st March, 2009 – 1,777,725 – 1,333,304 – 1,333,304 120,000 120,000 160,000 120,000 120,000 160,000 120,000 120,000 160,000 180,000 180,000 240,000 – 240,438 3,377,764 105,000 105,000 140,000 90,000 90,000 120,000 10,512,535 0.371 1,020,438	Exercised during the year (Note b) – (1,777,725) – (1,333,304) – (1,333,304) (120,000) (120,000) – (120,000) (120,000) – (120,000) (120,000) – (180,000) (180,000) – – (240,438) (3,377,764) – – – (90,000) – – (9,232,535) 0.302	Outstanding 31st March, 2010 – – – – – – – – 160,000 – – 160,000 – – 160,000 – – 240,000 – – – 105,000 105,000 140,000 – 90,000 120,000
				1,280,000

				0.807

				300,000

– 187 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(a) The weighted average closing price of the Company’s shares at the dates of exercise was HK$0.662 per share.

(b)	The weighted average closing price of the Company’s shares at the dates of exercise was
	HK$0.798 per share.

(c) On 1st April, 2010, Ms. Choi Hon Hing and Ms. Fung Wing Yee, Wynne have resigned as the directors of the Company.
(d) Mr. Fung Ka Pun (“Mr. Fung”) is a substantial shareholder of the Company and was appointed as an executive director of the Company subsequently on 1st April, 2010.

The Black-Scholes Option Pricing Model has been used to estimate the fair value of the options. The variables and assumptions used in computing the fair value of the share option are based on directors’ best estimate. The value of an option varies with different variables of certain subjective assumptions.

In the current year, share option expenses of approximately HK$275,000 (2009: HK$1,101,000) have been recognised with a corresponding credit in the Group’s share options reserve.

40. Related party transactions

During the year, the Group entered into the following related party transactions:

	2010	2009
	HK$’000	HK$’000
Services fee paid to a related company (note)	11	42

Note: The beneficial owner of this related company is also the director of the Company.

– 188 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The remuneration of directors and other members of key management during the year was as follows:

Salaries and other short-term benefits Post-employment benefits Share-based payments	2010 HK$’000 4,900 240 210 5,350	2009 HK$’000 4,401 222 638
		5,261

The remuneration of directors and key executive is determined by the remuneration committee having regard to the performance of individuals and market trends.

41. Major non-cash transactions

During the year ended 31st March, 2010, as part of the consideration for the Acquisitions, 323,696,505 ordinary share with fair value amounted to HK$403,819,000 and convertible notes and embedded derivatives with aggregated fair value at Completion Date amounted to HK$1,041,534,000 were issued.

During the year ended 31st March, 2010, part of the issued convertible notes with aggregate principal amounts of approximately HK$341,048,000 have been converted into 387,554,994 ordinary shares of the Company.

42. Event after the reporting period

On 1st April, 2010, Mr. Fung was appointed as an executive director of the Company and the Company granted 20,000,000 options at exercise price of HK$1.202 per share to Mr. Fung under the Post-Listing Scheme. The fair value of the share options granted determined at the date of grant using the option pricing model was approximately HK$12,763,000. The fair value of share options granted will be expensed on a straight-line basis over the vesting period from 1 to 3 years. Details of the Post-Listing Scheme are set out in note 39.

– 189 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

43. Particulars of principal subsidiaries of the company

Details of the Company’s principal subsidiaries at 31st March, 2010 and 2009 are as follows:

			Issued and		Proportion of	Proportion of
	Place of		fully paid up		nominal value of
	incorporation		share capital/		issued share capital/
Name of	or registration/	Class of	registered		registered capital
subsidiary	operations	shares held	capital		held by the Company			Principal activities
					2010		2009
				Directly	Indirectly	Directly	Indirectly
Winbox (BVI) Limited	The British Virgin	Ordinary	US$460	100%	–	100%	–	Investment holding
	Islands (“BVI”)
Win Team Investments	BVI	Ordinary	US$1	100%	–	–	–	Investment holding
Limited
Dardel	France	Ordinary	EUR470,000	–	100%	–	100%	Sale of quality plastic and
								paper boxes for luxury
								consumer goods
Fairich Investment	Hong Kong	Ordinary	HK$2	–	100%	–	100%	Investment holding
Limited
First Light Investments	BVI	Ordinary	US$1	–	100%	–	100%	Provision of sub-contracting
Limited								services (intra group service)
						–	100%
Grand Cast Limited	Hong Kong	Ordinary	HK$2	–	100%	–	100%	Investment holding
Golden Hope Holdings	Hong Kong	Ordinary	HK$1	–	100%	–	100%	Investment holding
Limited
Merrymaking Investment	BVI	Ordinary	US$50,000	–	100%	–	–	Investment holding
Limited					(note iii)
Tianyu Coal Company	The PRC (Note ii)	Contributed	RMB43,000,000	–	100%	–	–	Development of underground
Limited		capital			(note iii)			coking coal mine
Tianyu Gongmao	The PRC (Note ii)	Contributed	RMB46,000,000	–	100%	–	–	Exploitation of coal
Company Limited		capital			(note iii)			business, coal mining and
								development of underground
								coking coal mine
Pleasing Results Limited	BVI	Ordinary	US$50,000	–	100%	–	–	Investment holding
					(note iii)
Winbox Company	Hong Kong	Ordinary	Ordinary shares	–	100%	–	100%	Sale of quality plastic and
Limited			HK$5,500,000					paper boxes for luxury
								consumer goods
			Non-voting
			deferred shares
			HK$5,500,000
			(Note i)

– 190 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

			Issued and		Proportion of	Proportion of
	Place of		fully paid up		nominal value of
	incorporation		share capital/		issued share capital/
Name of	or registration/	Class of	registered		registered capital
subsidiary	operations	shares held	capital		held by the Company			Principal activities
					2010		2009
				Directly	Indirectly	Directly	Indirectly
Winbox Plastic	The PRC (Note ii)	Contributed	HK$12,000,000	–	100%	–	100%	Manufacture and sale of quality
Manufacturing		capital						plastic and paper boxes
(Shenzhen)								for luxury consumer goods
								and the provision of sub-
								contracting services (intra
								group service)
Winpac Europe Limited	United Kingdom	Ordinary	£500,000	–	100%	–	100%	Investment holding
Winpac International	Hong Kong	Ordinary	HK$2	–	100%	–	100%	Investment holding
Limited
Winpac Trading Co.	Hong Kong	Ordinary	HK$500,000	–	100%	–	100%	Sale of quality plastic and
Limited								paper boxes for luxury
								consumer goods
Winpac SARL	France	Ordinary	EUR10,000	–	100%	–	100%	Property holding
Wuhai City Menggang	The PRC (Note ii)	Contributed	HK$320,000,000	–	100%	–	–	Investment holding
Industrial Development		capital			(note iii)
Co., Ltd.

Notes:

(i) The holders of the non-voting deferred shares are not entitled to receive notice of or to attend or vote at any general meeting of this subsidiary, and not entitle to participate in the profits of this subsidiary. On a winding up, the holders of the non-voting deferred shares are entitled to be paid out of the surplus assets a return of the capital paid up on such shares after a total of HK$100,000,000 has been distributed in respect of each of the shares.
(ii) These subsidiaries were established in the PRC as wholly foreign-owned enterprise. The English names of these subsidiaries were for identification purpose only.
(iii) These subsidiaries were acquired during the year. Details of the Acquisitions are set out in note 36.

None of the subsidiaries had any debt securities outstanding at the end of the year or at any time during the year.

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results or assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

– 191 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

The following is the full text of a report of the Venture Path Group prepared by Deloitte Touche Tohmatsu which has been prepared for the sole purpose of inclusion in this circular.

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25 May 2011 The Directors

Hao Tian Resources Group Limited

Unit 4803, 48/F, COSCO Tower 183 Queen’s Road Central Hong Kong Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) regarding Venture Path Limited (“Venture Path”) and its subsidiary (hereinafter collectively referred as the “Venture Path Group”) for the period from 8 January 2010 (date of incorporation) to 31 December 2010 (the “Relevant Period”) for inclusion in a circular issued by Hao Tian Resources Group Limited (the “Company”) dated 25 May 2011 (the “Circular”) in connection with the major transaction in respect of the proposed acquisition (the “Acquisition”) of entire issued capital of Venture Path.

Venture Path was incorporated on 8 January 2010 in the British Virgin Islands (“BVI”) and is an investment holding company of West China Coal Mining Holdings Limited (“West China”), which acquired Baicheng Wenzhou Mining Development Co., Ltd.（拜城溫州礦業開發有限公司 (“Baicheng Wenzhou”) ）on 17 February 2011.

Venture Path was incorporated in a country where there is no statutory audit requirement. We have acted as auditor of Venture Path’s subsidiary, West China and audited the statutory financial statements of West China for the period from 3 July 2009 (date of incorporation) to 31 December 2010. For the purpose of this report, the sole director of Venture Path prepared management accounts of the Venture Path Group for the Relevant Period (“Underlying Management Accounts”) in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), and we have carried out independent audit procedures on the Underlying Management Accounts in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

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APPENDIX IIA ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

We have examined the Underlying Management Accounts for the Relevant Period in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” as recommended by the HKICPA.

The Financial Information of the Venture Path Group for the Relevant Period set out in this report has been prepared based on the Underlying Management Accounts. No adjustments were considered necessary to make to the Underlying Management Accounts in preparing our report for inclusion in the Circular.

The sole director of Venture Path is responsible for the Underlying Management Accounts who approve their issue. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the Financial Information set out in this report from the Underlying Management Accounts, to form an independent opinion on the Financial Information and to report our opinion to you.

In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the state of affairs of the Venture Path Group as at 31 December 2010 and of the results and cash flows of the Venture Path Group for the Relevant Period.

– 193 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

(A) FINANCIAL INFORMATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

NOTES Revenue Other expense 12 Administrative expenses Loss before taxation 6 Taxation 7 Loss and total comprehensive expense for the period	HK$’000 – (9) (907) (916) – (916)

– 194 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

NOTES Current assets Bank balances 8 Current liability Amount due to ultimate holding company 9 Net current liabilities Capital and deficit Share capital 10 Deficit	HK$’000 60,547 61,385 (838) 78 (916) (838)

– 195 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Shares issued on 8 January 2010 (date of incorporation) Loss and total comprehensive expense for the period At 31 December 2010	Share capital HK$’000 78 – 78	Deficit HK$’000 – (916) (916)	Total HK$’000 78 (916) (838)

– 196 –

ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

APPENDIX IIA

CONSOLIDATED STATEMENT OF CASH FLOWS

NOTE Operating activities Loss for the period Adjustment for: Other expense Net cash used in operating activities Cash from investing activity Acquisition of a subsidiary 12 Financing activities Issue of shares Advance from ultimate holding company Cash from financing activities Net increase in cash and cash equivalents during the period and at the end of the period	HK$’000 (916) 9 (907) 1 78 61,375 61,453 60,547

– 197 –

ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

APPENDIX IIA

NOTES TO FINANCIAL INFORMATION

1. General and basis of preparation

Venture Path is a private limited company incorporated in the BVI on 8 January 2010. Its immediate and ultimate holding company is Tai Rong Xin Ye International Power Generation Inc. (“Tai Rong”) which is incorporated in the BVI. The address of the registered office of Venture Path is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, BVI and the principal place of business of Venture Path is Unit 501, 5/F, Mirror Tower, 61 Mody Road, Tsim Sha Tsui East, Kowloon.

Venture Path is an investment holding company of West China, which acquired Baicheng Wenzhou on 17 February 2011.

The Financial Information is presented in Hong Kong dollars, which is the same as the functional currency of Venture Path.

The Financial Information has been prepared on a going concern basis because Ms. Li Shao Yu, the beneficial owner of Tai Rong has agreed to provide adequate funds to enable the Venture Path Group to meet in full its financial obligations before the completion of the Acquisition, while the Company agreed to provide adequate funds to enable the Venture Path Group to meet in full its financial obligations in the foreseeable future if the Acquisition is successfully completed.

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ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

APPENDIX IIA

2. Application of HKFRSs

For the purpose of preparing and presenting the Financial Information for the Relevant Period, the Venture Path Group has applied HKFRSs, Hong Kong Accounting Standards (“HKAS(s)”), amendments and interpretations (“INT”) issued by the HKICPA that are effective for annual accounting periods beginning on 1 January 2010.

The Venture Path Group has not early applied the following new or revised standards, amendments or interpretations that have been issued but are not yet effective.

HKFRSs (Amendments)	Improvements to HKFRSs issued in 20101
HKFRS 7 (Amendments)	Disclosures – Transfers of financial assets3
HKFRS 9	Financial instruments4
HKAS 12 (Amendments)	Deferred tax: Recovery of underlying assets5
HKAS 24 (as revised in 2009)	Related party disclosures6
HKAS 32 (Amendments)	Classification of rights issues7
HK(IFRIC) – INT 14	Prepayments of a minimum funding requirement6
(Amendments)
HK(IFRIC) – INT 19	Extinguishing financial liabilities with
	equity instruments2

1 Effective for annual periods beginning on or after 1 July 2010 or 1 January 2011, as appropriate.

2 Effective for annual periods beginning on or after 1 July 2010.

3 Effective for annual periods beginning on or after 1 July 2011.

4 Effective for annual periods beginning on or after 1 January 2013.

5 Effective for annual periods beginning on or after 1 January 2012.

6 Effective for annual periods beginning on or after 1 January 2011.

7 Effective for annual periods beginning on or after 1 February 2010.

The sole director of Venture Path anticipates that the application of the new and revised standards, amendments or interpretations will have no material impact on the Financial Information.

– 199 –

ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

APPENDIX IIA

3. Significant accounting policies

The Financial Information has been prepared under the historical cost basis and in accordance with HKFRSs issued by the HKICPA. In addition, the Financial Information includes applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance. The Principal accounting policies adopted are as follows:

Basis of consolidation

The consolidated financial information incorporates the financial information of Venture Path and entity controlled by Venture Path (its subsidiary). Control is achieved where Venture Path has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The results of subsidiary acquired or disposed of during the Relevant Period are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate.

When necessary, adjustments are made to the financial information of a subsidiary to bring its accounting policy into line with those used by Venture Path.

All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the period. Taxable profit differs from profit as reported in the consolidated statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years, and it further excludes items that are never taxable or deductible. The Venture Path Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

– 200 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the Financial Information and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary difference to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary differences arisen from goodwill or from the initial recognition of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investment in a subsidiary, except where the Venture Path Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Venture Path Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is recognised in profit or loss.

– 201 –

ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

APPENDIX IIA

Financial instruments

Financial assets and financial liabilities are recognised in the consolidated statement of financial position when the Venture Path Group becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

Financial assets

The Venture Path Group’s financial assets are mainly loans and receivables.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At the end of the reporting period subsequent to initial recognition, loans and receivables (including bank balances) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment of loans and receivables below).

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Interest income is recognised on an effective interest basis.

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ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

APPENDIX IIA

Impairment of loans and receivables

Loans and receivables are assessed for indicators of impairment at the end of the reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been impacted.

Objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty;
breach of contract, such as default or delinquency in interest or principal payments; or
it becoming probable that the borrower will enter bankruptcy or financial re-organisation.

An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

Financial liability and equity

Financial liability and equity instruments issued by the Venture Path Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of Venture Path after deducting all of its liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

Effective interest method

Interest expense is recognised on an effective interest basis.

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ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

APPENDIX IIA

Financial liability

Financial liability including amount due to ultimate holding company, is subsequently measured at amortised cost, using the effective interest method.

Equity instruments

Equity instruments issued by Venture Path are recorded at the proceeds received, net of direct issue costs.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Venture Path Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised directly in equity is recognised in profit or loss.

Financial liability is derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

4. Capital risk management

The Venture Path Group manages its capital to ensure the Venture Path Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.

The capital structure of the Venture Path Group consists of debt, mainly amount due to ultimate holding company, and equity attributable to equity holders of Venture Path, comprising share capital, set off with deficit. The sole director of Venture Path reviews the capital structure on a regular basis taking into account the cost of capital and the risk associated with the capital. The Venture Path Group will balance its overall capital structure through advances from or repayments to its ultimate holding company.

– 204 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

5. Financial instruments

Categories of financial instruments

Financial assets Loans and receivables (including cash and cash equivalents) Financial liability Amortised cost Financial risk management objectives and policies	HK$’000 60,547

	61,385

The Venture Path Group’s major financial instruments include bank balances and amount due to ultimate holding company. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Interest rate risk

The Venture Path Group’s cash flow interest rate risk relates primarily to deposits with banks. The Venture Path Group has not used any interest rate swaps to mitigate its exposure associated with fluctuations relating to interest rate. The Venture Path Group currently does not have an interest rate hedging policy. However, the sole director monitors interest rate exposure and will consider other necessary actions when significant interest rate exposure is anticipated.

As the bank interest rate as at 31 December 2010 was equal to 0% and bank balances has been fully used for the acquisition of a subsidiary subsequent to the end of the reporting period, no sensitivity analysis is prepared.

Credit risk

The Venture Path Group’s maximum exposure to credit risk in the event of the counterparty failure to perform its obligation as at 31 December 2010 in relation to each class of recognised financial assets is the carrying amount of bank balances as stated in the consolidated statement of financial position.

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ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

APPENDIX IIA

The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies.

Other than concentration of credit risk on liquid funds deposited with banks with high credit ratings, the Venture Path Group does not have any other significant concentration of credit risk.

Liquidity risk

The Venture Path Group has net current liabilities of HK$838,000 as at 31 December 2010. Provided that Ms. Li Shao Yu, the beneficial owner of Tai Rong and the Company provide adequate funds to enable the Venture Path Group to meet in full its financial obligations as they fall due before and after the Acquisition respectively, in the opinion of the sole director, Venture Path Group has sufficient funds to finance its current working capital requirements.

In the management of the liquidity risk, the Venture Path Group monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance the Venture Path Group’s operations and mitigate the effects of unexpected fluctuations in cash flows.

Amount due to ultimate holding company is repayable on demand.

Fair value

The fair value of financial assets and financial liability are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions. The sole director of Venture Path considers that the carrying amounts of financial assets and financial liability recorded at amortised cost in the Financial Information approximate their fair values.

6. Loss before taxation

	HK$’000
ss before taxation has been arrived at after charging:
Sole director’s remuneration	–
Auditor’s remuneration	14
Pre-operating expenses	9

Loss before taxation has been arrived at after charging:

– 206 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

7. Taxation

No provision for Hong Kong Profits Tax has been made in the Financial Information as the Venture Path Group has incurred tax loss for the period.

Taxation for the period can be reconciled to the loss before taxation per the consolidated statement of comprehensive income as follows:

Loss before taxation Taxation at Hong Kong Profits Tax rate of 16.5% Expenses not deductible for tax purpose Taxation	HK$’000 (916) (151) 151 –

8. Bank balances

Bank balances comprise deposits held by the Venture Path Group with original maturity of three months or less and carry interest at market rates of 0% as at 31 December 2010.

9. Amount due to ultimate holding company

The amount is unsecured, non-interest bearing and repayable on demand.

– 207 –

ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

APPENDIX IIA

10. Share capital

Ordinary shares of US$1 each Authorised: At 8 January 2010 (date of incorporation) and 31 December 2010 Issued and fully paid: At 8 January 2010 (date of incorporation) and 31 December 2010	Number of shares 50,000 10,000	Share capital HK$’000 390

		78

Venture Path was incorporated with an authorised share capital of US$50,000 with nominal value of US$1 each. At the date of incorporation, 10,000 ordinary shares of US$1 each were issued at par to the subscriber to provide the initial capital to Venture Path.

11. Capital commitment

HK$’000 Contracted for but not provided in the Financial Information: Acquisition of a subsidiary 259,128 Note: On 18 September 2010, Venture Path's subsidiary, West China entered into a sale and purchase agreement with the owners of Baicheng Wenzhou, pursuant to which West China agreed to purchase the entire interests of Baicheng Wenzhou at a consideration of RMB220,000,000 (approximately HK$259,128,000) which will be financed by its ultimate holding company. The transaction has been completed on 17 February 2011. Baicheng Wenzhou is principally engaged in exploration and mining of fine coal and lump coal in the People’s Republic of China.

In addition, on 23 March 2011, West China has submitted its application of new capital injection of RMB50,720,000 to Baicheng Wenzhou. The capital injection is pending from the approval by relevant government authorities.

– 208 –

ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

APPENDIX IIA

12. Acquisition of a subsidiary

Venture Path acquired the entire share capital of West China on 24 March 2010 at a consideration of HK$1,000. As at the date of acquisition, West China has not commenced any business operation. According, the acquisition is accounted as asset acquisition. The net assets acquired at the date of acquisition are as follows:

Assets and liabilities acquired: Bank balances Amount due to ultimate holding company Purchase consideration transferred Excess Cash inflow arising on acquisition: Cash consideration Bank balances acquired Net cash inflow in respect of the purchase of a subsidiary	HK$’000 2 (10) (8) (1) (9) (1) 2 1

Note: Excess represents the purchase consideration paid plus the net liabilities acquired. The excess amount is charged to profit or loss as other expense during the Relevant Period, as in the opinion of the director, such excess amount is not qualified as an asset as there is no future economic benefits embodied.

West China contributed a loss of HK$897,000 to the Venture Path Group’s loss for the period between the date of the acquisition and the end of the reporting period.

If the acquisition is completed on 1 January 2010, there would be no significant impact to the Venture Path Group’s loss for the period.

13. Related party transactions

Other than the amount due to ultimate holding company disclosed in note 9, the Venture Path Group had no other related party transactions during the Relevant Period.

– 209 –

ACCOUNTANTS’ REPORT OF THE VENTURE PATH GROUP

APPENDIX IIA

14. Loss per share

No loss per share information is presented as its inclusion, for purpose of this report, is not considered meaningful.

(B) SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by any entities in the Venture Path Group in respect of any period subsequent to 31 December 2010.

Yours faithfully,

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong

– 210 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

The following is the full text of a report of the Baicheng Wenzhou prepared by Deloitte Touche Tohmatsu which has been prepared for the sole purpose of inclusion in this circular.

==> picture [75 x 57] intentionally omitted <==

==> picture [80 x 38] intentionally omitted <==

25 May 2011 The Directors Hao Tian Resources Group Limited Unit 4803, 48/F, COSCO Tower 183 Queen’s Road Central Hong Kong

Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) regarding Baicheng Wenzhou Mining Development Co., Ltd.（拜城溫州礦業開發有限公司 (“Baicheng Wenzhou”) ）for each of the three years ended 31 December 2010 (the “Relevant Periods”) for inclusion in a circular issued by Hao Tian Resources Group Limited (the “Company”) dated 25 May 2011 (the “Circular”) in connection with the major transaction in respect of the proposed acquisition (the “Acquisition”) of entire issued capital of Venture Path Limited (“Venture Path”).

Venture Path is the immediate holding company of West China Coal Mining Holdings Limited (“West China”) which acquired Baicheng Wenzhou on 17 February 2011.

Baicheng Wenzhou was established on 17 December 2004 in the People’s Republic of China (the “PRC”) and is principally engaged in exploration and mining of fine coal and lump coal in Baicheng County, Aksu Prefecture, Xinjiang Uygur Autonomous Region, the PRC. The mining activities of Baicheng Wenzhou have been temporary stopped since December 2010.

The statutory financial statements of Baicheng Wenzhou for each of the three years ended 31 December 2010 were prepared in accordance with the relevant accounting rules and financial regulations applicable to enterprises established in the PRC (“PRC GAAP”) and were audited by 新疆華瑞有限責任會計師事務所. For the purpose of this report, the directors of Baicheng Wenzhou prepared management accounts of Baicheng Wenzhou for the Relevant Periods (“Underlying Management Accounts”) in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). Except for the inability to obtain sufficient appropriate audit evidence as explained below, we have carried out independent audit procedures on the Underlying Management Accounts in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

– 211 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

We have examined the Underlying Management Accounts for the Relevant Periods in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” as recommended by the HKICPA.

The Financial Information of Baicheng Wenzhou for the Relevant Periods set out in this report has been prepared based on the Underlying Management Accounts. However, due to the limitation in the audit evidence available to us, as explained below, we were unable to determine whether adjustments should be made to the Underlying Management Accounts in preparing our report for inclusion in the Circular.

The directors of Baicheng Wenzhou are responsible for the Underlying Management Accounts who approve their issue. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the Financial Information set out in this report from the Underlying Management Accounts, to form an independent opinion on the Financial Information and to report our opinion to you. Because of the matters described below, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for our opinion.

The evidence available to us was limited as follows:

(1) Baicheng Wenzhou recorded revenue of RMB23,142,000, RMB30,750,000 and RMB16,329,000 respectively (the “Transactions”) for the Relevant Periods. We were unable to obtain sufficient information and explanations to determine the substance of the Transactions. In the absence of sufficient information and explanations to determine the substance of the Transactions, we have been unable to satisfy ourselves as to whether the Transactions are fairly stated in the Financial Information for the Relevant Periods and, accordingly, whether the related trade receivables are fairly stated as at 31 December 2008, 2009 and 2010. Any adjustments found to be necessary to the amounts of revenue and trade receivables would affect the net assets (liabilities) of Baicheng Wenzhou as at 31 December 2008, 2009 and 2010 and the profit (loss) for the Relevant Periods;
(2) Baicheng Wenzhou failed to maintain proper books and records to record the movement of its inventories. There were no other satisfactory audit procedures that we could adopt to confirm that the cost of sales for the Relevant Periods and the inventories balances were properly recorded. Any adjustment found to be necessary to costs of sales and inventories would have a consequential effect on the net assets (liabilities) of Beicheng Wenzhou as at 31 December 2008, 2009 and 2010 and the profit (loss) for the Relevant Periods; and

– 212 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

(3) Income tax expense amounting to RMB455,000, RMB1,303,000 and nil has been recorded in the Financial Information for each of the years ended 31 December 2008, 2009 and 2010, respectively. Due to the limitations as mentioned in (1) and (2) above, we were unable to determine whether the income tax expense was fairly stated in the Financial Information for the Relevant Periods and, accordingly, whether the tax liabilities of RMB455,000, RMB1,139,000 and RMB1,139,000 were fairly stated as at 31 December 2008, 2009 and 2010, respectively.

Because of the significance of the possible effects of the matters described in the above paragraphs, we do not express an opinion on the Financial Information as to whether it gives a true and fair view of the state of affairs of Baicheng Wenzhou as at 31 December 2008, 2009 and 2010 and of its results and cash flows for the Relevant Periods.

– 213 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

(A) FINANCIAL INFORMATION

STATEMENTS OF COMPREHENSIVE INCOME

NOTES Revenue 7 Cost of sales Gross profit (loss) Other income Provision for restoration and environmental costs 22 Administrative expenses Finance cost 14 Profit (loss) before taxation Income tax expense 9 Profit (loss) and total comprehensive income (expense) for the year 10	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 23,142 30,750 16,329 (14,166) (18,743) (20,051) 8,976 12,007 (3,722) 116 6 5 (248) (263) (278) (5,920) (8,516) (6,917) (305) (396) (480) 2,619 2,838 (11,392) (455) (1,303) – 2,164 1,535 (11,392)

– 214 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

STATEMENTS OF FINANCIAL POSITION

NOTES
Non-current assets
Property, plant and equipment
12
Prepaid lease payments
13
Mining rights
14
Deposits
15
Current assets
Inventories
16
Trade and other receivables
17
Prepaid lease payments
13
Bank balances and cash
18
Current liabilities
Trade and other payables
19
Consideration payable
for purchase of mining rights
14
Amounts due to former equity
owners
20
Tax liabilities
Net current liabilities
Total assets less current liabilities
Capital and reserves
Registered capital
21
Reserves
Non-current liabilities
Consideration payable for
purchase of mining rights
14
Provision for restoration and
environmental costs
22

As at 31 December
2008
2009
2010
RMB’000
RMB’000
RMB’000
13,134
14,125
14,641
2,159
2,013
1,867
11,876
11,808
11,782
2,371
1,080
4,982
29,540
29,026
33,272
1,158
4,474
646
714
1,458
80
146
146
146
723
264
92
2,741
6,342
964
2,279
1,338
2
1,604
1,513
–
16,057
19,207
32,038
455
1,139
1,139
20,395
23,197
33,179
(17,654)
(16,855)
(32,215)
11,886
12,171
1,057
9,280
9,280
9,280
(3,330)
(1,795)
(13,187)
5,950
7,485
(3,907)
1,513
–
–
4,423
4,686
4,964
5,936
4,686
4,964
11,886
12,171
1,057

– 215 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

STATEMENTS OF CHANGES IN EQUITY

At 1 January 2008 Profit and total comprehensive income for the year Appropriation of special reserve Utilisation of special reserve At 31 December 2008 Profit and total comprehensive income for the year Appropriation of special reserve Utilisation of special reserve At 31 December 2009 Loss and total comprehensive expense for the year Appropriation of special reserve Utilisation of special reserve At 31 December 2010	Registered capital RMB’000 9,280 – – – 9,280 – – – 9,280 – – – 9,280	Capital reserve RMB’000 518 – – – 518 – – – 518 – – – 518	Special Accumulated reserve losses RMB’000 RMB’000 (Note) 1,686 (7,698) – 2,164 2,713 (2,713) (806) 806 3,593 (7,441) – 1,535 3,843 (3,843) (1,256) 1,256 6,180 (8,493) – (11,392) 1,602 (1,602) (1,500) 1,500 6,282 (19,987)	Total RMB’000 3,786 2,164 – –
				5,950 1,535 – –
				7,485 (11,392) – –
				(3,907)

Note: Pursuant to the relevant PRC regulations for coal mining business, provision for production maintenance, production safety and other related expenditures are accrued by Baicheng Wenzhou at fixed rates based on coal production volume (the “maintenance and productions fund”). According to the relevant rules, such funds will be specifically utilised for the transformation costs of the coal mine industry, for the land restoration and environmental cost, and for improvements of safety at the mines, and is not available for distribution to shareholders. Upon incurring qualifying expenditures, an equivalent amount is transferred from maintenance and productions fund to accumulated losses.

– 216 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

STATEMENTS OF CASH FLOWS

NOTE
Operating activities
Profit (loss) before taxation
Adjustments for:
Depreciation of property, plant
and equipment
Release of prepaid lease
payments
Amortisation of mining rights
Provision for restoration and
environmental costs
Finance cost
Interest income
Operating cash flow before movements
in working capital
(Increase) decrease in inventories
Decrease (increase) in trade and
other receivables
Decrease in trade and other payables
Cash generated from (used in)
operations
Tax paid
Net cash from (used in)
operating activities
Investing activities
Interest received
Purchase of property, plant and
equipment
Increase in deposits
Net cash used in investing activities
Financing activities
Increase in amounts due to
former equity owners
Settlement of outstanding
consideration for purchase of
mining rights
14
Net cash (used in) from financing
activities
Net increase (decrease) in cash and
cash equivalents
Cash and cash equivalents at the
beginning of the year
Cash and cash equivalents at the end of
the year, representing bank balances
and cash

Year ended 31 December
2008
2009
2010
RMB’000
RMB’000
RMB’000
2,619
2,838
(11,392)
1,024
1,168
1,300
146
146
146
47
68
26
248
263
278
305
396
480
(5)
(3)
(2)
4,384
4,876
(9,164)
(184)
(3,316)
3,828
170
(744)
1,378
(456)
(941)
(1,336)
3,914
(125)
(5,294)
–
(619)
–
3,914
(744)
(5,294)
5
3
2
(680)
(868)
(1,816)
(1,390)
–
(3,902)
(2,065)
(865)
(5,716)
440
3,150
12,831
(2,000)
(2,000)
(1,993)
(1,560)
1,150
10,838
289
(459)
(172)
434
723
264
723
264
92

– 217 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

NOTES TO FINANCIAL INFORMATION

1. General and basis of preparation

Baicheng Wenzhou was established and registered in the PRC with limited liability on 17 December 2004. Baicheng Wenzhou is principally engaged in exploration and mining of fine coal and lump coal in the PRC. The address of the registered office and principal place of business is in Baicheng County, Aksu Prefecture, Xinjiang Uygur Autonomous Region, the PRC.

For the Relevant Periods, Baicheng Wenzhou is owned by three individuals, namely Chen Jing Lian, Chen Ji Yan and Zhu Zhao Tan (collectively referred as “Mine Owners”). On 17 February 2011, Baicheng Wenzhou was acquired by West China, a company incorporated in Hong Kong, which is ultimately wholly owned by Tai Rong Xin Ye International Power Generation Inc. (“Tai Rong”), a company incorporated in British Virgin Islands. Thereafter, West China and Tai Rong became Baicheng Wenzhou’s immediate holding company and ultimate holding company respectively.

The Financial Information is presented in Renminbi (“RMB”) which is also the functional currency of Baicheng Wenzhou.

As at 31 December 2010, Baicheng Wenzhou had net current liabilities and net liabilities of RMB32,215,000 and RMB3,907,000 respectively. On 23 March 2011, Baicheng Wenzhou’s immediate holding company, West China has submitted its application of new capital injection by way of cash of RMB50,720,000 to Baicheng Wenzhou, thereafter, registered capital of Baicheng Wenzhou will increase from RMB9,280,000 to RMB60,000,000. The capital injection is pending from the approval by relevant government authorities. The Underlying Management Accounts have been prepared on a going concern basis because the directors of Baicheng Wenzhou (the “Directors”) believe that Baicheng Wenzhou has sufficient funds to finance its current working capital requirement after taking into account the new capital obtained from West China.

2. Application of HKFRSs

For the purpose of preparing and presenting the Financial Information for the Relevant Periods, Baicheng Wenzhou has consistently applied HKFRSs, Hong Kong Accounting Standards (“HKAS(s)”), amendments and interpretations (“INT”) issued by the HKICPA that are effective for annual accounting periods beginning on 1 January 2010 throughout the Relevant Periods.

– 218 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

Baicheng Wenzhou has not early applied the following new or revised standards, amendments or interpretations that have been issued but are not yet effective.

HKFRSs (Amendments) Improvements to HKFRSs issued in 2010[1] HKFRS 7 (Amendments) Disclosures – Transfers of financial assets[3] HKFRS 9 Financial instruments[4] HKAS 12 (Amendments) Deferred tax: Recovery of underlying assets[5] HKAS 24 (as revised in 2009) Related party disclosures[6] HKAS 32 (Amendments) Classification of rights issues[7] HK(IFRIC) – INT 14 Prepayments of a minimum funding requirement[6] (Amendments) HK(IFRIC) – INT 19 Extinguishing financial liabilities with equity instruments[2]

1 Effective for annual periods beginning on or after 1 July 2010 or 1 January 2011, as appropriate.
2 Effective for annual periods beginning on or after 1 July 2010. 3 Effective for annual periods beginning on or after 1 July 2011. 4 Effective for annual periods beginning on or after 1 January 2013. 5 Effective for annual periods beginning on or after 1 January 2012. 6 Effective for annual periods beginning on or after 1 January 2011. 7 Effective for annual periods beginning on or after 1 February 2010.

HKFRS 9 “Financial instruments” (as issued in November 2009) introduces new requirements for the classification and measurement of financial assets. HKFRS 9 “Financial instruments” (as revised in November 2010) adds requirements for financial liabilities and for derecognition.

Under HKFRS 9, all recognised financial assets that are within the scope of HKAS 39 “Financial instruments: Recognition and measurement” are subsequently measured at either amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent accounting periods.

– 219 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

In relation to financial liabilities, the significant change relates to financial liabilities that are designated as at fair value through profit or loss. Specifically, under HKFRS 9, for financial liabilities that are designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the presentation of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Under HKAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was presented in profit or loss.

In the opinion of the Directors, the application of HKFRS 9 may not have significant impact on the amounts reported in respect of Baicheng Wenzhou’s financial assets and financial liabilities.

The Directors anticipate that the application of other new and revised standards, amendments or interpretations will have no material impact on the Financial Information.

3. Significant accounting policies

The Financial Information has been prepared on the historical cost basis and in accordance with HKFRSs issued by the HKICPA. In addition, the Financial Information includes applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance. The principal accounting policies adopted are as follows:

Revenue recognition

Revenue from sale of coal is recognised when the risks and rewards to the owner of goods have been passed to the customers.

– 220 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to Baicheng Wenzhou and the amount of revenue can be measured reliably. Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition.

Property, plant and equipment

Property, plant and equipment including buildings held for use in the production or supply of services, or for administrative purposes other than construction in progress are stated at cost less subsequent accumulated depreciation and accumulated impairment losses, if any.

Depreciation is provided to write off the cost of items of property, plant and equipment (other than mining structures and construction in progress) over their estimated useful lives and after taking into account of their estimated residual values, using the straight-line method.

Construction in progress includes property, plant and equipment in the course of construction for production or for its own use purposes. Construction in progress is carried at cost less any recognised impairment loss. Construction in progress is classified to the appropriate category of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss in the period in which the item is derecognised.

Prepaid lease payments

Prepaid lease payments are amortised over the lease-term on a straight-line basis.

– 221 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

Mining rights

Mining rights are carried at cost less accumulated amortisation and any accumulated impairment losses. Amortisation for mining rights is provided based on units of production method utilising only recoverable coal reserves as the depletion base.

Retirement benefit costs

Payments to defined contribution retirement benefit plans are charged as an expense when employees have rendered service entitling them to the contributions. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where Baicheng Wenzhou’s obligations under the plans are equivalent to those arising in a defined contribution retirement benefit plan.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statements of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes of income or expense items that are never taxable or deductible. Baicheng Wenzhou’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the Financial Information and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary difference. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

– 222 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which Baicheng Wenzhou expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is recognised in profit or loss.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method.

Impairment

At the end of the reporting period, Baicheng Wenzhou reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Financial instruments

Financial assets and financial liabilities are recognised in the statements of financial position when Baicheng Wenzhou becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value.

– 223 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.

Financial assets

Baicheng Wenzhou's financial assets are classified into loans and receivables.

Effective interest method

Interest income is recognised on an effective interest basis for debt instruments.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including pledged bank deposits, other deposits, trade and other receivables as well as bank balances and cash) are carried at amortised cost using the effective interest method, less any identified impairment losses. The accounting policy on impairment loss of financial assets is set out below.

– 224 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

Impairment of loans and receivables

Loans and receivables are assessed for indicators of impairment at the end of the reporting period. Loans and receivables are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the loans and receivables, the estimated future cash flows of the loans and receivables have been impacted. Objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; or
breach of contract, such as default or delinquency in interest or principal payments; or
it becoming probable that the borrower will enter bankruptcy or financial re-organisation.

For certain categories of loans and receivables, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include Baicheng Wenzhou’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, and observable changes in national or local economic conditions that correlate with default on receivables.

The carrying amount of the loans and receivables is reduced by the impairment loss directly with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When the trade receivables are considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.

If in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

– 225 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

Financial liabilities and equity

Financial liabilities and equity instruments issued by Baicheng Wenzhou are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of Baicheng Wenzhou after deducting all of its liabilities.

Effective interest method

Interest expense is recognised on an effective interest basis.

Financial liabilities

Financial liabilities including trade and other payables, consideration payable for purchase of mining rights and amounts due to former equity owners are subsequently measured at amortised cost, using the effective interest method.

Equity instruments

Equity instruments issued by Baicheng Wenzhou recorded at the proceeds received, net of direct issue costs.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and Baicheng Wenzhou has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivables is recognised in profit or loss.

– 226 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

Provisions

Provisions are recognised when Baicheng Wenzhou has a present obligation as a result of a past event, and it is probable that Baicheng Wenzhou will be required to settle that obligation. Provisions are measured at the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect is material).

Provisions for the Baicheng Wenzhou’s restoration and environmental costs are based on estimates of required expenditure at the mines in accordance with PRC rules and regulations. Baicheng Wenzhou estimates its liabilities for final reclamation and mine closure based upon detailed calculations of the amount and timing of the future cash expenditure to perform the required work. Spending estimates are escalated for inflation, then discounted at a discount rate that reflects current market assessments of the time value of money and the risks specific to the liability such that the amount of provision reflects the present value of the expenditures expected to be required to settle the obligation.

4. Capital risk management

Baicheng Wenzhou manages its capital to ensure that Baicheng Wenzhou will be able to continue as a going concern while maximising the return to equity holders through the optimisation of the debt and equity balance. Baicheng Wenzhou’s overall strategy remains unchanged throughout the Relevant Periods.

The capital structure of Baicheng Wenzhou consists of debt balance and equity balance. Debt balance consists of amounts due to former equity owners and equity balance consists of registered capital, capital reserve and special reserve, set off with accumulated losses.

The Directors review the capital structure on an annual basis. As part of this review, the Directors consider the cost of capital and the risks associated with each class of capital. Based on recommendations of the Directors, Baicheng Wenzhou will balance its overall capital structure through the payment of dividends or obtain additional funds from its equity holders.

– 227 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

5. Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the end of each of the reporting period, 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.

Depreciation of property, plant and equipment

Property, plant and equipment other than mining structures and construction in progress are depreciated on a straight-line basis over their estimated useful lives. Baicheng Wenzhou assesses annually the useful life of the property, plant and equipment. If the expectation differs from the original estimate, such difference will impact the depreciation charge thereafter.

Estimation of coal reserves

The process of estimating quantities of reserves is inherently uncertain and complex. It requires significant judgments and decisions based on available geological, geophysical, engineering and economic data. These estimates may change substantially as additional data from ongoing development activities and production performance becomes available. The Directors have engaged independent consulting and engineering firm to carry out independent technical review to estimate the total proved and probable reserves of the coal mines. If the quantities of reserves are different from current estimates, it will result in a material impairment loss in respect to the mining rights and mining structures.

Provision for restoration and environmental costs

The provision for restoration and environmental costs has been determined by the Directors based on their best estimates. The Directors estimated this liability for final reclamation and mine closure based upon detailed calculations of the amount and timing of future cash flows spending for a third party to perform the required work, escalated for inflation, then discounted at a discount rate that reflects current market assessments of the time value of money and the risks specific to the liability, such that the provision reflects the present value of the expenditures expected to be required to settle the obligation. However, as the effect on the land and the environment from current mining activities becomes apparent in future periods, the estimate of the associated costs may be subject to change in the future. The provision is reviewed regularly to verify that it properly reflects the present value of the obligation arising from the current and past mining activities (see note 22).

– 228 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

6. Financial instruments

Categories of financial instruments

		As at 31 December
	2008	2009	2010
	RMB’000	RMB’000	RMB’000
Financial assets
Loans and receivables (including
cash and cash equivalents)	1,437	1,722	4,074
Financial liabilities
Amortised cost	21,453	22,058	32,040

Financial risk management objectives and policies

Baicheng Wenzhou’s major financial instruments include deposits, trade and other receivables, trade and other payables, consideration payable for purchase of mining rights, and amounts due to former equity owners, as well as bank balances and cash. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Market risk

Interest rate risk

Baicheng Wenzhou’s cash flow interest rate risk primarily relates to variablerate bank balances.

Baicheng Wenzhou has not used any interest rate swaps in order to mitigate its exposure associated with fluctuations relating to interest cash flows. However, the management monitors interest rate exposure and will consider necessary actions when significant interest rate exposure is anticipated.

The Directors do not expect there will be a significant interest rate adjustment in bank deposits, hence no sensitivity analysis is prepared.

– 229 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

Foreign currency risk

Baicheng Wenzhou collects all of its revenue in RMB and incurred all of the expenditures as well as capital expenditures in RMB. The Directors considered that Baicheng Wenzhou has no exposure to any foreign currency exchange risk.

Credit risk

Baicheng Wenzhou’s credit risk is primarily attributable to trade and other receivables and bank balances.

Baicheng Wenzhou’s maximum exposure to credit risk which will cause a financial loss to Baicheng Wenzhou in the event of the counterparties failure to perform their obligations as at the end of the reporting period in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the statements of financial position.

In order to minimise credit risk, management has delegated a team to be responsible for the determination of credit limits, credit approvals and other monitoring procedures. The management reviews the recoverable amount of each individual debt regularly to ensure that adequate impairment losses are recognised for irrecoverable debts. In addition, Baicheng Wenzhou normally request its customers to settle the full amount or paid deposits before the delivery of coal. In this regard, management considers that Baicheng Wenzhou’s credit risk is significant reduced.

The credit risk on liquid funds is limited because Baicheng Wenzhou’s bank balances are deposited with banks of high credit ratings in the PRC.

Liquidity risk

As at 31 December 2010, Baicheng Wenzhou had net current liabilities and net liabilities of RMB32,215,000 and RMB3,907,000, respectively. In the opinion of the Directors, the liquidity of Baicheng Wenzhou can be maintained in the coming year, after taking into consideration of the new capital of RMB50,720,000 to be obtained from West China.

– 230 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

In the management of the liquidity risk, Baicheng Wenzhou monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance Baicheng Wenzhou’s operations and mitigate the effects of unexpected fluctuations in cash flows.

The following table details Baicheng Wenzhou’s remaining contractual maturity for its non-derivative financial liabilities. It has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which Baicheng Wenzhou can be required to pay.

Weighted average interest rate As at 31 December 2008 Non-derivative financial liabilities Trade and other payables – Consideration payable for purchase of mining rights 5.67％ Amounts due to former equity owners – As at 31 December 2009 Non-derivative financial liabilities Trade and other payables – Consideration payable for purchase of mining rights 5.67% Amounts due to former equity owners – As at 31 December 2010 Non-derivative financial liabilities Trade and other payables – Amounts due to former equity owners –	Less than 1 year or on demand RMB’000 2,279 2,000 16,057 20,336 1,338 1,993 19,207 22,538 2 32,038 32,040	Between Total 1 to 2 undiscounted years cash flows RMB’000 RMB’000 – 2,279 1,993 3,993 – 16,057 1,993 22,329 – 1,338 – 1,993 – 19,207 – 22,538 – 2 – 32,038 – 32,040	Total carrying amount RMB’000 2,279 3,117 16,057
			21,453

			1,338 1,513 19,207
			22,058

			2 32,038
			32,040

– 231 –

ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

APPENDIX IIB

Fair values

The fair values of financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using the relevant prevailing market rates.

The Directors consider that the carrying values of financial assets and financial liabilities recorded at amortised cost in the Financial Information approximate their corresponding fair values.

7. Revenue and segment information

Revenue represents the amounts received and receivable for coal sold by Baicheng Wenzhou to outside customers, less sales tax during the Relevant Periods.

Baicheng Wenzhou has been operating in one operating segment which is exploration and mining of coal in the PRC. The chief operating decision maker has been identified as the Directors who reviews the results before taxation prepared in accordance with PRC GAAP. The Directors did not regularly review segment assets and liabilities. Segment revenue is the same as the amount presented in the statements of comprehensive income. However, segment results under PRC GAAP is different from that reported in the statements of comprehensive income. The major difference is the maintenance and production funds which is charged to profit or loss under PRC GAAP, but recorded as appropriation to special reserve in the Underlying Management Accounts. Accordingly, the results of Baicheng Wenzhou under the PRC GAAP were RMB2,713,000, RMB3,843,000 and RMB1,602,000 lower than the results presented in the statements of comprehensive income for the year ended 31 December 2008, 2009 and 2010 respectively.

Information about major customers

Revenues from customers of the corresponding years contributing over 10% of the total revenue of Baicheng Wenzhou are as follows:

	Year	ended 31 December
	2008	2009	2010
	RMB’000	RMB’000	RMB’000
Customer A	2,564	N/A*	N/A*
Customer B	N/A*	3,594	1,636
Customer C	N/A*	4,801	N/A*
Customer D	N/A*	N/A*	5,387

The corresponding revenue did not contribute over 10% of the total revenue of Baicheng Wenzhou.

– 232 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

Geographical information

Revenue of Baicheng Wenzhou is derived from and all non-current assets of Baicheng Wenzhou are located in the PRC.

8. Directors’ remuneration and employees’ emoluments

Directors’ remuneration

During the Relevant Periods, the remuneration paid or payable to Baicheng Wenzhou’s three directors was as follows:

For the year ended 31 December 2008 Fee Salaries and allowances Contributions to retirement benefit scheme Total remuneration For the year ended 31 December 2009 Fee Salaries and allowances Contributions to retirement benefit scheme Total remuneration For the year ended 31 December 2010 Fee Salaries and allowances Contributions to retirement benefit scheme Total remuneration	Yang Chuan Rong RMB’000 – – – – – – – – – – – –	Chen Ji Yan RMB’000 – 39 12 51 – 67 21 88 – 66 21 87	Zhu Zhon Tiaw RMB’000 – 40 13 53 – 42 13 55 – 39 12 51	Total RMB’000 – 79 25
				104

				– 109 34
				143

				– 105 33
				138

– 233 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

During the Relevant Periods, no remuneration was paid by Baicheng Wenzhou to the Directors as an inducement to join or upon joining Baicheng Wenzhou or as compensation for loss of office. None of the Directors of Baicheng Wenzhou has waived any remuneration during the Relevant Periods.

Employees’ emoluments

The five highest paid individuals included two directors for each of the years ended 31 December 2008, 2009 and 2010 respectively. The emoluments of the remaining three individuals for each of the years ended 31 December 2008, 2009 and 2010 during the Relevant Periods, which were individually less than HK$1,000,000, were as follows:

Salaries and other benefits Contributions to retirement benefit scheme	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 247 341 272 78 108 86 325 449 358	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 247 341 272 78 108 86 325 449 358
		358

During the Relevant Periods, no emoluments were paid by Baicheng Wenzhou to the five highest paid individuals as an inducement to join or upon joining the Baicheng Wenzhou.

9. Income tax expense

Current tax Underprovision in prior years	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 455 1,086 – – 217 – 455 1,303 –	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 455 1,086 – – 217 – 455 1,303 –
		–

– 234 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

On 16 March 2008, the PRC promulgated the Law of the PRC on Enterprise Income Tax (the “Tax Law”) by Order No. 63 of the President of the PRC. On 6 December 2008, the State Council of the PRC issued Implementation Regulation of the Tax Law. The Tax Law and Implementation Regulations changed the Enterprise Income Tax rate of Baicheng Wenzhou from 33% to 25% from 1 January 2008 onwards. The tax rate for Baicheng Wenzhou was 25% for the Relevant Periods.

Income tax expense for the year ended 31 December 2008 was relieved by RMB234,000, as a result of tax losses brought forward from previous years.

The taxation for the Relevant Periods can be reconciled to the profit (loss) before taxation per the statements of comprehensive income as follows:

Profit (loss) before taxation Taxation at domestic income tax rate of 25% Expenses not deductible for tax purpose Effect of tax loss not recognised Utilisation of tax loss brought forward Underprovision in prior years Income tax expense	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 2,619 2,838 (11,392) 655 710 (2,848) 34 376 134 – – 2,714 (234) – – – 217 – 455 1,303 –

As at 31 December 2010, Baicheng Wenzhou had unused tax loss of RMB10,856,000. The tax loss at 31 December 2010 will be expired in 2015. No deferred tax asset had been recognised due to the unpredictability of future profit stream.

– 235 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

10. Profit (loss) for the year

Profit (loss) for the year has
been arrived at after charging
(crediting):
Staff costs:
Directors’ remuneration
(note 8)
Other staff cost
Contributions to retirement
benefits schemes (excluding
directors)
Auditor’s remuneration
Cost of inventories recognised as
an expense
Depreciation of property,
plant and equipment
Release of prepaid lease payments
Amortisation of mining rights
Interest income

Year ended 31 December
2008
2009
2010
RMB’000
RMB’000
RMB’000
104
143
138
6,733
10,664
7,034
359
530
779
7,196
11,337
7,951
11
15
15
14,166
18,743
20,051
1,024
1,168
1,300
146
146
146
47
68
26
(5)
(3)
(2)

11. Earnings (loss) per share

No earnings (loss) per share information is presented as its inclusion, for the purpose of this report, is not considered meaningful.

– 236 –

ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

APPENDIX IIB

12. Property, plant and equipment

COST At 1 January 2008 Additions At 31 December 2008 Additions Transfer At 31 December 2009 Additions At 31 December 2010 DEPRECIATION At 1 January 2008 Provided for the year At 31 December 2008 Provided for the year At 31 December 2009 Provided for the year At 31 December 2010 CARRYING AMOUNTS At 31 December 2008 At 31 December 2009 At 31 December 2010	Buildings RMB’000 1,687 – 1,687 – 177 1,864 – 1,864 211 40 251 68 319 69 388 1,436 1,545 1,476	Mining structures RMB’000 3,870 – 3,870 – 1,030 4,900 – 4,900 37 15 52 26 78 11 89 3,818 4,822 4,811	Machinery RMB’000 6,403 104 6,507 987 7 7,501 1,761 9,262 1,521 647 2,168 700 2,868 783 3,651 4,339 4,633 5,611	Motor vehicles RMB’000 3,073 164 3,237 867 – 4,104 44 4,148 730 298 1,028 339 1,367 398 1,765 2,209 2,737 2,383	Office equipment RMB’000 141 67 208 39 – 247 11 258 66 24 90 35 125 39 164 118 122 94	Construction in progress RMB’000 354 860 1,214 266 (1,214) 266 – 266 – – – – – – – 1,214 266 266	Total RMB’000 15,528 1,195
							16,723 2,159 –
							18,882 1,816
							20,698
							2,565 1,024
							3,589 1,168
							4,757 1,300
							6,057
							13,134

							14,125

							14,641

Depreciation is provided to write off the cost of items of property, plant and equipment other than mining structures and construction in progress, over their estimated useful lives and after taking into account of their estimated residual values, using the straight-line method, at the following rates per annum:

Buildings	5%
Machinery	10%
Motor vehicles	25%
Office equipment	33%

Mining structures are depreciated based on units of production method utilising only recoverable coal reserves as the depletion base.

Buildings are located in the PRC and are held under medium term lease.

– 237 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

13. Prepaid lease payments

Analysed for reporting purpose as Current asset Non-current asset	2008 RMB’000 146 2,159 2,305	2009 RMB’000 146 2,013 2,159	2010 RMB’000 146 1,867
			2,013

Prepaid lease payments represent land use rights which are located in the PRC and charged to profit or loss on a straight-line basis over the lease term.

14. Mining rights and consideration payable for purchase of mining rights

COST At the beginning and end of year AMORTISATION At the beginning of year Charged for the year At the end of year CARRYING AMOUNTS At the end of year	2008 RMB’000 11,993 70 47 117 11,876	As at 31 December 2009 RMB’000 11,993 117 68 185 11,808	2010 RMB’000 11,993
			185 26
			211
			11,782

Mining rights are amortised based on units of production method utilising only recoverable coal reserves as the depletion base.

– 238 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

In 2004, Baicheng Wenzhou obtained two mining rights from Xinjiang Uygur Autonomous Region Land Resources Departments. The aggregate consideration for these two mining rights was approximately RMB11,993,000. The consideration is payable by annual installments from 2005 to 2010. At initial recognition, the fair value of the consideration was RMB10,416,000, determined by using imputed interest rate of 5.67% per annum. Imputed interest expense of RMB305,000, RMB396,000 and RMB480,000 were recognised as finance cost for the year ended 31 December 2008, 2009 and 2010 respectively. The unsettled amount was included in the statements of financial position as consideration payable for purchase of mining rights and classified as current and non-current portion based on the repayment schedule.

15. Deposits

Pledged bank deposit (note a) Other deposits (note b) Deposits paid for purchase of property, plant and equipment	2008 RMB’000 – 600 1,771 2,371	As at 31 December 2009 RMB’000 – 600 480 1,080	2010 RMB’000 3,902 600 480
			4,982

Notes:

(a) Pledged bank deposit of RMB3,902,000 as at 31 December 2010 represents the deposit placed in a bank account which is required by the Xinjiang Uyghur Autonomous Region Finance Department and Land Resource Department (the “Xinjiang Regulators”) as a deposit for land disturbance and environmental rehabilitation. Baicheng Wenzhou are not allowed to withdraw the deposit until the completion of land restoration activities after the cessation of mining activities.
(b) Being deposits paid to different government regulators for operating in mining industry, the deposits are refundable upon the cessation of mining activities.

– 239 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

16. Inventories

Coal Consumables 17. Trade and other receivables Trade receivables Other receivables Total trade and other receivables	2008 RMB’000 1,012 146 1,158 2008 RMB’000 146 568 714	As at 31 December 2009 RMB’000 4,357 117 4,474 As at 31 December 2009 RMB’000 721 737 1,458	2010 RMB’000 57 589
			646

			2010 RMB’000 – 80
			80

Baicheng Wenzhou has a policy of allowing its trade customers with average credit periods of 60 days.

The following is an aged analysis of trade receivables presented based on the invoice

date:

0 to 60 days 61 to 180 days 181 days to 1 year	2008 RMB’000 146 – – 146	As at 31 December 2009 RMB’000 134 284 303 721	2010 RMB’000 – – –
			–

– 240 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

Before accepting any new customer, Baicheng Wenzhou will assess the potential customer’s credit quality and define credit limits by customer. Limits attributed to customers are reviewed annually.

In determining the recoverability of the trade receivables, Baicheng Wenzhou considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The Directors believe that there is no credit provision required.

As at 31 December 2009, trade receivables of approximately RMB587,000 was past due but not provided for as there has not been a significant change in credit quality and the amounts are still considered recoverable. Baicheng Wenzhou does not hold any collateral over these balances. There was no past due trade receivables as at 31 December 2008.

Other receivables comprise receivables from third parties and deposits paid to suppliers. They are unsecured, interest free and recoverable within one year.

18. Bank balances and cash

The amounts comprise cash and bank balances held by Baicheng Wenzhou with original maturity of three months or less and carry interest at market rates of average of 0.72%, 0.30% and 0.36% per annum as at 31 December 2008, 2009 and 2010 respectively.

19. Trade and other payables

Trade payable Other payables	2008 RMB’000 20 2,259 2,279	As at 31 December 2009 RMB’000 418 920 1,338	2010 RMB’000 – 2
			2

The average credit period on purchases of goods is 60 days and the age of the trade payables based on the invoice date are within 60 days.

– 241 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

20. Amounts due to former equity owners

The amounts were interest-free and unsecured. In the opinion of the Directors, these balances will be settled by the new capital to be obtained from West China, which will be completed before the completion of the Acquisition.

21. Registered capital

Baicheng Wenzhou was established on 17 December 2004 with a registered and paidup capital of RMB9,280,000.

22. Provision for restoration and environmental costs

Movement for the year: At beginning of the year Provision for the year At end of the year	2008 RMB’000 4,175 248 4,423	2009 RMB’000 4,423 263 4,686	2010 RMB’000 4,686 278
			4,964

The provision for restoration and environmental costs has been determined by the Directors based on their best estimate. The discount rate applied is approximate 6% for the Relevant Periods.

23. Commitments

In accordance with the relevant rules and regulations issued by the Xinjiang Regulators in 2008, Baicheng Wenzhou was required to pay an ecological rehabilitation deposit to a specific bank account (set out in note 15) upon the receipt of formal notice from the Xinjiang Regulators. Baicheng Wenzhou received the formal notification on 30 October 2009. The notification required payment of approximately RMB3,213,000 upon receipt of the notification and then yearly payment of RMB689,000 from 2010 to 2016 for a total amount of RMB8,033,000. As at 31 December 2009 and 2010, the commitment of the unsettled deposits were RMB8,033,000 and RMB4,131,000 respectively.

– 242 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

24. Retirement benefits schemes

The PRC employees of Baicheng Wenzhou are members of a state-managed retirement benefit scheme operated by the local government. Baicheng Wenzhou is required to contribute a certain percentage of their payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of Baicheng Wenzhou with respect to the retirement benefit scheme is to make the specified contributions.

Baicheng Wenzhou did not make contributions, including Social Insurance and Housing Provident Fund Contributions, to its employees since its establishment.

According to the legal opinion issued by the Company’s legal advisor, if Baicheng Wenzhou did not make full contribution of Social Insurances and Housing Fund Contributions, Baicheng Social Insurance Management Bureau (the “Bureau”) may order Baicheng Wenzhou to pay the outstanding Social Insurances and Housing Fund Contributions within a time limit. If Baicheng Wenzhou fail to fulfill the order or to remedy the noncompliance within the limitation period, Baicheng Wenzhou has to pay a 0.2% overdue penalty in addition to the unpaid Social Insurances and a penalty for overdue Housing Fund Contributions between RMB10,000 to RMB50,000. During the Relevant Periods, Baicheng Wenzhou did not receive any order or notification from the Bureau. On 4 March 2011, Baicheng Wenzhou received a notification from the Bureau, in which Bureau confirmed that it will not require Baicheng Wenzhou to pay the outstanding contribution of Social Insurances and Housing Fund Contributions, after considered the reasons of the noncompliance provided by Baicheng Wenzhou.

During the year ended 31 December 2008, 2009 and 2010, Baicheng Wenzhou made provision for the contributions to retirement benefits of approximately RMB384,000, RMB564,000 and RMB812,000 respectively. On 31 December 2010, Baicheng Wenzhou had terminated the employment for all of its employees and paid an aggregated amount of RMB1,781,000 as the compensation for severance payments and unpaid retirement benefits.

25. Major non-cash transaction

For the year ended 31 December 2008 and 2009, addition of property, plant and equipment of RMB515,000 and RMB1,291,000, respectively was satisfied by deposits paid in previous years.

– 243 –

APPENDIX IIB ACCOUNTANTS’ REPORT OF BAICHENG WENZHOU

26. Related party transactions

Other than the amounts due to former equity owners disclosed in note 20, Baicheng Wenzhou had no other related party transactions during the Relevant Periods.

Compensation of key management personnel

The remuneration of the Directors and other members of key management during the year ended 31 December 2008, 2009 and 2010 were as follows:

Short-term benefits Post-employment benefits	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 326 450 443 103 142 140 429 592 583	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 326 450 443 103 142 140 429 592 583
		583

(B) SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Baicheng Wenzhou in respect of any period subsequent to 31 December 2010.

Yours faithfully,

Deloitte Touche Tohmatsu

Certified Public Accountants

Hong Kong

– 244 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

==> picture [75 x 58] intentionally omitted <==

==> picture [80 x 38] intentionally omitted <==

(A) ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

TO THE DIRECTORS OF HAO TIAN RESOURCES GROUP LIMITED

We report on the unaudited pro forma financial information (“Unaudited Pro Forma Financial Information”) of Hao Tian Resources Group Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) and Venture Path Limited (“Venture Path”) and its subsidiaries (together with the Group hereinafter collectively referred to “Enlarged Group”) as set out on Appendix III to the circular dated 25 May 2011 (the “Circular”), which has been prepared by the directors of the Company for illustrative purposes only, to provide information about how the proposed acquisition of the entire issued share capital of Venture Path (the “Acquisition”) might have affected the financial information presented. The basis of preparation of the Unaudited Pro Forma Financial Information is set out in Section B of appendix III to the Circular.

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 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “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.

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the 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.

– 245 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

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 Hong Kong Institute of Certified Public Accountants. 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 purpose of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purpose only, based on the judgments 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 future and may not be indicative of the financial position of the Enlarged Group as at 30 September 2010 or any future date.

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 so far as such policies related to the transactions; and
(c) the adjustments are appropriate for the purpose of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong

25 May 2011

– 246 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(B) BASIS OF PREPARATION OF THE UNAUDITED PRO FORMA FINANCIAL INFORMATION

The Unaudited Pro Forma Financial Information of the Enlarged Group is prepared to illustrate the effect of the acquisition of the entire issued share capital of Venture Path Limited (“Venture Path”) from Tai Rong Xin Ye International Power Generation Inc. (the “Vendor”). The aggregate consideration for the Acquisition is HK$1,550,000,000, comprising (i) HK$250,000,000 cash consideration; (ii) HK$725,000,000 by issue of the convertible shares; and (iii) HK$575,000,000 by the issue of the convertible bonds.

The Unaudited Pro Forma Financial Information is prepared based on the unaudited consolidated statement of financial position of the Group as at 30 September 2010 as extracted from the interim report of the Company issued on 29 November 2010, the audited consolidated statement of financial position of Venture Path and its subsidiary (hereinafter collectively referred as the “Venture Path Group”) as at 31 December 2010 as extracted from the accountants’ report set out in Appendix IIA to this circular, and the audited statement of financial position of Baicheng County Wenzhou Mining Development Co., Ltd. (“Baicheng Wenzhou”) as at 31 December 2010 as extracted from the accountants’ report set out in Appendix IIB to this circular, after making pro forma adjustments relating to the Acquisition, as if the Acquisition had been completed on 30 September 2010.

The Unaudited Pro Forma Financial Information is based on the aforesaid historical data after giving effect to 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 (ii) factually supportable, is summarised in the accompanying notes.

The Unaudited Pro Forma Financial Information has been prepared by the directors of the Company for illustrative purpose only and is based on a number of assumptions, estimates, uncertainties and currently available information. Accordingly, and because of its nature, the Unaudited Pro Forma Financial Information does not purport to predict what the financial position of the Enlarged Group will be on completion of the Acquisition.

– 247 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(C) PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Non-current assets Property, plant and equipment Prepaid lease payments Investment property Mining rights Available-for-sale investments Deposits Deferred tax assets Current assets Inventories Trade and bills receivables Other receivables, deposits and prepayments Investments held for trading Prepaid lease payments Tax recoverable Bank balances and cash Current liabilities Trade payables Other payables deposits received and accruals Amounts due to former equity owners of Baicheng Wenzhou Amount due to former ultimate shareholder of the Venture Path Group Consideration payable Bank borrowings due within one year-secured Tax payable Net current assets (liabilities) Total assets less current liabilities Non-current liabilities Retirement benefits obligations Convertible notes Embedded derivatives Provision for restoration and environmental costs Deferred tax liabilities Net assets (liabilities) Capital and reserves Share capital Convertible shares Reserves Total equity	Unaudited condensed consolidated statement of financial position of the Group as at 30 September 2010 HK$’000 (Note 1) 144,589 26,154 1,041 1,914,127 8,992 81,151 205 2,176,259 29,406 23,177 12,114 171 1,106 2,018 133,966 201,958 13,578 36,526 – – – 9,294 2,060 61,458 140,500 2,316,759 1,160 321,574 348,777 – 477,781 1,149,292 1,167,467 90,935 – 1,076,532 1,167,467	Audited consolidated statement of financial position of the Venture Path Group as at 31 December 2010 HK$’000 (Note 2) – – – – – – – – – – – – – – 60,547 60,547 – – – 61,385 – – – 61,385 (838) (838) – – – – – – (838) 78 – (916) (838)	Audited statement of financial position of Baicheng Wenzhou as at 31 December 2010 Pro forma adjustments RMB’000 HK$’000 HK$’000 (Note 3) (Note 3) (Note 4) 14,641 16,965 1,867 2,163 – – 11,782 13,652 1,555,365 – – 4,982 5,773 – – 33,272 38,553 646 749 – – 80 93 – – – – 146 169 92 107 (133,966) 964 1,118 – – 2 2 32,038 37,124 – – – – 116,034 – – 1,139 1,320 33,179 38,446 (32,215) (37,328) 1,057 1,225 – – – – 358,582 – – 216,418 4,964 5,752 – – 4,964 5,752 (3,907) (4,527) 9,280 10,753 (10,831) – – 725,000 (13,187) (15,280) 16,196 (3,907) (4,527)	Unaudited pro forma consolidated statement of financial position of the Enlarged Group HK$’000 161,554 28,317 1,041 3,483,144 8,992 86,924 205
				3,770.177
				30,155 23,177 12,207 171 1,106 2,187 60,654
				129,657
				13,578 36,528 37,124 61,385 116,034 9,294 3,380
				277,323
				(147,666)
				3,622,511

				1,160 680,156 565,195 5,752 477,781
				1,730,044
				1,892,467

				90,935 725,000 1,076,532
				1,892,467

– 248 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Notes:

The financial information of the Group is extracted from the published interim report of the Company for the six months ended 30 September 2010 issued on 29 November 2010.
The audited consolidated statement of financial position of the Venture Path Group is extracted from the accountant’s report thereon as set out in Appendix IIA to the Circular.
The audited statement of financial position of Baicheng Wenzhou is extracted from the accountants’ report thereon as set out in Appendix IIB to the Circular and is translated from its presentation currency, Renminbi to Hong Kong dollars at the rate of RMB0.863 to HK$1, which is the prevailing exchange rate as at 30 September 2010.
The adjustments in connection with the Acquisition represent:

The excess of the consideration over the assumed fair values of the identifiable assets and liabilities (other than mining rights) acquired is adjusted to the fair value of mining rights as follows:

Fair value of the consideration of the Acquisition (note i) Carrying amounts of net liabilities of Baicheng Wenzhou and the Venture Path Group as at 31 December 2010 (note ii) Net fair value adjusted Represented by: Mining rights (note iii)	HK$’000 1,550,000 5,365
	1,555,365

	1,555,365

In the opinion of the directors of the Company, as the principal assets acquired by the Group is Baicheng Wenzhou’s mining rights, the acquisition is therefore accounted for as acquisition of assets.

(i) The fair value of the consideration for the Acquisition as at 30 September 2010 is HK$1,550,000,000, will be satisfied by: (a) HK$250,000,000 cash consideration; (b) issue of convertible shares with fair value of HK$725,000,000; and (c) issue of convertible bonds with fair value of HK$575,000,000.
(a) The Group has insufficient bank balances and cash to satisfy the total cash consideration of HK$250,000,000 as at 30 September 2010. The shortfall in bank balances and cash of HK$116,034,000 is included as consideration payable for the preparation of the Unaudited Pro Forma Financial Information. On 29 October 2010, 363,740,000 shares of the Company have been successfully placed with net proceeds of approximately HK$319,082,000 and the cash consideration of HK$250,000,000 has been paid on 31 January 2011 as deposit for the Acquisition.

– 249 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(b) The 941,558,441 convertible shares to be issued by the Company have the same right on return of capital on liquidation or otherwise, but do not carry voting right and do not entitle to dividend or other distribution. Each convertible share can be converted into one ordinary share of the Company, given that, immediately following the conversion, the Company will be able to meet the public float requirement under the Listing Rules and the relevant convertible share holder, together with the parties acting in concert with it will not hold or control such amount of the Company’s voting power at general meetings as may trigger a mandatory general offer under the Takeovers Code. Fair value of the convertible shares, determined by the market price of HK$0.77 per ordinary share as at 28 January 2011, being the date of the sales and purchase agreement entered between the Group and the Vendor, as adjusted by dilution factor, is HK$725,000,000. The fair value of the convertible shares will be re-estimated at the date of the Acquisition.
(c) The convertible bonds are denominated in Hong Kong dollars with the principal amount of HK$575,000,000, bear interest at 2% per annum and will be matured on the date falling on the fifth anniversary of the issue of the convertible bonds. The convertible bonds can be converted into 746,753,246 shares of the Company at the conversion price of HK$0.77 per share. The Company may redeem the convertible bonds at 100% of the principal outstanding amount, in whole or in part, at any time before the maturity date given that, immediately following the conversion, the Company will be able to meet the public float requirement under the Listing Rules and the relevant convertible bonds holders, together with the parties acting in concert with it will not hold or control more than 25% of the Company’s voting power at general meetings. In accordance with Hong Kong Accounting Standard 39 “Financial instruments: Recognition and measurement”, the convertible bond contains both the liability and the embedded conversion components. The liability component is recognised at fair value of HK$358,582,000 which is estimated based on effective interest rate of 12.6% per annum. The embedded conversion option is recognised at HK$216,418,000 which is determined by application of Binomial Model. The fair value of the convertible bond will be re-estimated at the date of the Acquisition.
(ii) For the purpose of the preparation of the Unaudited Pro Forma Financial Information, the fair value of the identifiable assets and liabilities (except for mining rights) acquired is assumed to be the same as the carrying amounts of the assets and liabilities of Baicheng Wenzhou and the Venture Path Group. The fair value of mining rights and other assets and liabilities are subject to change upon the completion of the valuation of all identifiable assets and liabilities acquired.
(iii) In the preparation of the Unaudited Pro Forma Financial Information, the excess of considerations over the fair value of the identifiable assets and liabilities (except for mining rights) acquired was recognised as fair value adjustment to the mining rights.

– 250 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The directors of the Company have assessed whether there is indication that the mining rights may be impaired as at 30 September 2010 on a pro forma basis, in accordance with Hong Kong Accounting Standard 36 “Impairment of assets”. The directors of the Company have assessed and concluded that there is no impairment indication in respect of the mining rights with an assumed fair value of approximately HK$1,569,017,000, as the fair value provided in the valuation performed by an independent valuer, BMI Appraisals Limited is HK$1,700,000,000, which is higher than such assumed fair value. Upon the completion of the Acquisition and in subsequent reporting periods, valuation of the mining rights will be performed for the purpose of determining the fair value or recoverable amount of the mining rights.
On 17 February 2011, Venture Path Group acquired the entire share capital of Baicheng Wenzhou at a consideration of RMB220,000,000 (approximately HK$259,128,000), which was financed by its fund deposited in bank of HK$60,547,000 as at 31 December 2010 and additional funding of approximately HK$198,581,000 provided by the former ultimate shareholder of the Venture Path Group. The total amount due to former ultimate shareholder of the Venture Path Group of HK$259,128,000 will be waived upon the completion of the Acquisition.

– 251 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

A. VENTURE PATH GROUP

Set out below is the management discussion and analysis on Venture Path Limited and its subsidiary (collectively the “Venture Path Group”) for the period from 8 January 2010 (date of incorporation) to 31 December 2010.

For the period ended 31 December 2010, the Venture Path Group did not generate any revenue for the periods under review.

The principal activity of the Venture Path Group is primarily engaged in investment holding.

Amount due to ultimate holding company, namely Tai Rong Xin Ye International Power Generation Inc.

As at 31 December 2010, there was an amount of approximately HK$61,385,000 due to ultimate holding company.

The amount due to ultimate holding company is unsecured, interest free and repayable on demand.

LIQUIDITY, FINANCIAL RESOURCES AND GEARING

Net Assets/Liabilities

Set out below is a summary of the audited financial statements of the Venture Path Group as at 31 December 2010 which was prepared on the bases as set out on page 195 of this circular and details of which are set out in Appendix IIA this circular.

	31 December
	2010
	HK$’000
Total assets	60,547
Total liabilities	61,385
Net liabilities	838
*Gearing ratio	101.4%

The gearing ratio is defined as total liabilities to total assets other than goodwill.

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APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

Cash & Bank Balances

As at 31 December 2010, aggregate cash and bank balances of the Venture Path Group amounted to approximately HK$60,547,000, representing 100% of total current assets.

Borrowings

As at 31 December 2010, there was no borrowing from banks or financial institutions.

SIGNIFICANT INVESTMENTS HELD

As at 31 December 2010, the Venture Path Group did not hold any significant investments during the periods save for the proposed acquisition mentioned below.

ACQUISITION AND DISPOSALS

The Venture Path Limited acquired the entire share capital of West China Coal Mining Holdings Limited (“West China”) on 24 March 2010.

On 18 September 2010, West China entered into a sale and purchase agreement with the Baicheng Wenzhou Owners where West China agreed to purchase and the Baicheng Wenzhou Owners agree to sell the entire equity interest of Baicheng Wenzhou. Baicheng Wenzhou is a domestic enterprise established in the PRC and will become a wholly-owned foreign enterprise upon completion of the said acquisition by West China.

Nevertheless, the acquisition has not yet been completed on 31 December 2010. As such, West China has capital commitments outstanding at 31 December 2010 not provided for in the financial statement in respect of the said acquisition by West China. In this connection, no financial cost was recognized for the year 2010.

The Venture Path Group had not made any other acquisition or disposal during the periods under review.

SEGMENTAL INFORMATION

No business segment analysis and geographical segment analysis was presented as the Venture Path Group did not generate any revenue for the period under review.

– 253 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

FOREIGN EXCHANGE MANAGEMENT

The Venture Path Group does not hedge its foreign currency risk, as the management does not expect any significant movements in exchange rate between the Hong Kong dollar and Renminbi. During the relevant period under review, as the impact of foreign exchange exposure has been insignificant, no hedging or other alternatives have been implemented.

CAPITAL COMMITMENTS

The Venture Path Group had the following capital commitments at the end of the reporting period:

	31 December
	2010
	HK$’000
Contracted, but not provided for:
Acquisition of a subsidiary	259,128

On 18 September 2010, West China entered into an equity transfer agreement with the Baicheng Wenzhou Owners to acquire entire equity interest of Baicheng Wenzhou, at a consideration of RMB220,000,000.

CONTINGENT LIABILITIES

As at 31 December 2010, the Venture Path Group did not have any contingent liabilities.

PLEDGE OF ASSETS

As at 31 December 2010, the Venture Path Group had no pledged assets.

CAPITAL STRUCTURE

Venture Path Limited was incorporated with an authorized capital of US$50,000, divided into 50,000 ordinary shares. On 27 January 2010, 10,000 ordinary share of US$1 were issued at par.

EMPLOYMENT, SHARE OPTION SCHEMES AND TRAINING SCHEMES

As at 31 December 2010, the Venture Path Group did not have any workforce. In the future, the Venture Path Group would regard human resource as the core value for the development of the group. Consistent review would be conducted on human resource requirements and on the job training will be provided so as to promote the overall quality of its staff. As for remuneration package, the Venture Path Group would adopt various salary systems including position salary system and such systems will be reviewed annually. The Venture Path Group would provide pension scheme for its employees in the PRC.

– 254 –

MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

APPENDIX IV

FUTURE PLAN AND MATERIAL INVESTMENTS

The Venture Path Group has no future plan for material investments or in capital assets. The Venture Path Group intends to complete the acquisition of Baicheng Wenzhou.

B. BAICHENG WENZHOU

Set out below is the management discussion and analysis on Baicheng County Wenzhou Mining Development Company Limited (“Baicheng Wenzhou”) for each the years ended 31 December 2008, 31 December 2009 and 31 December 2010 respectively.

For the years ended 31 December 2008, 31 December 2009 and 31 December 2010

Revenue Cost of sale Gross profit (loss) Other income Provision for restoration and environmental costs Administrative expenses Finance cost Profit (loss) before taxation Income tax expense Profit (loss) and total comprehensive (expense) income for the year	31 December 2008 RMB’000 23,142 (14,166) 8,976 116 (248) (5,920) (305) 2,619 (455) 2,164	31 December 2009 RMB’000 30,750 (18,743) 12,007 6 (263) (8,516) (396) 2,838 (1,303) 1,535	31 December 2010 RMB’000 16,329 (20,051) (3,722) 5 (278) (6,917) (480) (11,392) – (11,392)

– 255 –

APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

Revenue

The principal activities of Baicheng Wenzhou are primarily engaged in coal production and sales of coal in Xinjiang Uygur Autonomous Region, PRC.

During the financial year 2009, revenue has increase from approximately RMB23.1 million to approximately RMB30.8 million represented an increase of 32.9%. The increase in revenue for 2009 as compared to 2008 was mainly attributable to the fact that in 2008 there were certain ongoing construction work performed and the Target Mine was in ramp up mode, whereas in 2009 the Target Mine was in full production.

During the financial year 2010, revenue has dropped from approximately RMB30.8 million to approximately RMB16.3 million represented a drop of 46.9%, it was mainly due to the production having been suspended for one month during Chinese New Year holiday. The said one-month suspension is not an annual recurring event for Baicheng Wenzhou as production is generally suspended for around one week during the Chinese New Year holidays for past years. Based on discussions with the Vendor, the Company understands that the one-month suspension is mainly attributable to the fact that the Baicheng Wenzhou Owners had commenced negotiations for the sale of Baicheng Wenzhou, and had intended to enter into arrangements for such sale, in early 2010. The relatively longer suspension period was one of the reasons for the decrease in revenue for the year ended 31 December 2010 as compared with previous years. Also, less coal was produced after the sale and purchase agreement for acquisition of Baicheng Wenzhou by West China was signed on 18 September 2010, upon which completion of the West China acquisition took place in February 2011. After the said sale and purchase agreement was signed in September 2010, the Baicheng Wenzhou Owners were reluctant to maintain normal production levels and had set lower sales targets. On 28 January 2011, the S&P Agreement was entered into in respect of the Acquisition of Baicheng Wenzhou by the Purchaser, such Acquisition currently pending completion. The Company believes that as a result of the Baicheng Wenzhou Owners’ arrangements to sell Baicheng Wenzhou commencing in January 2010, and the said changes in ownership of Baicheng Wenzhou within the said 5-month span, the Baicheng Wenzhou Owners and key personnel and employees of Baicheng Wenzhou did not have the inclination or incentive to maintain normal operations of the Target Mine, which resulted in disruption of normal operations.

– 256 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

Cost of revenue and administrative expenses

As coal production is a labour intensive business, labour costs and related welfare costs comprise a significant part of the operating costs of Baicheng Wenzhou. Further, as the Target Mine ran in full production in 2009 and the same level of labour costs was incurred for the whole year 2010 until certain lay-offs in December 2010. The said lay-offs were initiated by the Baicheng Wenzhou Owners, the Vendor having consented to such lay-offs. In view of the pending change in ownership of Baicheng Wenzhou, the Baicheng Wenzhou Owners had intended to suspend operation of the Target Mine from December 2010. Moreover, in line with common practice for acquisitions in the PRC coal industry, the Vendor intended to put in place its own management personnel and workforce upon completion of West China’s acquisition of Baicheng Wenzhou to improve overall management and operation efficiency of Baicheng Wenzhou and the Target Mine. Moreover, in view of plans to commence commercial production in mid May 2011, Baicheng Wenzhou, having commenced recruitment of relevant personnel and workers in April 2011, has, as at the Latest Practicable Date, recruited 50 employees. Based on the voluntary nature of the layoffs, with the same being supported by commercial basis of the Baicheng Wenzhou Owners and the Vendor, and in view of the status of new staff recruitment of Baicheng Wenzhou, the Company is not aware of there being any material disruption of stable operations of the Target Mine.

In addition, some costs such as office expenses, depreciation and amortization were incurred with the same level although the revenue dropped in year 2010. Hence, the cost of revenue and administrative expenses did not fluctuate with revenue correspondingly for 2009 and 2010.

Gross profit margin and net profit margin

The gross profit margin of Baicheng Wenzhou for 2009 and 2010 were 39.0% and -22.8% respectively, and the net profit margin of Baicheng Wenzhou for 2009 and 2010 were 5.0% and -69.8% respectively. The fluctuation in the margins is due to the drop in turnover in 2010 due to the reasons disclosed in the section headed “Revenue” above and similar level of cost is incurred in 2010 as disclosed in the section headed “Cost of revenue and administrative expenses” above.

– 257 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

Amounts due to former equity owners

As at 31 December 2010, there was an amount of approximately RMB32,038,000 due to former equity owners.

As at 31 December 2009, there was an amount of approximately RMB19,207,000 due to former equity owners.

As at 31 December 2008, there was an amount of approximately RMB16,057,000 due to former equity owners.

The increase in balance in year 2010 is due to Baicheng Wenzhou having incurred losses for year 2010 and the Baicheng Wenzhou Owners had injected funds into Baicheng Wenzhou for its daily operations.

The amount due was unsecured and interest-free. The said outstanding amounts will be settled before the Completion of the Acquisition and there are no expected financial implications.

LIQUIDITY, FINANCIAL RESOURCES AND GEARING

Net Assets/Liabilities

Set out below is a summary of the audited financial statements of the Baicheng Wenzhou as at 31 December 2008, 31 December 2009 and 31 December 2010 which was prepared on the bases as set out on page 215 of this circular and details of which are set out in Appendix IIB to this circular.

	31 December	31 December	31 December
	2008	2009	2010
	RMB’000	RMB’000	RMB’000
Total Assets	32,281	35,368	34,236
Total Liabilities	26,331	27,883	38,143
Net assets (liabilities)	5,950	7,485	(3,907)
*Gearing ratio	81.6%	78.8%	111.4%

The gearing ratio is defined as total liabilities over total assets other than goodwill.

– 258 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

Cash & Bank Balances

As at 31 December 2008, 31 December 2009 and 31 December 2010, Baicheng Wenzhou’s aggregate cash and bank balances amounted to approximately RMB723,000, RMB264,000 and RMB92,000 respectively, representing 26.4%, 4.2% and 9.5% of total current assets respectively.

Borrowings

As at 31 December 2008, 31 December 2009 and 31 December 2010, there were no borrowings from banks or financial institutions during the relevant periods.

SIGNIFICANT INVESTMENTS HELD

As at 31 December 2008, 31 December 2009 and 31 December 2010, Baicheng Wenzhou did not hold any significant investments during the relevant periods.

ACQUISITION AND DISPOSALS

Baicheng Wenzhou had not made any acquisitions or disposals during the periods under review

SEGMENTAL INFORMATION

No business segment analysis and geographical segment analysis was presented since substantially all turnover and contribution to results were derived from the sale of coal to the PRC local market.

FOREIGN EXCHANGE MANAGEMENT

Baicheng Wenzhou collects all of its revenue in RMB and incurs all of the expenditures as well as capital expenditure in RMB. During the relevant periods under review, there has been no exposure to any foreign currency exchange risk, and no hedging or other alternatives have been implemented.

COMMITMENTS

In accordance with the relevant rules and regulations issued by the relevant regulators in Xinjiang, the PRC in 2008, Baicheng Wenzhou was required to pay an ecological rehabilitation deposit upon the receipt of formal notice from the said regulators. Baicheng Wenzhou received the formal notification on 30 October 2009. The notification required payment of approximately RMB3,213,000 upon receipt of the notification and then yearly payments of RMB689,000 from 2010 to 2016 for a total amount of RMB8,033,000. As at 31 December 2009 and 2010, the commitment of the unsettled deposits were RMB8,033,000 and RMB4,131,000 respectively.

– 259 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

CONTINGENT LIABILITIES

As at 31 December 2008, 31 December 2009 and 31 December 2010, Baicheng Wenzhou did not have any contingent liabilities.

PLEDGE OF ASSETS

As at 31 December 2010, Baicheng Wenzhou had pledged bank deposits of RMB3,902,000. It represents the deposit placed in a bank account which is required by the Xinjiang Uyghur Autonomous Region Finance Department and Land Resource Department as a deposit for land disturbance and environmental rehabilitation.

As at 31 December 2008 and 31 December 2009, Baicheng Wenzhou had no pledged assets.

CAPITAL STRUCTURE

Baicheng Wenzhou was a domestic enterprise established in the PRC on 17 December 2004 with a registered capital of RMB9,280,000. The Company expects the registered capital of Baicheng Wenzhou to be increased as follows: (i) from RMB9,280,000 to approximately RMB39,537,000 prior to Completion; and (ii) from RMB39,537,000 to approximately RMB60,000,000. For the capital injection mentioned in (i) above, the Vendor will make a capital injection of approximately RMB30,257,000 into West China, which will in turn inject capital of the same amount into Baicheng Wenzhou. Baicheng Wenzhou will use the said capital to settle outstanding shareholders loan of approximately RMB30,257,000 owed to the Baicheng Wenzhou Owners in fulfillment by the Vendor of condition precedent (j) to Closing (set out in the section headed “The S&P Agreement” in the “Letter from the Board” section of this circular). The said capital injection by the Vendor and West China into Baicheng Wenzhou is pending approval from the relevant PRC government authorities as at the Latest Practicable Date, and is expected to be completed prior to Completion. Upon Completion, the Company intends to procure a capital injection of approximately RMB20,463,000 into Baicheng Wenzhou to be used as general working capital. The said capital injections do not constitute part of the Consideration for the Acquisition.

– 260 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

EMPLOYMENT, SHARE OPTION SCHEMES AND TRAINING SCHEMES

As at 31 December 2008, 2009 and 2010, Baicheng Wenzhou had a workforce of 270, 344 and 50 employees respectively, and the total remuneration were approximately RMB7,196,000, RMB11,337,000 and RMB7,951,000 respectively. Baicheng Wenzhou regards human resource as the core development area of the Company. Consistent review will be conducted on human resource requirements and on the job training will be provided so as to promote the overall quality of its staff. As for remuneration package, Baicheng Wenzhou adopted various salary systems including position salary system and such systems will be reviewed annually. Baicheng Wenzhou provides Pension Scheme for its employees in the PRC. During the relevant periods under review, no share option scheme was adopted.

FUTURE PLAN AND MATERIAL INVESTMENTS

It is the intention of Baicheng Wenzhou to continue with the coal mining and coal sales business. In view of increasing global demand for natural resources and the increase in coal prices over the past recent years, management is optimistic about the future prospects and demand for coal. With a strong and sustainable growth momentum of the PRC economy and the continuous development of cities and the infrastructure and real estate sectors as well as accelerated industrialization and urbanization in the PRC, it is expected that the demand for coal will continue to grow.

Baicheng Wenzhou will make further investments in the Target Mine and management is confident that the revenue of Baicheng Wenzhou will grow in the coming years.

C. INDEBTEDNESS

As at 31 March 2011, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group had outstanding indebtedness as follows:

Borrowings

As at the close of business on 31 March 2011, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group had outstanding zero coupon convertible notes with aggregate principle amount of approximately US$49,032,000 (equivalent to approximately HK$380,052,000).

– 261 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

Amounts due to former equity owners of Baicheng Wenzhou

The Enlarged Group had amounts due to the Baicheng Wenzhou Owners of approximately RMB60,000,000 (equivalent to approximately HK$71,090,000) as at 31 March 2011. The amount will be settled before completion of the Acquisition.

Amount due to Tai Rong Xin Ye International Power Generation Inc.

The Enlarged Group had an amount due to Tai Rong Xin Ye International Power Generation Inc. of approximately HK$224,246,000 as at 31 March 2011. The balance will be waived upon the completion of the Acquisition.

Pledged assets

The Enlarged Group had pledged its bank deposits of RMB3,902,000 (equivalent to approximately HK$4,623,000) as at 31 March 2011 as deposit for land disturbance and environmental rehabilitation as required by the Xinjiang Uygur Autonomous Region Finance Department and Land Resource Department.

Save as disclosed above and apart from intra-group liabilities and normal trade payables in the ordinary course of business, the Enlarged Group did not have any bank borrowings, bank overdrafts, loans or other similar indebtedness, mortgage, charges, finance leases or hire purchases commitments, guarantees or other material contingent liabilities outstanding at the close of business on 31 March 2011.

D. WORKING CAPITAL

As at the Latest Practicable Date, the Enlarged Group is in the process of finalising banking facilities with total amount of RMB320,000,000 (approximately HK$380,000,000) with a bank (the “ Banking Facilities ”), subject to the completion of the registration of the pledge of the Enlarged Group’s mining rights. The Enlarged Group also has in place no less than HK$220,000,000 credit facility arrangements with financial institutions (the “ Credit Facility Arrangements ”), from which the Enlarged Group may, depending on then subsisting financial and other relevant circumstances, procure relevant financing.

On the assumption that (1) the Banking Facilities will be available at the relevant time; (2) the Credit Facility Arrangements remain in place and valid at the relevant time; and (3) the Enlarged Group elects to procure financing therefrom, the Directors are of the opinion that, after taking into account the present financial resources, banking facilities available, expected project financing and its internal generated funds, the Enlarged Group has sufficient working capital to satisfy its requirements for at least 12 months from the date of publication of this circular in the absence of unforeseen circumstances.

– 262 –

VALUATION REPORT

APPENDIX V

The following is the text of a report prepared for the purpose of incorporation in this circular received from BMI Appraisals Limited, an independent valuer, in connection with its valuation as at 31 December 2010 of the fair market value of the 100% interest in the coal mine located in the Kuche-Baicheng Coalfield, Xinjiang Autonomous Region, the People’s Republic of China.

33[rd] Floor, Shui On Centre, Nos. 6-8 Harbour Road, Wanchai, Hong Kong

25 May 2011

The Directors

Hao Tian Resources Group Limited

Unit 4803, 48th Floor COSCO Tower No. 183 Queen’s Road Central Hong Kong

Dear Sirs,

INSTRUCTIONS

We refer to the instructions from Hao Tian Resources Group Limited (referred to as the “Company”) for us to provide our opinion on the fair market value of the 100% interest in the coal mine (referred to as the “Coal Mine”) located in the Kuche-Baicheng Coalfield, Xinjiang Autonomous Region, the People’s Republic of China (referred to as the “PRC”) as at 31 December 2010.

This report presents the basis of valuation, the background of the Coal Mine, an industry overview, the source of information, the scope of work and the valuation assumptions. It also explains the valuation methodology utilized and presents our conclusion of value.

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VALUATION REPORT

APPENDIX V

BASIS OF VALUATION

Our valuation has been carried out in accordance with the “Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports” (VALMIN Code).

The valuation has been carried out on the basis of fair market value. Fair market value is defined as “the amount of money (or the cash equivalent of some other consideration) determined for which an asset change hands on the valuation date in an open and unrestricted market between a willing buyer and a willing seller in an arm’s length transaction, with each party acting knowledgeably, prudently and without compulsion.”

BACKGROUND OF THE COAL MINE

The Coal Mine is an underground coal mine located in the Kuche-Baicheng Coalfield on the southern slope of Tianshan Fold Zone and on the northern margin of Talimu Basin. The Coal Mine is currently in operation. According to a competent person’s report (referred to as the “Competent Person’s Report”) prepared by Minarco-MineConsult (referred to as the “Competent Person”) in February 2011, the historical production in years 2010, 2009 and 2008 were 87 thousand tonnes per annual (referred to as “ktpa”), 208 ktpa and 147 ktpa respectively. As stated in the Competent Person’s Report, the deposit was separated into two mining areas during the process of estimating coal resources. The upper area, namely Mining Area A (Mining Licence surface co-ordinates and from surface elevation “2320 m to elevation level of 2,060 m above sea level) and the lower area, namely Mining Area B (Mining Licence surface co-ordinates and from elevation 2,060 m to 1,500 m above sea level) And the estimated reserves for the Coal Mine are as follows:

Mining Area JORC Classification Mining Area A Probable Mining Area B Probable Total: Probable	Tonnes (Mt) 5.5 32.6
	38.1

In accordance with the Competent Person’s Report, the Coal Mine produces predominantly Gas Coal, along with 1/2 Caking Coal, 1/3 Coking Coal and Weakly Caking Coal (Chinese Coal Classification Standard – GB 5751-86), all of which can be used as thermal coal or blending coking coal.

A feasibility study (referred to as the “Feasibility Study”) prepared by Design Institute of Hami Mining Administration Bureau (referred to as “Design Institute”) in December 2010, as provided by the Company, stated the details of an expansion plan to increase the coal mine production to 900,000 tonnes per year (referred to as “900 ktpa”).

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APPENDIX V

INDUSTRY OVERVIEW

The PRC General Economy

According to the National Bureau of Statistics（國家統計局）of the PRC, an agency in charge of statistics and economic accounting in the PRC, the gross domestic product (GDP) of the PRC in year 2009 was RMB33,535.3 billion, up by 8.7% over the previous year. Analyzed by different industries, the added value of the primary industry was RMB3,547.7 billion, up by 4.2%, that of the secondary industry was RMB15,695.8 billion, up by 9.5% and that of the tertiary industry was RMB14,291.8 billion, up by 8.9%.

GDP Growth Rate of the PRC, 1999-2009 (%)

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----- Start of picture text -----

14%
12%
10%
8%
6%
4%
2%
0%
13.0%
11.6%
10.4%
10.0% 10.1%
9.1% 9.0%
8.4% 8.3% 8.7% 8.7% 8.4% 8.5% 8.2% 8.2%
7.6%
1999A2000A2001A2002A2003A2004A2005A2006A2007A2008A2009A2010F2011F2012F2013F2014F
----- End of picture text -----

Source: National Bureau of Statistics of the PRC, Economist Intelligence Unit

The general level of consumer price of the PRC in year 2009 was down by 0.7% over the previous year. Of this total, the price for food went up by 0.7%. The prices for investment in fixed assets were down by 2.4%. The producer prices for manufactured goods dropped by 5.4%. The purchasing prices for raw materials, fuels and power went down by 7.9%. The producer prices for farm products were down by 2.4%. The prices for means of agricultural production were down by 2.5%. And the sales prices for housing in 70 large and medium-sized cities were up by 1.5%.

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APPENDIX V

Consumer Price Growth Rate of the PRC, 2004-2009

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----- Start of picture text -----

7
6
5
4
3
2
1
0
-1
-2
2004A 2005A 2006A 2007A 2008A 2009A 2010F 2011F 2012F 2013F 2014F
5.9%
4.8%
10.4%
4.1% 4.1%
3.9%
3.2% 3.4%
2.4%
1.8%
1.5%
-0.7%
----- End of picture text -----

Source: National Bureau of Statistics of the PRC, Economist Intelligence Unit

The PRC economy cooled down to an eight-year low of 8.7% in year 2009 as the global financial crisis took its toll on the world’s fastest growing economy. According to Economist Intelligence Unit, a global provider of country, industry and management analysis, real GDP growth of the PRC is forecasted to slow down, but will remain impressive, averaging 8.4% in the period from 2010 to 2014, and the domestic demand is expected to remain strong in the period. Rapid private consumption growth and increases in government spending will offset weaker export growth. Downside risks are posed by the threat of a fall in consumer confidence, but the government’s actions in year 2009 have highlighted its ability to support growth.

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APPENDIX V

The PRC Coal Industry

Coal is an important source of energy and an essential material in iron and steel production.

Energy Consumption of the PRC in 2009

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----- Start of picture text -----

Nautral Gas
4%
Hydo Power
8%
Crude Oil
18%
Coal
70%
----- End of picture text -----

Source: CEIC database

Due to the rapid development of the PRC economy, the demand for energy becomes greater. According to a reputable research provider, CEIC database, coal is the dominant source of energy in the PRC energy portfolio, which contributes 70% to the total energy consumption. 50% of coal produced was used for electricity generating in the end of year 2008.

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APPENDIX V

Coal Production in the PRC (Million Tons)

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----- Start of picture text -----

3,500
3,000
2,500
2,000
1,500
1,000
500
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Coal Production Million Tons
----- End of picture text -----

Source: CEIC database

The PRC is a world leader in terms of both reserves and production of coal. In the first 5 months of year 2010, the production of coal was 1.3 billion tonnes, an increase of 20%. The production of coal in March, April and May of year 2010 were 279 million tonnes (referred to as “mt”), 271 mt and 283 mt, respectively. The compound annual growth rate (CAGR) of the coal production between year 2000 and year 2009 was 14.98%. However, this growth may not cope with the increasing demand as there were 7.87 million tonnes of coals imported to the PRC in the first half of year 2010, up 19.86% year on year.

Production of Coal Top Five Procinces in the PRC, 2009

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----- Start of picture text -----

Other
Inner Mongolia
35%
22%
Shanxi
20%
Shaanxi
10%
Shangong Henan
5% 8%
----- End of picture text -----

Source: CEIC database

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VALUATION REPORT

APPENDIX V

SOURCE OF INFORMATION

For the purpose of our valuation, we have been furnished with the information in respect of the Coal Mine provided by the senior management of the Company. The valuation required the consideration of all pertinent factors, including, but not limited to, the following:

The nature of the Coal Mine including the overall market, industry sector and geographical location;
The information in respect of the Coal Mine provided by the senior management of the Company, including the Competent Person’s Report, the Feasibility Study and the legal opinion;
The Competent Person’s Report in respect of the Coal Mine prepared by the Competent Person;
The Feasibility Study in respect of the Coal Mine prepared by Design Institute;
The specific economic environment and competition for the market in which the Coal Mine is currently exposed to or will be exposed to; and
Other factors that will materially affect the operation of the Coal Mine.

SCOPE OF WORK

The following processes have been conducted by us to evaluate the reasonableness of the adopted basis and assumptions provided by the senior management of the Company:

Interviewed the senior management of the Company and obtained all relevant information in respect of the Coal Mine;
Examined the information in respect of the Coal Mine provided by the senior management of the Company;
Examined the information in respect of the Coal Mine stated in the Competent Person’s Report;
Examined the information in respect of the Coal Mine stated in the Feasibility Study;

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APPENDIX V

Conducted appropriate research to obtain sufficient market data and statistical figures and prepared the valuation based on generally accepted valuation procedures and practices; and
Presented the purpose and the basis of valuation, the background of the Coal Mine, an industry overview, the source of information, the scope of work, the valuation assumptions, the valuation methodology and our conclusion of value in this report.

VALUATION ASSUMPTIONS

In the course of our valuation work, the following assumptions have been adopted in order to sufficiently support our conclusion of value:

All requisite licenses and permits, including the Mining License and the Coal Production Permit, issued by any authorized entities that will materially affect the operation of the Coal Mine have been obtained or can be obtained upon request without substantial time and cost;
There will be no material change in the political, legal, fiscal, technological, market and economic conditions as well as taxation laws and regulations in the jurisdiction where the Coal Mine is currently exposed to or will be exposed to;
The market return, market risk, interest rates and exchange rates will not differ materially from those of present or expected;
The core operation of the Coal Mine will not differ materially from those of present or expected;
The information in respect of the Coal Mine have been prepared on a reasonable basis after due and careful considerations by the senior management of the Company;
The information in respect of the Coal Mine stated in the Competent Person’s Report have been prepared on a reasonable basis after due and careful consideration by the Competent Person;
The information in respect of the Coal Mine stated in the Feasibility Study have been prepared on a reasonable basis after due and careful consideration by Design Institute; and
Appropriate contingency measures against any human disruptions or natural disasters as described by Environmental Resources Management Shanghai Limited in the Competent Person’s Report that will materially affect the operation of the Coal Mine would be implemented.

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APPENDIX V

VALUATION METHODOLOGY

The Valuation Approaches

The following generally accepted valuation approaches have been considered in the valuation:

The cost approach provides an indication of value based on the principle that an informed buyer would pay no more than the cost of producing a substitute asset with equal utility as the subject asset;
The market approach provides an indication of value by comparing the subject asset to similar assets that have been sold in the market, with appropriate adjustments for the differences between the assets; and
The income approach provides an indication of value based on the principle that an informed buyer would pay no more than the present value of anticipated future economic benefits generated by the subject asset.

The income approach was considered to be the most appropriate valuation approach in this valuation, as it takes the future growth potential and asset-specific issues of the Coal Mine into consideration.

Under the income approach, the Discounted Cash Flow (DCF) method was adopted. In applying the DCF method, the free cash flows for each year in the future were determined. The results were then discounted using a discount rate to determine the present value of the free cash flows. The free cash flows for each year were computed using the following formula:

FCF = NI + NCE + Int (1 – Tint) – NCI – InvFA – InvWC

Where:

FCF = free cash flow NI = net income NCE = non-cash expenses Int = interest expense Tint = tax rate applied to interest expense NCI = non-cash incomes InvFA = investment in capital expenditure InvWC = investment in net working capital

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APPENDIX V

The detailed elaboration of the free cash flow, as shown below, was broken down into three portions, including (1) Items related to the Competent Person’s Report, (2) Items related to the Competent Person’s Report and was adjusted in the Valuation and (3) Items not related to the Competent Person’s Report.

(1) Items Related to the Competent Person’s Report

(a) Net income:

The net income was determined mainly by the selling price and operating cost of the Coal Mine.

The selling price was stated in the Competent Person’s Report, the coal price as RMB420 per tonne for fine coal and RMB600 per tonne for lump coal, and approximately 30% of the total coal production were estimated to be lump coal. The coal price of RMB474 adopted in the valuation was the weighted average based on the above-mentioned proportion of the reserves. The prices as advised in the Competent Person’s Report were stated as the current price of coal sold from the mine, of which is of the same quality of coal.

The operating cost of the Coal Mine adopted in the valuation was taken with reference to the Competent Person’s Report, with interest expense and non cash items such as depreciation and amortization being deducted. These two items were considered in non-cash item and interest expense item.

(b) Investment in capital expenditure:

According to the Competent Person’s Report, the estimated capital expenditure required to increase the annual production capacity of the Coal Mine to 900,000 tonnes is RMB296 million.

(2) Items Related to the Competent Person’s Report and was adjusted in the valuation

(a) Non-cash items:

The amount of non-cash items such as depreciation and amortization as stated in the Competent Person’s Report was being deducted. It was then replaced by the calculated amount based on a common valuation practice: straight line depreciation. Such approach was adopted since depreciation is an accounting related issues. It is more appropriate to be prepared by valuers instead of mining experts in order to better reflect the relevant accounting treatment.

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APPENDIX V

(b) Interest expense component:

Interest expense was originally one of the components of operating cost. With interest expense being included in operating cost during the calculation of net income, the amount deducted would be required to add back in the calculation of cash flow. In the valuation, interest expense was excluded from the operating cost, thus no add back for this component is needed.

(c) Investment in net working capital:

The amount of investment in net working capital as stated in the Competent Person’s Report was taken as a reference while the adopted net working capital in the valuation was taken reference from those of comparable companies since they represent the industry practice and is more conservative than the figures as stated in the Competent Person’s Report.

(3) Items Not Related to the Competent Person’s Report

(a) Tax rate:

Tax rate was the corporate tax of the PRC of 25%.

(b) Non-cash income:

There is no non-cash income for the Coal Mine.

Apart from the calculation of the free cash flow, there are various major items that will affect the valuation and they are listed as follows:

The Production Schedule

The mine life of approximately 43 years was estimated based on the total estimated reserve and the production capacity of the Coal Mine. The planned production of the Coal Mine in year 2011 and year 2012 was 298,000 tonnes as advised by the Company is achievable as it is the existing production capacity as stated in the Competent Person’s Report; while the planned production in year 2013 and the years after would reach 900,000 tonnes as stated in the Feasibility Study. The coal production permit and the expanded mining license of 300,000 tonnes are currently under application and the Company believes that the expanded mining license will be obtained without substantial time, cost and any other difficulties. As advised by the senior management of the Company, applications for the requisite mining licenses in achieving production capacity of 900,000 tonnes per year would take around 6 to 12 months and would cost approximately RMB4,000,000.

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APPENDIX V

The Comparable Companies

In the valuation, certain publicly listed companies that are considered to be comparable to the Coal Mine (referred to as the “Comparable Companies”) have been selected.

Details of the Comparable Companies are as follows:

		Bloomberg
	Name of the Comparable Companies	Ticker
1.	China Coal Energy Company Ltd.	601898 CH
2.	Shanxi Lu’an Environmental Energy Development Co., Ltd.	601699 CH
3.	Qinghai Sunshiny Mining Co., Ltd.	600381 CH
4.	Shanxi Xishan Coal & Electricity Power Co., Ltd.	000983 CH
5.	Jizhong Energy Resources Co., Ltd.	000937 CH
6.	Datong Coal Industry Co., Ltd.	601001 CH
7.	Guizhou Panjiang Refined Coal Co., Ltd.	600395 CH

The above Comparable Companies are selected based on the following criteria:

(i) the companies’ principal businesses were located in the PRC
(ii) the companies were principally engaged in the coal related business
(iii) The financial information of the companies are publicly available

Since no two companies are ever exactly alike, however, apart from the differences, there are similar business attributes guided by the overall industry sector and geographical location. Therefore, the above-mentioned key factors are sufficient in determining the comparability to serve this purpose.

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APPENDIX V

The Investment in Net Working Capital

Net working capital is a measurement of the operating liquidity available for a company to use in developing and growing its business. In the valuation, the net working capital was computed using the following formula:

NWC = AR + INV – AP

Where:

NWC = net working capital AR = accounts receivables INV = inventories AP = accounts payables

The projected amounts of accounts receivables, inventories and accounts payables of the Coal Mine were determined with reference to the average accounts receivable turnover ratio, average inventory turnover ratio and average accounts payable turnover ratio, respectively, of the Comparable Companies, as detailed in the following table:

Comparable Companies 1. China Coal Energy Company Ltd. 2. Shanxi Lu’an Environmental Energy Development Co., Ltd. 3. Qinghai Sunshiny Mining Co., Ltd. 4. Shanxi Xishan Coal & Electricity Power Co., Ltd. 5. Jizhong Energy Resources Co., Ltd. 6. Datong Coal Industry Co., Ltd. 7. Guizhou Panjiang Refind Coal Co., Ltd. Average of the Ratios	Account Receivable Turnover Ratio 10.20 5.85 5.07 4.45 6.94 37.89 4.82 10.75	Inventories Turnover Ratio 9.36 42.16 11.29 16.13 24.81 11.70 26.94 20.34	Account Payable Turnover Ratio 6.79 4.35 0.42 3.89 7.07 5.21 9.10 5.26

Assumption has been made that the accounts receivable turnover, inventory turnover and accounts payable turnover move towards the average of the same in respect of the Comparable Companies over time as that is the indicated pattern in the industry.

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APPENDIX V

The Discount Rate

The Weighted Average Cost of Capital (WACC) was adopted as the discount rate for the valuation. It is calculated by multiplying the cost of each source of capital by its proportional weight. The WACC was computed using the following formula:

WACC = Re (E / V) + Rd (D / V) (1 – Tc)

Where:

WACC = weighted average cost of capital Re = cost of equity Rd = cost of debt E = value of equity D = value of debt V = sum of values of equity and debt Tc = corporate tax rate

The WACC comprises two components: the cost of equity and the cost of debt. The cost of equity was determined using the Capital Asset Pricing Model (CAPM). The CAPM indicates the relationship between risk and expected return that investors require additional return to compensate for the additional risk assumed. The CAPM was computed using the following formula:

Re = Rf + β * MRP

Where:

Re = cost of equity Rf = risk-free rate β = beta coefficient MRP = market risk premium

The yield rate of the 10-year United States Treasury Bonds of 3.29% was adopted as it is generally adopted as the long term risk-free rate for the valuation of a business with long projected life. And the US Treasury Bonds has no default risk as it is rated as “AAA”, while PRC government bond is not default-free.

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APPENDIX V

The beta coefficient measures the risk of an asset relative to the overall market. To determine the beta coefficient, adjusted beta was firstly extracted from Bloomberg Terminal to determine the unlevered beta. The unlevered beta was then calculated by removing the effects of the use of leverage on the capital structure of the Comparable Companies. The average of the unlevered betas of the Comparable Companies of 1.076 was then being relevered based on the specific corporate tax rate and the weight of debt applied in the valuation. The beta coefficient was then calculated as 1.124.

Details of the beta of the Comparable Companies are as the follows:

	Comparable Companies	Beta
1.	China Coal Energy Company Ltd.	1.18
2.	Shanxi Lu’an Environmental Energy Development Co., Ltd.	1.19
3.	Qinghai Sunshiny Mining Co., Ltd.	0.94
4.	Shanxi Xishan Coal & Electricity Power Co., Ltd.	1.10
5.	Jizhong Energy Resources Co., Ltd.	1.08
6.	Datong Coal Industry Co., Ltd.	1.21
7.	Guizhou Panjiang Refind Coal Co., Ltd.	1.17

The market risk premium represents the additional return required by an investor as compensation for investing in equities rather than a risk-free instrument. In the valuation, the market risk premium of the PRC of 6.13% was determined by the market risk premium of the United States and the country risk premium of the PRC.

Having considered that the Coal Mine is located in the PRC, to convert the cost of equity in United States dollars into a cost of equity in local currency, the figure was scaled by the relative inflation using the following formula:

ERadj = (1 + ER)(1 + IRLC) / (1 + IRUS) – 1

Where:

ERadj	=	Expected	return in local currency
ER	=	Expected	return in United States dollar
IRLC	=	Inflation	rate of a specific country
IRUS	=	Inflation	rate of the United States

As a result, the cost of equity in local currency was calculated as 11.99%.

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APPENDIX V

VALUATION REPORT

The cost of debt of 6.40% was determined by the expected lending rate of the Coal Mine, which is the besting lending rate in the PRC as extracted from Bloomberg. Since the interest paid on debts are tax-deductible, the cost of obtaining debt funds is less than the required rate of return of the suppliers of the debt capital. The after-tax cost of debt of 4.80% was calculated by multiplying one minus the corporate tax rate of the PRC of 25% by the cost of debt.

The weight of debt of 5.67% was determined by the average of the weights of debt of the Comparable Companies, and the weight of equity of 94.33% was calculated as one minus the weight of debt, Assumption has been made that the weight of debt moves toward that of the average of the Comparable Companies over time as it is the indicated capital structure of the industry. As a result, the WACC was calculated as 11.58%.

Details of the weights of debt of the Comparable Companies are as the follows:

	Comparable Companies	Weight of Debt
1.	China Coal Energy Company Ltd.	6.76%
2.	Shanxi Lu’an Environmental Energy Development Co., Ltd.	7.79%
3.	Qinghai Sunshiny Mining Co., Ltd.	6.62%
4.	Shanxi Xishan Coal & Electricity Power Co., Ltd.	7.32%
5.	Jizhong Energy Resources Co., Ltd.	6.01%
6.	Datong Coal Industry Co., Ltd.	3.63%
7.	Guizhou Panjiang Refind Coal Co., Ltd.	1.59%

The Discount for Lack of Marketability

The concept of marketability deals with the liquidity of an ownership interest, that is, how quickly and easily it can be converted into cash if the owner chooses to sell. The lack of marketability discount (DLOM) reflects the fact that there is no ready market for shares in a closely held company. Ownership interests in closely held companies are typically not readily marketable compared to similar interests in publicly listed companies. Therefore, a share of stock in a privately held company is usually worth less than an otherwise comparable share in a publicly listed company.

Marketability discount for a controlling interest is generally lower than that for a noncontrolling interest to reflect the higher control value, as control represents the right to direct the strategies and activities of a firm, including the right to allocate resources and distribute the economic products.

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APPENDIX V

Generally, any holding of greater than 50% voting rights would represent controlling interest.

With reference to the study done by Frank C. Evans and David M. Bishop, principals of the American Business Appraisers, DLOM for controlling interest is normally ranged from 5% to 15%. To be conservative, 15% DLOM was adopted in our valuation for the fair market value of the Coal Mine.

As WACC was adopted as the discount rate for the valuation, and was applied to compute the present value of the cash flow.

While the DOLM is an independent adjustment factor which was separated from the discount rate, and was applied on the present value of the cash flow to produce a downward adjusted valuation result due to the lack of marketability.

Exchange Rate

The exchange rate of 1.177 for changing the value from RMB to HK$ as at the valuation date was extracted from Bloomberg Terminal.

Risk Factors

• Potential Deviation from the Production Plan

According to the Company’s advice, the annual production was 298,000 tonnes in the first two years and reach 900,000 tonnes in the year after 2012. Also, 6 to 12 months estimated for application of the requisite mining licenses in relation to production capacity of 900 ktpa while 1.5 years was estimated for constructing the relevant mining infrastructure. Since projections are related to the future, there will usually be differences between projections and actual results, and in some cases, those variances may be material. Accordingly, the valuation result may differ.

• Reliance on the Reserves Estimate

The valuation is dependent, to a large extent on the amount of estimated reserve as stated in the Competent Person’s Report as it is the only source of operating income of the Coal Mine. Any change of the reserves amount requires relevant adjustments and the valuation result would differ.

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VALUATION REPORT

APPENDIX V

SENSITIVITY ANALYSIS

The sensitivity analysis has been applied to determine the impact of changes in the estimated coal price, discount rate and starting year of production of 900 ktpa on the fair market value of the Coal Mine. The results of the sensitivity analysis were as follows:

				Change in
		Estimated Coal	Concluded Fair	Fair Market
Change in Price		Price	Market Value	Value
	(%)	(RMB per tonne)	(HK$)	(%)
	+10%	521	2,000,000,000	+17%
	+5%	498	1,900,000,000	+9%
	–	474	1,700,000,000	0%
	-5%	450	1,600,000,000	-9%
	-10%	427	1,400,000,000	-17%
				Change in
			Concluded Fair**	Fair Market
Change in Discount Rate		*Discount Rate	Market Value	Value
	(%)	(%)	(HK$)	(%)
	+2%	13.58%	1,300,000,000	-22%
	+1%	12.58%	1,500,000,000	-12%
	–	11.58%	1,700,000,000	0%
	-1%	10.58%	2,000,000,000	+15%
	-2%	9.58%	2,300,000,000	+33%

*Note 1: The WACC was adopted as the discount rate for the valuation

**Note 2: The DOLM was taken into account and was constant i.e. 15% as adopted in the sensitivity analysis

	Starting year of
	production of	Concluded Fair	Change in Fair
Delaying years	900 ktpa	Market Value	Market Value
		(HK$)		(%)
0	2013	1,700,000,000		0%
+1	2014	1,600,000,000		-6%
+2	2015	1,500,000,000		-11%
+3	2016	1,400,000,000		-16%

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APPENDIX V

REMARKS

For the purpose of our valuation, we have been furnished with the information in respect of the Coal Mine provided by the senior management of the Company. We have had no reason to doubt the truth and accuracy of the information provided to us by the Company. We have also sought and received confirmation from the Company that no material facts have been omitted from the information supplied.

To the best of our knowledge, all data set forth in this report are true and accurate. Although gathered from reliable sources, no guarantee is made or liability assumed for the accuracy of any data, opinions or estimates identified as being furnished by others, which have been used in formulating our analysis.

Unless otherwise stated, all money amounts stated herein are in Hong Kong Dollars (HK$).

CONCLUSION OF VALUE

Our conclusion of value is based on accepted valuation procedures and practices that rely substantially on the use of numerous assumptions and the consideration of a lot of uncertainties, not all of which can be easily ascertained or quantified.

Further, whilst the assumptions and consideration of such matters are considered by us to be reasonable, they are inherently subject to significant economic and competitive uncertainties and contingencies, many of which are beyond the control of the Company, the Coal Mine, the Competent Person, Design Institute or us.

Based on our investigation and analysis outlined in this report, it is our opinion that the fair market value of the 100% interest in the Coal Mine as at 31 December 2010 was HK$1,700,000,000 (HONG KONG DOLLARS ONE THOUSAND AND SEVEN HUNDRED MILLION ONLY).

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APPENDIX V

We hereby certify that we have neither present nor prospective interest in the Company, the Competent Person, Design Institute, the Coal Mine or the result reported.

Yours faithfully,

For and on behalf of

BMI APPRAISALS LIMITED

Marco T. C. Sze

C. S. Kong

B.Eng(Hon), PGD(Eng), MBA(Acct), Bsc, MSc, MA(Econ), EurGeol CFA, AICPA/ABV, RBV CGeol, FGS, CSci, MIMMM MAusIMM(CP),HKCPG Director Director

Notes:

Mr. Marco T. C. Sze is a Chartered Financial Analyst, a member of the American Institute of Certified Public Accountants (AICPA) and is accredited in Business Valuation by the AICPA. In addition, he is a Registered Business Valuer under the Hong Kong Business Valuation Forum. He has over 4 years’ experience in valuing similar assets or companies engaged in similar business activities as those of the Coal Mine worldwide.
Mr. C. S. Kong took the role of the competent evaluator under Chapter 18 of the Listing Rules for this valuation. He is a registered Geologist and Geotechnical Engineer, a member of the Australasian Institute of Mining and Metallurgy (AusIMM), and is serving on the Geological Society of Hong Kong. He has over 25 years’ geological experience in Hong Kong and overseas, especially in mining and materials handling industries with a broad background in engineering and project management.

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APPENDIX VI

COMPETENT PERSON’S REPORT

Competent Person’s Report Xinjiang Baicheng County Kueraken Mine Field No. 3 Pit of No. 1 Mine Xinjiang, People’s Republic of China

Minarco-MineConsult, Level 10, Silver Fortune Plaza, 1 Wellington Street, Central, Hong Kong

[email protected]

www.runge.com.au

May 2011

Compiled by:

Peer Review by:

Michael Johnson Dan Peel Senior Mining Consultant Operations Manager – Beijing

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COMPETENT PERSON’S REPORT

APPENDIX VI

Hao Tian Resources Group Limited

Unit 4803, 48/F COSCO Tower 183 Queen’s Road Central, Hong Kong

West China Coal Mining Holdings Limited

Unit 501, 5/F., Mirror Tower 61 Mody Road Tsim Sha Tsui East, Kowloon Hong Kong

25 May 2011

RE: INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

Runge Asia Limited, trading as Minarco-MineConsult (“MMC”) has been engaged by West China Coal Mijning Holdings Limited (“WCCM” or the “Client” or “Company”) to carry out an Independent Technical Review (“ITR”) of the Xinjiang Baicheng County Kueraken Mine Field No. 3 Pit of No. 1 Mine (“the Mine” or “Baicheng Mine” ) located in Xinjiang Autonomous Region, China. The Mine is being conditionally acquired by WCCM.

The process and conclusions of the ITR are summarised in the attached Independent Technical Review and Competent Person’s Report, which will be included in a Hong Kong Stock Exchange (“HKEx”) Circular prepared as part of this transaction.

MMC’s technical team (“the Team”) consisted of both International and Chinese national senior mining engineers and geologists. The Team undertook a number of site visits to the Project to familiarise themselves with site conditions. MMC’s Competent Persons were responsible for compiling of the CPR and the JORC Coal Resource and Coal Reserve estimates stated within.

During the site visit, the Team had open discussions with the Company personnel on technical aspects relating to the project. MMC found the personnel to be cooperative and open in facilitating MMC’s work.

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APPENDIX VI

COMPETENT PERSON’S REPORT

In addition to work undertaken to generate estimates of Coal Resources and Coal Reserves, this report relies largely on information provided by the Company, either directly from the site and other offices, or from reports by other organisations whose work is the property of the Company. The data relied upon for the JORC Coal Resource and Coal Reserve estimates completed by MMC have been compiled primarily by the Company and validated where possible by MMC. The report is based on information made available to MMC prior to the 15th of November 2010. WCCM has not advised MMC of any material change, or event likely to cause material change, to the designs or forecasts since the date of Asset’s inspection.

MMC has conducted its review and preparation of the Independent Technical Review and Competent Person’s Report in accordance with the requirements of Chapter 18 of the Listing Rules of the HKEx. 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;
the “Australian Guidelines for Estimation and Reporting of Inventory Coal, Coal Resources and Coal Reserves”; and
the Code and Guidelines for technical assessment and/or valuation of mineral and petroleum assets and mineral and petroleum securities for Independent Expert Reports (the “Valmin Code”).

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
rights or options in the Relevant Asset; or
the outcome of the proposed transaction.

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APPENDIX VI

The work undertaken is an ITR of the information provided, as well as information collected during site inspections completed by MMC as part of the ITR process. It specifically excludes all aspects of legal issues, marketing, commercial and financing matters, insurance, land titles and usage agreements, and any other agreements/contracts that the Company may have entered into.

MMC does not warrant the completeness or accuracy of information provided by the Company which has been used in the preparation of this report.

The title of this report does not pass to the Company until all consideration has been paid in full.

Drafts of this report were provided to the Company but only for the purpose of confirming the accuracy of factual material and the reasonableness of assumptions relied upon in the report.

Generally, the data available was sufficient for MMC to complete the scope of work. The quality and quantity of data available, and the cooperative assistance, in MMC’s view, showed a willingness by the Company to assist the ITR process. All opinions, findings and conclusions expressed in the report are those of MMC and its specialist advisors.

PROJECT SUMMARY AND CONCLUSIONS

General

The Baicheng Mine is located 39 km from Baicheng County and 209 km from Arkesu City in the Xinjiang Autonomous Region, China. The licence area is 5.9178 sq km and extends approximately 5.52 km from east to west and approximately 1.06 km from north to south.
The Mine is an underground coal mine located 39 km from Baicheng County, which produced 208 kt of gas coal in 2009. The Mine, originally known as the No. 3 Pit of No. 1 Coal Mine Baicheng Wenzhou Mining Development Co. Ltd, was constructed in 1984 and produces coal for the thermal market. A Feasibility Study, which details a planned increase in production to 900 ktpa, has recently been completed for the Mine.

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APPENDIX VI

Mining Method and Operations

The Mine produced 208 ktpa of coal in 2009, which is in line with above the production rate of 210 ktpa specified in the mining licence that was issued in 2009.
The approved mine plan, titled the “Mining Extension Design Report 2007”, outlines the current mining method and production schedule. Mining is currently underway on mining level 2,120 m and utilises an Apparent Dip Flexible Shields (“ADFS”) mining method to extract the coal.
There are 7 sub-vertical dipping coal seams defined within the Baicheng Mine licence, which are considered mineable. The steeply dipping nature of the deposit heavily impacts the mining methods and techniques that can be effectively used to extract the coal.
A Feasibility Study, has recently been completed (approval pending) which details plans to increase production to 900 ktpa. The Feasibility Study details a plan to use a modified version of the Shortwall Top Coal Caving (“STCC”) mining method utilising drill and blasting techniques in addition to the ADFS system. The applied mining methods, mine development, mine scheduling and safety issues are outlined in the Feasibility Study, which was prepared by the Design Institute of Hami Mining Administration Bureau. (B Qualified Institute) This study anticipates that the expansion to full production will take approximately 1.5 years to develop.

Coal Types

From the 6 JORC reported seams, the Baicheng mine produces predominantly Gas Coal, along with 1/3 Coking Coal, 1/2 Caking Coal, and Weakly Caking Coal (Chinese Coal Classification Standard – GB 5751 – 86), which are typically used as Thermal Coal or Blending Coking Coal.

JORC Coal Resources and Coal Reserve Estimates

Coal Resources within the current and proposed Mining Licence area have been independently estimated as at November 2010 by MMC in accordance with the recommendations of the JORC Code. The estimate of full composite seam (Coal inclusive of stone partings) tonnes from within the current mining licence (Area A) is 11.7 Mt of Indicated Resources. From below the mining licence in the planned extension area (Area B) there is an estimated total of 57.6 Mt of Indicated and 42.5 Mt of Inferred Resources. A combined Coal Resource of 112 Mt was estimated including 69.3 Mt of Indicated Resources and 42.5 Mt of Inferred Resources. No Measured Resources have been estimated within the resource area.

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APPENDIX VI

MMC estimated JORC compliant Probable Coal Reserves as at November 2010 within the Mining Licence area (Area A – Above an elevation of +2,060 m) to be 5.5 Mt, and below the current Mining Licence, (elevation 1,500 to 2,060 m) to be 32.6 Mt, with a total JORC Coal Reserve estimate of 38.1 Mt . MMC has applied appropriate mining “Modifying Factors” to the JORC Resources so as to estimate JORC Reserves. Some of these Factors include mining licence boundaries, non-economical areas of the deposit, horizontal barrier pillars which separate the individual mining levels, mining dilution factors based on mining parameters, individual working sections and historical reconciliation information. No Proved Coal Reserves were estimated for the Baicheng Mine.

Operating and Capital Costs

Estimated operating costs for the 2010 Feasibility Study were RMB134.25/ROM t. This is significantly higher than the operating costs estimated (74.07 RMB/ROM t) for the 2006 Mining Extension Design. The estimated operating cost increase is considered to be predominately due to the increase in labour and materials costs from 2006 to 2010 as well as higher depreciation costs associated with the additional capital expenditure for the proposed mine development.
The capital expenditure estimated in the 2010 Feasibility Study, to increase production to 900 ktpa, is 296 M RMB. The majority of this cost is related to the purchase of additional mining equipment required to achieve a 900 ktpa production rate.

Risks

There may be some project risk associated with the ability of the Mine to reach and maintain the production rates outlined in the Mining Extension Design and the Feasibility Study (which is still pending Government approval). This risk is associated with the steeply dipping coal seams, complex mine plan (involving the development of multiple seams) and the variation of mining seam thicknesses. However, as similar mining practices are used throughout China at similar deposits, MMC believes that with careful management the full production capacity could be achieved.
The Project currently does not comply with all regulatory Environmental, Health, Safety and Social (EHSS) requirements. The maximum penalty for such non compliance includes fines and the potential halting of operations.

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COMPETENT PERSON’S REPORT

APPENDIX VI

The production rate in 2009 (after the construction phase) was 208 kt, this is in the order of the mining licence set in 2009 of 210 kt. Production rates in the first 11 months of 2010 totalled only 87 kt. This is a significant decrease and should be addressed by a review to determine the cause behind such a low productions rate.
A new mining licence and Environmental, Health and Safety Permitting is required to access resources below its current mining elevation limits and an associated licenced production increase to achieve the forecast coal production of 900 ktpa.

Opportunities

Approval of a new mining licence to develop an estimated 32.6 Mt of Probable Reserves (elevation 2,060 m to 1,500 m) that are below the current mining Licence. As it considered reasonable to expect the grating of a new licence beneath the existing licence, these Coal Reserves have already been included in MMC’s Coal Reserve estimate.
An estimated 42.5 Mt of Inferred Resources lie beneath the current mining licence, with increased confidence attained through additional drilling these some the Inferred Resources may be converted to Indicated Resources and therefore, following additional mine planning may be converted to Probable Coal Reserves.
Additional drilling to the Eastern extents of the mine could increase confidence level (Inferred and Indicated Resources) of Seam 5, Seam 6, and Seam 7. There are currently no Points of Observation in this area.

Yours faithfully,

Michael Johnson Senior Mining Consultant – China Runge Asia Limited (Trading as Minarco-Mineconsult)

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COMPETENT PERSON’S REPORT

APPENDIX VI

1	INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	296
	1.1	SCOPE OF WORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	296
	1.2	RELEVANT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	297
	1.3	REVIEW METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	297
	1.4	SITE VISITS AND INSPECTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	297
	1.5	INFORMATION SOURCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	298
	1.6	COMPETENT PERSON AND RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . .	299
	1.7	LIMITATIONS AND EXCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	300
	1.8	CAPABILITY AND INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	302
2	PROJECT OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		303
	2.1	PROJECT LOCATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	303
	2.2	REGIONAL ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	304
	2.3	LICENCES AND APPROVALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	304
	2.4	HISTORY OF EXPLORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	307
	2.5	HISTORICAL AND CURRENT MINING OPERATIONS . . . . . . . . . . . . . . . .	309
3	GEOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		312
	3.1	REGIONAL AND MINE GEOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	312
	3.2	STRUCTURE OF DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	314
4	COAL SEAMS AND COAL QUALITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		314
	4.1	RESOURCE SETTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	314
	4.2	MINEABLE COAL SEAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	314
	4.3	COAL PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	314
	4.4	COAL CLASSIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	315
	4.5	COAL PARTICULATES AND QUALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	317
5	JORC	COAL RESOURCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	319
	5.1	JORC CODE RESOURCE REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . .	319
	5.2	GEOLOGICAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	320
	5.3	STRUCTURAL MODELS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	322
	5.4	JORC RESOURCE ESTIMATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	325
6	JORC	COAL RESERVES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	336
	6.1	BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	336
	6.2	DESCRIPTION OF MINING METHOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	337
	6.3	RESERVE ESTIMATION PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .	337
	6.4	RESERVE ESTIMATION PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	339

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APPENDIX VI COMPETENT PERSON’S REP	APPENDIX VI COMPETENT PERSON’S REP	APPENDIX VI COMPETENT PERSON’S REP	ORT
7	MINING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		341
	7.1	GENERAL COAL MINING PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	341
	7.2	CURRENT OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	344
	7.3	FUTURE MINING OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	357
	7.4	MINE CHARACTERISTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	366
8	OPERATING AND CAPITAL COSTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		369
	8.1	OPERATING COST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	369
	8.2	TRANSPORTATION CAPITAL COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	376
9	MINE	SAFETY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	378
	9.1	SAFETY PERMITTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	378
10	ENVIRONMENT HEALTH AND SAFETY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		384
	10.1	OUTLINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	384
	10.2	SCOPE OF ACTIVITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	386
	10.3	LIMITATIONS OF COMPLIANCE AUDIT . . . . . . . . . . . . . . . . . . . . . . . . . . .	386
	10.4	OVERVIEW OF ENVIRONMENT AND SOCIAL SETTING . . . . . . . . . . . . . .	387
	10.5	OVERVIEW OF MAIN REGULATORY REQUIREMENTS . . . . . . . . . . . . . . .	388
	10.6	REVIEW OF FINDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	388
	10.7	RISK ASSESSMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	389
11	PROJECT RISK AND OPPORTUNITY SUMMARY. . . . . . . . . . . . . . . . . . . . . . .		390
	11.1	RISK SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	390
	11.2	OPPORTUNITY SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	393
12	ANNEXURE A – QUALIFICATIONS AND EXPERIENCE. . . . . . . . . . . . . . . . . .		394
13	ANNEXURE B – JORC RESERVE CHECKLIST. . . . . . . . . . . . . . . . . . . . . . . . . .		401
14	ANNEXURE C – RESERVE SUMMARY TABLES. . . . . . . . . . . . . . . . . . . . . . . . .		403
15	ANNEXURE D – EHSS RISK ASSESSMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . .		409
	15.1	MATERIAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	410
	15.2	HIGH RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	412
	15.3	MEDIUM & LOW RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	414
	15.4	OTHER RELEVANT ASPECTS OF
		THE ASSETS UNDER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . . .	419
	15.5	OVERVIEW OF THE SITE’S EXPERIENCE IN DEALING WITH
		APPLICABLE LAWS AND PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . .	420
16	ANNEXURE E – GLOSSARY OF TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		421
17	ANNEXURE F – CHINESE AND OTHER INTERNATIONAL
	RESOURCE REPORTING STANDARDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		423

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APPENDIX VI

LIST OF TABLES

TABLE	2-1	BAICHENG PROJECT – MINING LICENCE DETAILS . . . . . . . . . . . . . . .	304
TABLE	2-2	BAICHENG PROJECT – MINING LICENCE COORDINATES . . . . . . . . .	307
TABLE	2-3	BAICHENG PROJECT – OTHER RELATED LICENCES . . . . . . . . . . . . . .	307
TABLE	2-4	BAICHENG PROJECT – HISTORICAL ROM COAL
		PRODUCTION (2008 TO 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	311
TABLE	3-1	BAICHENG PROJECT – STRATIGRAPHY OF
		BAICHENG COAL MINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	313
TABLE	4-1	BAICHENG PROJECT – CHINESE CODE
		COAL CLASSIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	315
TABLE	4-2	BAICHENG PROJECT – COAL – ELEMENTS AND
		TOTAL SULPHUR COMPOSITION . . . . . . . . . . . . . . . . . . . . . . . . . . . .	317
TABLE	4-3	BAICHENG PROJECT – SULPHUR CONSTITUENTS TESTED . . . . . . . .	318
TABLE	5-1	BAICHENG PROJECT – POINTS OF OBSERVATION
		– DRILLHOLE INFORMATION; CHANNEL SAMPLES . . . . . . . . . . . .	321
TABLE	5-2	BAICHENG PROJECT –MMC DERIVED DEFAULT
		STONE VALUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	321
TABLE	5-3	BAICHENG PROJECT – SEAM THICKNESS
		AND INTERBURDEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	322
TABLE	5-4	BAICHENG PROJECT – NOMENCLATURE FOR
		STRUCTURAL MODELS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	323
TABLE	5-5	BAICHENG PROJECT – MODELLING PARAMETERS . . . . . . . . . . . . . .	324
TABLE	5-6	BAICHENG PROJECT – POINTS OF OBSERVATION . . . . . . . . . . . . . . . .	325
TABLE	5-7	BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESOURCE;
		SEAM BY JORC CLASSIFICATION (COAL ONLY)
		AS AT NOVEMBER 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	326
TABLE	5-8	BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESOURCE;
		JORC CLASSIFICATION BY SEAM (COAL ONLY)
		AS AT NOVEMBER 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	327

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APPENDIX VI

TABLE	5-9	BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESOURCE;
		SEAM BY JORC CLASSIFICATION (COMPOSITE SEAM
		– INCLUDING STONE PARTINGS) AS AT NOVEMBER 2010 . . . . . . .	328
TABLE	5-10	BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESOURCE;
		JORC CLASSIFICATION BY SEAM (COMPOSITE SEAM
		– INCLUDING STONE PARTINGS) AS AT NOVEMBER 2010 . . . . . . .	329
TABLE	6-1	BAICHENG PROJECT – TYPICAL MINE PLAN PARAMETERS . . . . . . .	339
TABLE	6-2	BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESERVES
		AS AT NOVEMBER 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	340
TABLE	7-1	BAICHENG PROJECT – MINING LEVEL DESIGN PARAMETERS . . . . .	347
TABLE	7-2	BAICHENG PROJECT – MAIN INCLINED SHAFT
		DESIGN PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	350
TABLE	7-3	BAICHENG PROJECT – AUXILIARY INCLINED SHAFT
		DESIGN PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	350
TABLE	7-4	BAICHENG PROJECT – WEST VENTILATION
		SHAFT DESIGN PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	351
TABLE	7-5	BAICHENG PROJECT – EAST VENTILATION
		SHAFT DESIGN PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	352
TABLE	7-6	BAICHENG PROJECT – EAST MINING DISTRICT A9 SEAM ADFS
		LONGWALL UNIT OPERATING DESIGN PARAMETERS . . . . . . . . . .	353
TABLE	7-7	BAICHENG PROJECT – WEST MINING DISTRICT A9 SEAM ADFS
		LONGWALL UNIT OPERATING DESIGN PARAMETERS . . . . . . . . . .	354
TABLE	7-8	BAICHENG PROJECT – MINING LEVEL
		DESIGN PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	358
TABLE	7-9	BAICHENG PROJECT – MAIN INCLINED
		SHAFT DESIGN PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	362
TABLE	7-10	BAICHENG PROJECT – AUXILIARY INCLINED
		SHAFT DESIGN PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	362
TABLE	7-11	BAICHENG PROJECT – CENTRE VENTILATION INCLINED
		SHAFT DESIGN PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	363

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APPENDIX VI

TABLE	7-12	BAICHENG PROJECT – EAST VENTILATION
		INCLINED SHAFT DESIGN PARAMETERS . . . . . . . . . . . . . . . . . . . . .	364
TABLE	7-13	BAICHENG PROJECT – OPERATING PARAMETERS OF
		STCC UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	365
TABLE	7-14	BAICHENG PROJECT – OPERATING PARAMETERS OF
		BOTH ADFS UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	366
TABLE	8-1	BAICHENG PROJECT – FORECAST OPERATING COST . . . . . . . . . . . .	369
TABLE	8-2	BAICHENG PROJECT – FORECAST CAPITAL COSTS (M RMB) . . . . . .	377
TABLE	10-1	BAICHENG PROJECT – RELEVANT ASSETS REVIEWED . . . . . . . . . . .	385
TABLE	10-2	BAICHENG PROJECT – ENVIRONMENTAL HEALTH,
		SAFETY AND SOCIAL REVIEW RISK RANKING . . . . . . . . . . . . . . . .	390
TABLE	11-1	OVERALL RISK ASSESSMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	391
TABLE	11-2	BAICHENG PROJECT – PROJECT RISK SUMMARY . . . . . . . . . . . . . . .	391
TABLE	14-1	BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESERVES;
		CURRENT LICENCE +2060M ELEVATION (AREA A).
		CLASSIFICATION BY DISTRICT BY SEAM
		AS AT NOVEMBER 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	403
TABLE	14-2	BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESERVES;
		CURRENT LICENCE +2060M ELEVATION (AREA A).
		CLASSIFICATION BY SEAM BY DISTRICT
		AS AT NOVEMBER 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	404
TABLE	14-3	BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESERVES;
		LICENCE EXTENSION AREA 1500M – 2060M ELEVATION (AREA B).
		CLASSIFICATION BY DISTRICT BY SEAM
		AS AT NOVEMBER 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	405
TABLE	14-4	BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESERVES;
		LICENCE EXTENSION AREA 1500M – 2060M ELEVATION (AREA B).
		CLASSIFICATION BY SEAM BY DISTRICT
		AS AT NOVEMBER 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	407

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LIST OF FIGURES

FIGURE	2-1	BAICHENG PROJECT – GENERAL LOCATION PLAN . . . . . . . . . . . . . .	305
FIGURE	2-2	BAICHENG PROJECT – DETAILED ASSET LOCATION PLAN . . . . . . . .	306
FIGURE	4-1	BAICHENG PROJECT – CHINESE COAL QUALITY
		CLASSIFICATION SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	316
FIGURE	5-1	BAICHENG PROJECT – SEAM ASH (SEAMS 5, 6, 7) . . . . . . . . . . . . . . .	330
FIGURE	5-2	BAICHENG PROJECT – SEAM ASH (SEAMS 8, 9, 10) . . . . . . . . . . . . . .	331
FIGURE	5-3	BAICHENG PROJECT – SEAM TOTAL SULPHUR (SEAMS 5, 6, 7) . . . .	332
FIGURE	5-4	BAICHENG PROJECT – SEAM TOTAL SULPHUR (SEAMS 8, 9, 10) . . .	333
FIGURE	5-5	BAICHENG PROJECT – SEAM THICKNESS (SEAMS 5, 6, 7) . . . . . . . . .	334
FIGURE	5-6	BAICHENG PROJECT – SEAM THICKNESS (SEAMS 8, 9, 10) . . . . . . . .	335
FIGURE	6-1	SCHEMATIC OF MINING DISTRICTS AND
		MINE DEVELOPMENT PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	341
FIGURE	7-1	BAICHENG PROJECT – APPARENT DIP FLEXIBLE
		SHIELD MINING METHOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	346
FIGURE	7-2	BAICHENG PROJECT – MINE PLAN – DETAILED VIEW. . . . . . . . . . . .	349
FIGURE	7-3	BAICHENG PROJECT – SHORT WALL TOP COAL CAVING . . . . . . . . .	359
FIGURE	7-4	BAICHENG PROJECT – ILLUSTRATION OF DISTRICT
		AND LEVEL PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	361

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APPENDIX VI

1 INTRODUCTION

Runge Asia Limited, trading as Minarco-MineConsult (“MMC”) has been engaged by West China Coal Mining Holding Limited (“WCCM” or the “Client” or “Company”) to carry out an Independent Technical Review (“ITR”) of the Xinjiang Baicheng County Kueraken Mine Field No. 3 Pit of No. 1 Mine (“the Mine” or “Baicheng Mine”). The Mine is located in Xinjiang Autonomous Region, China and is being conditionally acquired by WCCM.

The Mine is an underground coal mine located 39 km from Baicheng County and produced 208 kt of gas coal in 2009. The Mine, originally known as the No. 3 Pit of No. 1 Coal Mine Baicheng Wenzhou Mining Development Co. Ltd, was constructed in 1984 and produces coal for the thermal market. A Feasibility Study, which details a plan to increase production to 900 ktpa, was recently completed for the Mine.

1.1 Scope of Work

MMC carried out the following scope of work for the Independent Technical Review:

Gathered relevant information on the Mine including Chinese resources and reserves, life of mine production schedules, operating and capital cost information;
Reviewed resources and reserves, including quantity and quality of drilling, reliability of historic data and adequacy of resource estimation methods;
Reviewed the categorisation of Chinese coal resource and coal reserve estimates;
Completed Coal Resource and Coal Reserve estimations in compliance with the recommendations of the JORC Code;
Reviewed and commented on the appropriateness of planned mining methods and mine design in the relevant technical studies;
Reviewed potential production profiles;
Reviewed and commented on forecast operating and capital expenditure in the relevant technical studies;
Reviewed Mine Safety; and,
Reviewed the company’s short and long term development plans.

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1.2 Relevant Assets

The Relevant Asset is the Xinjiang Baicheng County Kueraken Mine Field No. 3 Pit of
No. 1 Mine located 39 km from Baicheng County and 209 km from Arkesu City, Xinjiang.

1.3 Review Methodology

MMC’s ITR methodology included the following:

Prepared for the study by translating and reviewing existing reports. The lists of reports reviewed are given in Information Sources below.
Numerous site visits were conducted, during which technical issues were discussed with technical project personnel. The site visits occurred from September to December 2010.
Project information was reviewed.
MMC prepared this Report and provided drafts to the Company and its specialist advisers.

The comments and forecasts in this report are based on information compiled by enquiry and verbal comment from the Company. Where possible, this information has been cross checked with hard data or by comment from more than one source. Where there was conflicting information on issues, MMC used its professional judgment to assess the issues.

1.4 Site Visits and Inspections

MMC conducted numerous site visits during the period of September to December 2010. Personnel who attended site visits during this period included Mr. Michael Johnson (Competent Person), Mr. Hong Zhao, Mr. Kevin Qu, Mr. Xu Jinping and Ms. Cindy Zhao. During the site visits the team inspected the mine surface, underground mine workings, access roads and completed general inspections of the surrounding countryside.

Open discussions were held with the project owner’s personnel and associated design institutes’ experts on technical aspects relating to the technical issues of the projects.

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APPENDIX VI

1.5 Information Sources

The following information sources were provided for review:

Reports

“Xinjiang Baicheng County Kueraken Mine Field No. 3 Pit of No. 1 Mine Exploration Report,” Xinjiang Coalfield Geological Bureau No. 161 Coalfield geological Exploration Team, May 2010.
“Baicheng County Wenzhou Mining Development Co, Ltd No. 3 Pit of No. 1 Mine Mining Extension Design Report (210 ktpa)” Exploration Design Institute of Hami Mining Administration Bureau, January 2007.
“Baicheng County Wenzhou Mining Development Co, Ltd No. 3 Pit of No. 1 Mine Safety Status Comprehensive Assessment Report” Exploration Design Institute of Hami Mining Administration Bureau, March 2008.
“Baicheng County Wenzhou Mining Development Co, Ltd No. 3 Pit of No. 1 Mine Reforming and Expansion Feasibility Study Report (900 ktpa)” Exploration Design Institute of Hami Mining Administration Bureau, December 2010.

Licences

Safety Production Permit No. MK2008.096 Y1G1, Xinjiang Coal Mine Safety Supervision Bureau, April 2008.
Coal Production Permit (120 ktpa) No. 206401020036 by Xinjiang Coal Industry Administration Bureau, 22nd November 2006.
Business Licence No. 6500002390774, Xinjiang ICAB, 9th January 2006.
“Mining Licence No. C6500002009101130052982, Department of Land and Resources of Xinjiang Uygur Autonomous Region, 28th October 2010.

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1.6 Competent Person and Responsibilities

1.6.1 JORC Requirements

The estimation and reporting of Coal Resources and Coal Reserves in this Competent Person’s Report complies with the recommendations in the Australian Code for Reporting of Mineral Resources and Ore Reserves (2004) by the Joint Ore Reserves Committee (JORC). Therefore it is suitable for public reporting.

The information in this report that relates to Coal Resources and Coal Reserves is based on information compiled by Michael Johnson, a full time employee of MMC and a Member of the Australasian Institute of Mining and Metallurgy. Michael Johnson has sufficient experience, which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he has undertaken, to qualify as a Competent Person as defined in the 2004 Edition of the Australasian Code for the Reporting of Coal Resources.

1.6.2 HKEx Requirements

Michael Johnson meets the requirements of a Competent Person, as defined by Chapter 18 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. These requirements include:

Greater than five years experience relevant to the type of deposit.
Member of the Australian Institute of Mining and Metallurgy (“AUSIMM”).
Does not have economic or beneficial interest (present or contingent) in any of the reported assets.
Has not received a fee dependent on the findings outlined in the Competent Person’s Report.
Is not an officer, employee of proposed officer for the issuer or any group, holding or associated company of the issuer.
Assumes overall responsibility for the Competent Person’s Report.

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1.7 Limitations and Exclusions

The review was based on various reports, plans and tabulations provided by the Client either directly from the project sites and other offices, or from reports by other organisations whose work is the property of the Client. The Client 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, product pricing and marketing, land titles and agreements.

MMC has specifically excluded comments on the competitive position of the Relevant Asset compared with other similar and competing coal producers around the world. MMC strongly advises that any potential investors make their own comprehensive assessment of both the competitive position of the Relevant Asset in the market, and the fundamentals of the market at large.

1.7.1 Limited Liability

MMC will not be liable for any loss or damage suffered by a third party relying on this report (regardless of the cause of action, whether breach of contract, tort (including negligence) or otherwise unless and to the extent that the third party has signed a reliance letter in the form required by MMC (in its sole discretion). MMC’s liability in respect of this report (if any) will be specified in that reliance letter.

1.7.2 Responsibility and Context of this Report

The contents of this report have been created using data and information provided by or on behalf of the Company. MMC accepts no liability for the accuracy or completeness of data and information provided to it by, or obtained by it from, the Company or any third parties, even if that data and information has been incorporated into or relied upon in creating this report. The report has been produced by MMC using information that is available to MMC as at the date stated on the cover page. This report cannot be relied upon in any way if the information provided to MMC changes. MMC is under no obligation to update the information contained in the report at any time.

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APPENDIX VI

1.7.3 Limitations and Exclusions for Chapter 10 Safety and Environment

Chapter 10 Safety and Environment and its Annexure D Environment, Health and Safety Risk Assessment were prepared by an environmental consultant, Environmental Resources Management (Shanghai) Limited (“ERM”).

Disclaimer for Chapter 10 Safety and Environment and Annexure D – Environment, Health and Safety Risk Assessment

This Chapter and Annexure were prepared in accordance with the contracted scope of services for the specific purpose stated and subject to the applicable cost, time and other constraints. In preparing this report, ERM relied on: (a) client/third party information which was not verified by ERM except to the extent required by the scope of services, and ERM does not accept responsibility for omissions or inaccuracies in the client/third party information; and (b) information taken at or under the particular times and conditions specified, and ERM does not accept responsibility for any subsequent changes. This report has been prepared solely for use by, and is confidential to, the client and ERM accepts no responsibility for its use by other persons, except where ERM expressly agrees otherwise. This report is subject to copyright protection and the copyright owner reserves its rights. This report does not constitute legal or financial advice.

Limitations and Use of Chapter 10 Safety and Environment and Annexure D – Environment, Health and Safety Risk Assessment

This Chapter and Annexure or the findings within these must not be used or reproduced, in whole or part, for the purpose of any prospectus, offering circular or similar documentation without the prior written approval of ERM. The reproduction of any extract or summary of this report or the findings of the report, for any use whatsoever, are subject to the prior written approval of ERM. ERM’s approval of the use of these or the findings of the report include approval of any limitations and disclaimers in the material in which the reproduction or use occurs.

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APPENDIX VI

1.7.4 Intellectual Property

All copyright and other intellectual property rights in this report are owned by and are the property of MMC.

MMC grants the Client a non-transferable, perpetual and royalty-free Licence to use this report for its internal business purposes and to make as many copies of this report as it requires for those purposes.

1.7.5 Mining Unknown Factors

The findings and opinions presented herein are not warranted in any manner, expressed or implied. The ability of the operator, or any other related business unit, to achieve forward-looking production and economic targets is dependent on numerous factors that are beyond the control of MMC and cannot be fully anticipated by MMC. These factors include site-specific mining and geological conditions, the capabilities of management and employees, availability of funding to properly operate and capitalise the operation, variations in cost elements and market conditions, developing and operating the mine in an efficient manner, etc. Unforeseen changes in legislation and new industry developments could substantially alter the performance of any mining operation.

1.8 Capability and Independence

MMC provides advisory services to the mining and finance sectors. Within its core expertise it provides independent technical reviews, resource evaluation, mining engineering and mine valuation services to the resources and financial services industries.

MMC has independently assessed the Relevant Assets of the Client by reviewing pertinent data, including resources, reserves, manpower requirements and the life of mine plans relating to productivity, production, operating costs and capital expenditures. All opinions, findings and conclusions expressed in this Report are those of MMC and its specialist advisors.

Drafts of this report were provided to the Client, but only for the purpose of confirming the accuracy of factual material and the reasonableness of assumptions relied upon in this Report.

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APPENDIX VI

MMC has been paid, and has agreed to be paid, professional fees based on a fixed fee estimate for its preparation of this Report. None of MMC or its directors, staff or specialists who contributed to this report has any interest or entitlement, direct or indirect, in:

the Company, securities of the Company or companies associated with the Company; or
the Relevant Assets; or
the outcome of the acquisition.

This ITR was prepared on behalf of MMC by the signatories to this letter, details of whose qualifications and experience are set out in Annexure A to this ITR. The Specialists who contributed to the findings within this Report have each consented to the matters based on their information in the form and context in which it appears.

2 PROJECT OVERVIEW

2.1 Project Location

The mine is located 39 km from Baicheng County and 209 km from Arkesu City in the Xinjiang Autonomous Region, China. The geographic coordinates are:

Eastings – 81˚54’01”;
Northings – 42˚05’01”.

The licence area is 5.9178 sq km and extends approximately 5.52 km from east to west and approximately 1.06 km from north to south.

Access to the mine is via the No. 307 Provincial Road, which goes through Baicheng County and connects to the No. 314 National Road at Wenshu County.

The location of the project is shown in Figure 2-1 and 2-2 .

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APPENDIX VI

2.2 Regional Environment

The Mine is located in a warm temperate dry arid climate. The climate features large temperature variations between seasons with cold winters and hot summers. The average annual temperature ranges from 9.9˚C to 11.5˚C. Maximum temperatures reach approximately 30.5˚C (average max ~ 22.7˚C) in summer and down to approximately –14.4˚C (average min ~ –8˚C ) in winter.

The topography is relatively complex with hills and valleys over the mining area. The surface elevation ranges from +2,258 m to +2,443 m.

The Shushan River flows yearly through the centre of the mining area, and occasional flooding occurs within the valley during the wet season.

Four seismic events have been recorded in the Project area since 1947. According to the Code for Seismic Design of Buildings (GB50011-2001), “seismic fortification intensity” of the site is “Ms VII”; meaning seismic peak ground acceleration is 0.15g.

2.3 Licences and Approvals

The total licence area of the Mine is 5.9178 sq km. The current licences held for the Mine are summarised in Table 2-1 , Table 2-2 and Table 2-3 .

TABLE 2-1

BAICHENG PROJECT – MINING LICENCE DETAILS

Mine/Project	No. 3 Pit of No. 1 Coal Mine
Name of certificate	P.R. China Mining Licence
Certificate No.	C6500002009101130052982
Mine right holder	Baicheng Wenzhou Mining Development Co., Ltd
Location	Baicheng County, Xinjiang Autonomous Region
Name of minefield	No. 3 Pit of No. 1 Mine of Baicheng Wenzhou Mining
	Development Co., Ltd
Company category	Co., Ltd
Mine Method	Underground mining
Production Scale	210 ktpa
Minefield acreage	5.9178 sq km
Excavation Elevation	2,315 – 1,800 m
Validation	28th October 2009 – 28th November 2017
Issue Date	18th October 2009

Source: MMC viewed a copy of the document

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APPENDIX VI

FIGURE 2-1

BAICHENG PROJECT – GENERAL LOCATION PLAN

==> picture [418 x 589] intentionally omitted <==

----- Start of picture text -----

Salween
Huang
Mekong
Irtysh
Ganges
N
1000
FIGURE 2-1 Baicheng Mine
500
International boundary Provincial boundary Rivers Highways Kilometres
General Location Plan
LEGEND
0
50ûN 140ûE 40ûN 30ûN 130ûE 20ûN
Xinjiang Autonomous Region, China
140ûE JAPAN
Sea of Japan
(East Sea)
Sea
East China
Seoul SOUTH KOREA PHILIPINES
NORTH KOREA Pyongyang
130ûE Harbin Changchung Yellow Sea Shanghai Shanghai Taipei Taiwan Manila 021Eû
Jilin Shenyang Liaoning Jiangsu Nanjing Hangzhou Zhejiang Fuzhou Project No : ADV-HK-03644
Fujian
Tianjin Tianjin Jinan Shandong Hefei Anhui Nanchang Jiangxi Hong Kong Hong Kong South China Sea
120ûE Nei Mongol Hohhot Beijing Beijing Shijiazhuang HebeiTaiyuan Shanxi Zhengzhou Henan Hubei Wuhan Changsha Hunan Guangdong GuangxiGuangzhou Nanning Haikou Hainan 011Eû
110ûE Xian Shaanxi
L. Baykal Ulaanbaatar Guizhou Guiyang
Yinchuan Ningxia VIETNAM Hanoi
Lanzhou Gansu Chengdu Sichuan
100ûE RUSSIA MONGOLIA AN Xining Kunming Yunnan LAOS Vientiane THAILAND 001Eû
I Qinghai
H Rangoon
90ûE MYANMAR
C
Lhasa
Urumqi g Thimbu BHUTAN Dhaka
n
80ûE ijiXgnan iXaz BANGLADESH BayofBengal 90ûE
Kathmandu
Baicheng Projects
NEPAL
70ûE Astana L. Balkhash INDIA
Bishkek
KAZAKHSTAN KYRGYZSTAN
New Delhi
PAKISTAN Islamabad 80ûE
50ûN 40ûN 70ûE 30ûN 20ûN
Yangtze
Amur
----- End of picture text -----

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APPENDIX VI

FIGURE 2-2 BAICHENG PROJECT – DETAILED ASSET LOCATION PLAN

==> picture [400 x 588] intentionally omitted <==

----- Start of picture text -----

FIGURE 2-2 Baicheng Mine
N
Detail Asset Location Plan
Provincial boundary Rivers Highways Railways
Xinjiang Autonomous Region, China
LEGEND
G314
Baicheng County
Baicheng Projects Project No : ADV-HK-03644
G314
02
10
Kilometres
0 04
Baicheng Project
Arkesu City
20
Baicheng County Kilometres
0
39 km
----- End of picture text -----

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APPENDIX VI

TABLE 2-2 BAICHENG PROJECT – MINING LICENCE COORDINATES

Point	X	Y
1	4,662,359.93	27,571,802.75
2	4,663,419.91	27,571,792.75
3	4,663,429.91	27,577,282.66
4	4,662,339.93	27,577,322.66

From Elevation 2,320 m to 2,060 m

Source: MMC viewed original document

TABLE 2-3

BAICHENG PROJECT – OTHER RELATED LICENCES

		Valid	Period
Licences	No.	From	To
Business	6500002390774	31st March 2009	2nd July 2011
Coal Production (0.12 Mtpa)	206401020036	22nd December 2006	22nd December 2016
Safety Production	MK(2008)096Y1G1	18th April 2008	18th April 2011

Source: MMC viewed a copy of the document

MMC provides this information for reference only and recommends that land titles and ownership rights be reviewed by legal experts.

2.4 History of Exploration

Exploration has been undertaken at the Mine in various stages since 1959. The exploration results, particularly results from the recently completed exploration programme, have provided a significant geological basis for mining. The relevant history of exploration is described as below.

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APPENDIX VI

1959-1960 – The exploration was performed by Akesu Geology Team 1 and outlined in the Interim Detailed Exploration Report of Aken Area of Xijiang Baicheng Coal Mine. Exploration consisted of 3,924.3 m of drilling, 87.85 m of tunnelling, 233.90 m of shallow shafts and 1,700 m[3] of trenching. Testing of 1,143 samples of coal seams, coal roofs and coal floors were also completed. The coal resources of 62.15 Mt (Classifications A2 + B + C1 + C2) was defined and officially reviewed. MMC notes that 9 boreholes (CK3, CK4, CK5, CK12, CK13, CK14, CK15, CK16 and CK17) in the exploration programme undertaken in 1959-1960 were used in the latest Additional Detailed Exploration Report of Kueraken Coal Mine 1-Shaft 3 (May 2010).

1999-2001 – The Xinjiang Coal Geology Bureau General Exploration Team submitted the Prospecting Summarising Report of Tielieke Coal Area, Baicheng County, Xinjiang. The exploration completed during this period included 17 boreholes totalling 6,300.66 m. Two of these boreholes were used in the 2010 Additional Detailed Exploration Report and are outlined below:

Hole 1-1 – depth of 400.61 m and located to the east of the Kueraken Coal Mine 1-Shaft 3.
Hole 1-2 – depth of 506.98 m and located to the east of the Kueraken Coal Mine 1-Shaft 3.

The Chinese coal resources were reported and approved at 520.08 Mt, which consisted of 75.42 Mt of Category C (122b) and 444.66 Mt of Category D (333) according to the Chinese Classification System.

2006 – The Comprehensive Exploration Team of Xinjiang Coal Field Geological Exploration submitted the Xinjiang Baicheng County Kueraken Mine Field No. 3 Pit of No. 1 Mine Production Exploration Report.

2009-2010 – Seven boreholes (2-1, 3-1, 4-1, 4-2, 7-1, 8-1 and 11-1) were drilled totalling 3,606.56 m during this period. Geophysical logging was completed for each borehole.

The Additional Detailed Exploration Report (May 2010) was completed and was based on information collected from:

11 previously drilled boreholes (as noted above),
102 pieces of coal core and seam samples (collected in 2009),

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APPENDIX VI

39 bulk density samples (collected in 2009),
47 historic samples and tests.

The Additional Detailed Exploration Report was submitted in May 2010 with reported Chinese resources of 100.60 Mt (121b + 122b + 333) and 51.25 Mt (121b + 122b) according to the Chinese mineral resources and mineral reserves reporting standard. In the initial mining area the identified Chinese resource is 40.10 Mt (121b + 122b + 333) consisting of 25.56 Mt (121b), 9.07 Mt (122b) and 5.45 Mt (333).

2.5 Historical and Current Mining Operations

2.5.1 Historical Mining Operations

Prior to 2007 the Baicheng Mine was originally two separate mines known as the East Shaft Mining Area and the West Inclined Drift Mining Area. Previously the local government authorities did not permit one mine to undertake small scale mining in two separate areas simultaneously. Therefore, mining only occurred in one area at a time, leaving the second area open as a contingent mining area. The two mining areas are described below:

East Shaft Mining Area

Mining began in 1984 with a licensed production capacity of 120 ktpa;
The coal seams were accessed via a main shaft, an auxiliary inclined drift and a ventilation shaft;
Historically, the mining method used in the A5, A7, A8, A9 and A10 coal seams was “stope shrinkage”;
The depth of the main shaft was 187 m with the collar elevation of 2,310.70 m;
The lowest mining elevation was 2,120.56 m and the length of the auxiliary incline drift was 132 m with a dip angle of 24˚. The collar elevation of the incline was 2,285.46 m;
The original mining levels were deployed at the following elevations; 2,231 m (Level 1) and 2,180 m (Level 2). The coal reserves in the original levels (above 2,180 m elevation) have been depleted;

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Current mining operations are carried out on Level 3 (2,120 m elevation), which is divided into 3 mining districts. Crosscuts separate the mining districts and provide access to the coal seams. The crosscuts are spaced at 210 m, 436 m, and 453 m from the shaft;
The A5, A6, A7, and A9 seams have been mined up to the second crosscut (436 m). The A8 seam has been mined throughout the mining area;
A roadway has been developed towards the west along A10 coal seam at 2120 m elevation level. This roadway is connected with the underground inclined drift, 850 m from the main shaft in the west inclined drift mining area. The A5, A6, A7, A8, A9 and A10 coal seams have been identified at this point;
No evidence of subsidence was observed on the surface. This is partly due to the short mining period and the minor amount of extraction that has taken place so far (approximate extruded depth 30-50 m within mining area).

West Inclined Drift Mining Area

Mining began in 1985 with a licensed production capacity of 90 ktpa;
The coal seams were accessed via a main inclined drift and a ventilation shaft;
Originally the mining method was the stope shrinkage method in the A5, A7, A8, A9 and A10 coal seams;
The length of the main incline drift was 253 m with dip angle of 22˚ and a collar elevation of 2,272.22 m;
The original mining level was deployed at an elevation of 2,240 m (Level 1). The coal reserves in the original level (above 2,240 m) have been depleted;
The coal seams are accessed by 4 crosscuts spaced at 430 m, 450 m, and 460 m from the west inclined drift;

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The upper levels (above 2,120 m elevation) of the A5, A6, A7, A8 and A9 seams have been mined out;
A roadway has been developed towards the east along the A10 coal seam connecting to the East Main Shaft at 2,120 m elevation;
There is no apparent evidence of subsidence on the surface.

2.5.2 Current Mining Operations

In 2007, the East Shaft Mining Area and the West Inclined Drift Mining Area were combined into one mining operation. The current mine plan is based on the report “Mining Extension Design Report 2007”, which details the current mining method and production schedule. Mining is currently underway on mining move level 2,120 m and utilises an Apparent Dip Flexible Shields (“ADFS”) mining method to extract the coal. The Mine produced 208 ktpa of coal in 2009, which is in line with the production rate of 210 ktpa specified in the mining licence that was issued in 2009. It should be noted that the production licence currently held by the Mine was issued on the 22nd December 2006 and specifies a production capacity of 120 ktpa. The variation between the mining licence capacity and the production licence capacity is likely due to final production approvals not being completing following implementation of the mining extension, MMC does not consider this to be material to the future production capacity.

Coal production for the past 3 years is shown in Table 2-4 .

TABLE 2-4

BAICHENG PROJECT – ROM COAL PRODUCTION (2008 TO 2010)

Year	2008	2009	2010*
Production (kt)	147	208	87
N.B. ROM tonnes were taken from audited numbers supplied to MMC.

N.B. 2010 production to 30th November

Reasons for production variances over the 3 years were provided by the company, and are listed as below.

2008; Mine construction phase and ramp up period;
2009; Full mine production;
2010;

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January to March – low production rates due to ramp down production prior to national Spring Festival holiday period, nil production in February and ramp up production rates in March;
April to June – provincial government initiative on technical reform (mine safety), required the mine to implement numerous projects to increase safety standards. These included; the expansion of the underground substation to handle the 10 kV line delivered from the surface, and the widening of approximately 950 m of ventilation return roadway dimensions from 1.6 m by 1.8 m to 2.0 m by 2.5 m,
June to August – were normal production months, however full production was not achieved due to ramp up phase from previous month and ramp down phase into successive months;
September to November – lower production rates were seen due to operational “handover” phase to new ownership, main works during this period were moderate production and mine “care and maintenance”.

MMC recommends a review of the current production practices.

3 GEOLOGY

3.1 Regional and Mine Geology

The Mine is located in the Kuche-Baicheng coalfield on the southern slope of Tianshan Fold Zone and on the northern margin of Talimu Basin. The base of this fold zone is of the upper Paleozoic, while the fold zone consists of Mesozoic and Neozoic sedimentary strata land facies. A clastic sedimentary complex also exists, consisting of strata from the Triassic to the Tertiary system. Although no igneous intrusions have been identified within the region, all strata in the region have been subjected to the post sedimentary folding, faulting and erosion. The main coal bearing measures occur in the Jurassic Series and occur as a monocline structure dipping to the north at 80˚ to 85˚. Within the mining area the structure exhibits dips of between 85˚ to 89˚, which heavily impacts upon the mining methods and techniques that can be effectively used. Table 3-1 shows the general stratigraphy of the Mine.

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TABLE 3-1 BAICHENG PROJECT – STRATIGRAPHY OF BAICHENG COAL MINE

					True Thickness of
		Stratigraphy Unit			Stratigraphy Unit
Erathem	System	Series	Formation	Symbol	(m)
Cenozoic	Quaternary	Holocene	Diluvia	Q4	5
		Pleistocene	Alluvial	Q3	< 4
Mesozoic	Jurassic	Lower	Ahe	J1a	>300
			Upper Section of
			Taliqike	J1t2	87
			Lower Section of
			Taliqike	J1t1	81
Triassic	Upper		Haojiagou	T3h	141
			Huangshanjie	T3hs	–
		Middle	Kalamayi	T2k	–

Source: 2010 Geological Report

The stratigraphy within the Project from oldest to youngest is further outlined below:

Haojiagou Formation (T3h) – The Haojiagou Formation is exposed in the northern region of the mining area and forms a conformable contact with the underlying strata. The lithology of the formation consists of heavy light green argillaceous shale interlaced with moderate to thick off-white gritstone.
Lower Section of Taliqike (J1t[1] ) – This section consists of a thick layer of conglomerate, coarse sandstone, coal and thinly bedded siltstone or mudstone. This section contains the A5, A6 and A7 coal seams and forms a conformable contact with the underlying strata.
Upper Section of Taliqike (J1t[2] ) – This section is exposed in the centre of the mining area and consists of mainly grey and black mudstone, siltstone and coal seams (A8, A9, A10, A11, A12, A13 and A14). Locally, the section also contains a layer of thin fine-grained sandstone.
Ahe Formation (J1a) – This formation is widely exposed in the southern extent of the mining area and also forms a conformable contact with the underlying strata. The lithology consists of sallow, pebbly to coarse sandstone and coarse sandstone interbedded with some grey-green fine sandstone lenses.

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Layer of Alluvial (Q3) – This layer exists towards the centre of the mining area and consists of sandy loam, sandy clay and weathered rock fragments.
Layer of Diluvia (Q4) – A composition consisting of mainly gravel, weathered rock, sand and loam.

3.2 Structure of Deposit

The general structure of the mining area has been interpreted from drilling data and from observing exposed coal seams in underground roadways. The deposit trends east to west at a dip direction of 178˚ to 184˚, which is consistent with the regional geological structure. The coal bearing measures display little variation and dip towards the south at an angle of approximately 80˚ in the west and 89˚ in the east. The coal seam orientations are stable and no faults or igneous intrusions have been identified.

4 COAL SEAMS AND COAL QUALITY

4.1 Resource Setting

The coal-bearing Taliqike Formation (J1t), of the Lower Jurassic Series, contains 10 coal seams including the A5, A6, A7, A8, A9, A10, A11, A12, A13, and A14 coal seams. The average true thickness of the package is 168 m and consists of mostly conglomerate, coarse sandstone, siltstone and fine sandstone, mudstone and coal. The average true thickness of the coal seams is 23.43 m.

4.2 Mineable Coal Seams

Mineable coal seams are defined and meet the criteria as set in accordance with the Chinese Coal Regulations. There are 7 mineable coal seams in the Baicheng Mine licence, which dip at an average angle of 87˚ (ranging from 85˚ to 89˚). A summary of each coal seam is provided outlined in Chapter 5 of the report.

4.3 Coal Properties

The physical properties of each of the coal seams are relatively similar and can be described as dull bands, with minor bright bands. Samples of A5, A7 and A10 seams were taken from underground roadways on the 2,120 m level to evaluate washability. Analysis of the samples revealed that the coal generally requires a heavy float (density of between 1.5 g/cm[3] and 1.6 g/cm[3] ) to effectively wash the coal.

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4.4 Coal Classification

The coal within the mining area can be predominately classified, according to Chinese Coal Classification Standard (GB5751 – 86), as gas coal with a small amount of 1/3 Coking Coal (see Figure 4-4). The coal can be used for blending with coking coal in the coal chemistry industry or as thermal coal. The classification of the coal is shown in Table 4-1.

TABLE 4-1 BAICHENG PROJECT – CHINESE CODE COAL CLASSIFICATION

Seam		Chinese Code	Utilisation
A5	32	RN, 33(1/2) ZN, and 34 QM	Blending Coking Coal/Thermal Coal
A6		34 QM and 35 QM	Blending Coking Coal/Thermal Coal
A7		1/3 JM and 45 QM	Blending Coking Coal/Thermal Coal
A8		45 QM	Blending Coking Coal/Thermal Coal
A9		1/3 JM and 45 QM	Blending Coking Coal/Thermal Coal
A10		45 QM	Blending Coking Coal/Thermal Coal
A12		34QM and 35QM	BlendingCokingCoal/Thermal Coal

RN Weakly Caking Coal 1/2 ZN 1/2 Medium Caking Coal QM Gas Coal 1/3 JM 1/3 Coking Coal

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FIGURE 4-1 BAICHENG PROJECT – CHINESE COAL QUALITY CLASSIFICATION SYSTEM

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4.5 Coal Particulates and Quality

The sulphur (St,d) content of the coal ranges between 0.09% and 1.32%, which is considered to correspond to a low to moderate sulphur rating according to China Sulphur Rating (GB/T15224.2-2004). This is particularly important as high levels of sulphur can impact on the end use of the coal and can attract price penalties. Arsenic levels are important as excessive levels of arsenic would attract coal price penalties. The arsenic content (As, ad) is 3 ug/g, which is considered to be in the lowest arsenic category (first class category) according to China Arsenic Rating in Coal. Other elements such as phosphorus (Pd), chlorine (Cld) and fluorine (Fad) are considered low. Table 4-2 shows the elements contained within each seam.

TABLE 4-2 BAICHENG PROJECT – COAL – ELEMENTS AND TOTAL SULPHUR COMPOSITION

	St,d	Pd	Fad	Cld	As,ad
Coal Seam No.	(%)	(%)	(ug/g)	(%)	(ug/g)
A5	0.14(11)	0.004(8)	67(8)	0.052(8)	3(8)
A6	0.57(5)	0.008(3)	114(3)	0.052(3)	6(3)
A7	0.48(13)	0.006(4)	47(4)	0.027(4)	6(4)
A8	0.56(12)	0.009(6)	116(6)	0.063(6)	3(6)
A9	0.46(11)	0.007(6)	123(6)	0.056(6)	5(6)
A10	0.62(11)	0.005(7)	106(6)	0.037(6)	5(6)
A12	0.46(4)	0.075(3)	114(3)	0.063(3)	5(3)

Source: 2010 Geological Report (3) number of points

The coal was analysed by Xinjiang Coalfield Geological Bureau Comprehensive Testing Laboratory to determine the form of sulphur that existed in the coal seams. Sulphates and sulphides are relatively easy to remove from the coal in the washing process, while organic sulphur is difficult to remove from the coal. As a result, high levels of organic sulphur would limit the marketability and price of the coal. The analysis was based on 31 samples and showed that, despite the St,d ranging from 0.10% to 0.51%, sulphates (Ssd) ranged from 0.0% to 0.02%. It was also found that the level of ferric sulphides (Sp.d) ranged from 0.05% to 0.27% and the level of organic sulphur ranged from 0.07% to approximately 0.26%. These are regarded as low concentrations by Chinese standards. The results of the analysis are shown in Table 4-3 .

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TABLE 4-3

BAICHENG PROJECT – SULPHUR CONSTITUENTS TESTED

Coal Seam No.	St,d (%)	Ss.d (%)	Sp.d (%)	So.d (%)
A5 A6 A7 A8 A9 A10 A12	0.1-0.47 0.37(6) 0.21-0.24 0.22(3) 0.12-0.29 0.22(6) 0.13-0.51 0.26(4) 0.20-0.44 0.29(4) 0.22-0.45 0.32(6) 0.18-0.35 0.27(2)	0.00-0.02 0.01(6) 0-0.02 0.011(3) 0-0.02 0.011(6) 0.0-0.02 0.01(4) 0-0.02 0.012(4) 0-0.02 0.01(6) 0.1-0.02 0.015(2)	0.05-0.22 0.13(6) 0.05-0.11 0.08(3) 0.06-0.24 0.14(6) 0.06-0.26 0.16(4) 0.05-0.27 0.21(4) 0.07-0.18 0.15(6) 0.12-0.18 0.15(2)	0.18-0.24 0.21(6) 0.17-0.22 0.19(3) 0.17+0.23 0.18(6) 0.22-0.26 0.24(4) 0.19-0.23 0.21(4) 0.07-0.21 0.16(6) 0.11-0.25 0.18(2)

Min – Max % = Average

Source: 2010 Geological Report

Other coal quality characteristics for the Mine are outlined below:

Soften Temperature (ST) and Flow Temperature (FT) – ST and FT are measures of fluidity. The average ST of coal ash is 1,275˚C and the average FT of coal ash is 1,350˚C, which falls into the moderate temperature range.
Thermal Stability – Thermal stability is the measure of the resistance of the coal to permanent change due to heat. After analyzing 13 samples it was found that the coal seam exhibited low to moderate thermal stability.
Reaction to CO2 – Analysis of samples from the A5, A7 and A10 coal seams suggest that as the temperature increases, CO2 would be given off continually. Once the temperature reached 950˚C, 100% of the CO2 in the coal desorbed.

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Low Temperature Carbonization – The low temperature carbonization of coal was also tested and was based on 36 coal samples. The test showed that the rate of tar (Tar, ad) is between 3.7% and 16.2% with an average of 8.45%. It was also found that the char recovery (CRad) rate is between 70.4% and 84.4% with an average of 78.52%. The tests show that the A5 and A6 coal seams are tar bearing, while other coal seams are tar abundant.
Caking and Coking Characteristics – The caking and coking characteristics of the coal determine if the coal can be used for coking purposes. A coke button index or CSN of 7 to 9 indicates that the coal has good coking properties, while a coke button index of less than 6 indicates that the coal has poor coking properties and would most likely be used as thermal coal. The characteristics at the mine include a coke button index of between 3 and 8, a caking index (GR.I) of between 17 and 100 (96 and 102 to float coal), degree of expansion (b%) of between 9% and 122% and a maximum thickness plastometer (Y) of between 10 and 67.

5 JORC COAL RESOURCES

5.1 JORC Code Resource Requirements

The JORC Code provides a minimum standard for public reporting of Resources and Reserves to the investment community. The JORC Code is supplemented by the Australian Guidelines for Estimating and Reporting of Inventory Coal, Coal Resources and Coal Reserves (referred to as “the Guidelines”) for coal deposits. The Code and the Guidelines provide a methodology, which reflects best industry practice in estimating the quality and quantity of Coal Resources and Reserves.

A Coal Resource is defined as the portion of a coal deposit that exists in such a form and quantity that there are reasonable prospects for economic extraction. The location, quantity, quality, geological characteristics and continuity of a Coal Resource are known, estimated or interpreted from specific geological evidence and knowledge. Coal Resources are subdivided into three categories:

Measured – Quantity and quality can be estimated for Measured Resources with a high degree of confidence. The level of confidence is such that mining costs, beneficiation costs, washplant yields and quality specifications can be determined and detailed mine plans can be generated;
Indicated – Quantity and quality can be estimated for Indicated Resources with a reasonable degree of confidence. The level of confidence is such that mine plans can be generated and likely product coal quality can be determined; and

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Inferred – Quantity and quality can be estimated for Inferred Resources with a low degree of confidence. The level of confidence is such that mine plans cannot be generated.

Resources are estimated based on information gathered from Points of Observation. Points of Observation include surface or underground exposures, bore cores, geophysical logs, and/or drill cuttings in non-cored boreholes. It should be noted that Points of Observation for coal quantity estimation do not necessarily need to be used for coal quality estimation.

There are a number of other requirements set out by the JORC Code in relation to the estimation of Coal Resources including:

The Resource estimate is calculated using the area, thickness and in-situ density of the coal seam. The basis from which the in-situ density is derived should be clearly stated as in-situ density is not the same as the density reported by the standard laboratory measurement;
The JORC Code requires the distance between the Points of Observation to be decreased if the coal seams in the deposit are faulted, intruded, split, lenticular or have significant lateral variations in thickness or quality;
The table of Coal Resources should be accompanied by a report, and a statement by the Estimator that the Resources comply with the JORC Code. The Estimator should state their qualifications and experience.

5.2 Geological Data

A geological model and Coal Resource estimate was completed from the Baicheng geological datasets. Geological data was provided in the form of Excel spreadsheets, figures, reports, data from drillhole collars and data from downhole lithology and quality surveys. Downhole depths were modelled using geophysical downhole vertical surveys.

Two data sets were provided and used in the Resource estimate, which were drillholes and underground channel samples. These datasets are summarised below in Table 5-1 .

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TABLE 5-1 BAICHENG PROJECT – POINTS OF OBSERVATION – DRILLHOLE INFORMATION; CHANNEL SAMPLES

Parameters	Number
Surface Cored Holes	6
Underground channel samples	6

The Baicheng dataset provided downhole depths for coal plies and stone bands within the seam. The stone bands were labelled with a rock type of “ST” (Stone) for all holes. After completing a visual inspection of these stone bands during the site visit, it was found that the stone bands mainly consisted of siltstone. Therefore it has been assumed that the general stone band compositions within the seams consist mainly of siltstone.

Although the coal seams at the Baicheng Mine have been sampled on a ply by ply basis, analysis was only completed on the coal bands, which is common practice in China. In order to create a composite value for the complete seam, default stone values have been used as shown in Table 5-2 . These values are considered reasonable.

TABLE 5-2

BAICHENG PROJECT – MMC DERIVED DEFAULT STONE VALUES

Parameter	Applied Value
Relative Density	2.2
Moisture	1.0%
Ash	95% (ad)
Volatile Matter	1% (ad)
Total Sulphur	0.2% (ad)
Specific Energy	1 MJ/kg (ad)

Note: ad = air dried

The drillhole data was reformatted to a form suitable for loading into Surpac, which is a computer modelling package. Table 5-3 summarises the structural statistics for each seam.

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TABLE 5-3 BAICHENG PROJECT – SEAM THICKNESS AND INTERBURDEN

			Thickness(m)
Seam	No. holes	Mean	Minimum	Maximum
A5	6	5.23	0.1	10.3
A6	6	1.91	0.15	4.39
A7	6	2.71	1.64	5.09
A8	6	1.95	0.1	4.02
A9	6	2.13	0.23	5.24
A10	6	4.74	0.36	12.85

5.3 Structural Models

Each individual coal seam was modelled in Surpac and interpreted using vertical cross sections on each drill and cut through section. These sectional interpretations were used to produce seam envelopes in a 3 dimensional (3D) space. These envelopes encompassed both coal plies and internal stone partings.

A 3D block model was created to encompass the full extent of the interpreted seams and “sub-blocked” to ensure the total volume was representative of the envelopes. An isotropic inverse distance squared search was used to interpret the quality parameters for both coal and stone within each coal seam. The proportion of the stone within the coal seam was estimated for each drillhole and channel sample intercept and interpolated using the inverse distance squared method for each block. Each quality attribute was aggregated to determine average quality for each individual seam on a coal only basis and on a combined coal and stone (composite model) basis.

The deposit was separated into two mining areas during the process of estimating Coal Resources. The upper area (Mining Area A) encompasses all limits set out in the current prescribed and approved Mining Licence. This includes surface boundary extents (Mining Licence surface co-ordinates, see Table 2-2 ), and depths limits (from surface to a set elevation depth above sea level). The lower area, (Mining Area B) is defined by the current Licence Areas surface boundary extents only (co-ordinates detailed in Table 2-2 ) and physically sits underneath the Mining Area A. Both Mining Areas are confined (horizontally) by the prescribed surface boundary extents (geographically co-ordinates in Table 2-2 ) set in the Mining Licence limits. The Mining Areas are described below in more detail:

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Mining Area A (Mining Licence surface co-ordinates and from surface elevation “2320 m” to elevation level of 2,060 m above sea level) – The mining limits of the old mining operations and topography contours were used to define the upper limits of the Resource. The area was also restricted to the current mining licence. Although old mining areas were added to the model, volumes associated with these areas were coded as “mined out quantities” and were excluded from the results.
Mining Area B (Mining Licence surface co-ordinates and from elevation 2,060 m to 1,500 m above sea level) – Mining Area B includes all tonnes below the existing lower elevation limits of the current mining licence and above 1,500 m elevation.

Topographic data was provided as an Autocad drawing file (dwg file) and loaded into Surpac. All of the boreholes were validated by checking the borehole collars against the topography and by checking the resurveyed borehole location against the known location of the position of the main shaft on the surface.

Geological and structural models were constructed for the Baicheng Mine using the Surpac block modelling software. This software is particularly suited to modelling vein deposits and uses the inverse distance squared method to estimate qualities. Seam nomenclature for the model is shown in Table 5-4 .

TABLE 5-4 BAICHENG PROJECT – NOMENCLATURE FOR STRUCTURAL MODELS

Seam Name	Nomenclature
Seam A5	5
Seam A6	6
Seam A7	7
Seam A8	8
Seam A9	9
Seam A10	10

A brief description of the seam structure within the Coal Resources Classifications for the Baicheng deposit is outlined below.

Seam A5 – Seam A5 is one of the thickest seams in the deposit and has an average true thickness of 5.23 m. The seam contains stone bands, which average 0.05 m in thickness and make up approximately 0.01% of the seam.

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Seam A6 – Seam A6 reaches a maximum thickness of 4.39 m and has an average thickness of 1.91 m. The seam contains stone bands that have an average thickness of 0.22 m.
Seam A7 – This seam has an average thickness of 1.64 m and contains no stone bands.
Seam A8 – Seam A8 has a maximum thickness of 4.02 m and an average thickness of 1.95 m. No stone bands have been identified from the boreholes.
Seam A9 – This seam has an average thickness of 2.13 m and a maximum thickness of 5.24 m. No stone bands have been identified from the boreholes.
Seam A10 – Seam A10 is also one of the thickest seams in the deposit ranging in thickness from 0.36 m to 12.85 m, with an average thickness of 4.74 m. The seam contains stone bands, which average 0.28 m in thickness and make up approximately 0.06% of the seam.

Coal quality was modelled in Surpac using proximate analysis results for raw coal. Ply by ply data was loaded and composited into seams, using the defaults listed above for the stone bands within the seam.

The modelling parameters for the Baicheng model is listed in Table 5-5 ,

TABLE 5-5

BAICHENG PROJECT – MODELLING PARAMETERS

Parameter	Value
Topography model	Topo and pre-existing mining basement
Topo model cell size	100 m
Geology model block size	100 m
Lower limit for seams	1500 m elevation
Upper limit for seams	Topo
Control points	None
Constraint file	No
Mask polygons	Yes – Licence
Faults	None
QualityInterpolator	Inverse distance,power 2

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5.4 JORC Resource Estimates

The Points of Observation used to define the Coal Resources at Baicheng included drillholes that had a reliability type of 1 or 2, as shown in Table 5-6 .

TABLE 5-6 BAICHENG PROJECT – POINTS OF OBSERVATION

Type	Point of Observation Description	Value and Use of Point of Observation
1	Cored and analysed intersection of seam
	with wireline log, may or may not have
	lithology log	TYPES 1 – 2
2	Cored and analysed intersection of seam	TYPES 1 – 3 Reliable for Required for quality
	without wireline log, may or may not have	structure and confirmation
	lithology log	thickness
3	Non cored intersection of seam with wireline	Type 3
	log, may or may not have lithology log	May support
4	Non cored intersection of seam without	quality Type 4
	wireline log, may or may not have	Supportive of
	lithology log	structure and thickness

The following drillhole spacing has been used to define the Resources categories:

Measured – Drill spacing less than 500 m apart;
Indicated – Drill spacing less than 1,000 m apart; and
Inferred – Drill spacing less than 2,000 m apart.

Apparent relative density was available in all but one of the boreholes used in the model. It was not necessary to apply the Preston-Sanders equation as the density is on an in-situ basis. No coal thickness cut-offs have been used for resource estimation as true thicknesses for each seam is generally greater than 1.50 m. Also, no quality cut-offs have been used.

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The Seam by JORC Classification and the JORC Classification by Seam for the “composite seam” is shown in Table 5-7 and Table 5-8 respectively. The Seam by JORC Classification and the JORC Classification by Seam for the composite seam (including all stone partings) is shown in Table 5-9 and Table 5-10 respectively.

Coal Resources within the current and proposed Mining Licence area have been independently estimated as at January 2011 by MMC in accordance with the recommendations of the JORC Code. A combined Coal Resource of 112 Mt was estimated including 69 Mt of Indicated Resources and 42.5 Mt of Inferred Resources. No Measured Resources have been delineated within the resource area.

Area A includes Resources within the current Mining Licence, Area B are Resources below the current Mining Licence between the elevation of 2,060 m to 1,500 m.

Seam Ash, Total Sulphur and Thickness profiles for Baicheng are shown in Figure 5-1 – Figure 5.6 .

TABLE 5-7

BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESOURCE; SEAM BY JORC CLASSIFICATION (COAL ONLY) AS AT NOVEMBER 2010

		JORC	Volume	Tonnes	Density (ard)	Raw Ash	Moisture	Qbd	Qbdaf	Qgrd	Qnetd	Sulphur	Volatiles
District	Seam	Classification	(M m3)	(Mt)	(g/cm3)	(ad) (%)	(ad) (%)	(MJ/kg)	(MJ/kg)	(MJ/kg)	(MJ/kg)	(%)	(daf) (%)
Area A	10	Indicated	2.3	3.2	1.37	21.02	0.96	25.11	34.17	24.10	25.33	0.43	39.88
Area A	9	Indicated	0.7	1.0	1.36	21.91	0.83	24.89	34.07	23.77	23.89	0.37	40.20
Area A	8	Indicated	0.9	1.3	1.44	26.85	1.62	23.64	33.10	25.21	22.72	0.33	39.52
Area A	7	Indicated	1.0	1.4	1.40	23.21	0.88	23.34	33.20	22.33	21.70	0.46	40.51
Area A	6	Indicated	0.7	1.0	1.41	26.40	1.46	22.41	33.03	21.42	20.02	0.46	39.89
Area A	5	Indicated	2.2	2.8	1.26	18.21	0.87	27.38	33.47	26.96	26.59	0.11	33.74
	Total	Mining Area A	8.2	11.1	1.35	21.93	1.05	24.99	33.61	24.44	24.19	0.34	38.39
Area B	10	Inferred	9.3	13.1	1.40	22.09	1.02	24.31	34.01	23.60	25.42	0.43	40.16
Area B	10	Indicated	10.3	14.1	1.37	21.18	0.98	24.97	34.15	24.07	25.62	0.43	39.92
		Sub-total	19.6	27.2	1.39	21.62	1.00	24.65	34.08	23.84	25.52	0.43	40.04
Area B	9	Inferred	4.2	5.6	1.34	21.77	0.84	25.05	34.09	23.91	24.47	0.36	40.08
Area B	9	Indicated	3.8	5.0	1.33	20.98	0.82	25.53	34.18	24.21	24.55	0.36	40.01
		Sub-total	8.0	10.6	1.33	21.40	0.83	25.28	34.13	24.05	24.51	0.36	40.05
Area B	8	Inferred	3.7	5.3	1.43	27.47	1.69	23.32	32.88	25.03	22.57	0.34	39.75
Area B	8	Indicated	4.6	6.6	1.44	27.04	1.52	23.92	33.35	25.67	22.93	0.32	39.44
		Sub-total	8.3	11.9	1.43	27.23	1.60	23.65	33.14	25.39	22.77	0.33	39.58
Area B	7	Inferred	4.0	5.7	1.40	22.51	0.88	23.65	33.22	22.57	21.98	0.45	40.34
Area B	7	Indicated	6.3	8.8	1.39	21.95	0.88	24.02	33.17	22.72	22.19	0.45	40.16
		Sub-total	10.3	14.5	1.40	22.17	0.88	23.87	33.19	22.66	22.11	0.45	40.23
Area B	6	Inferred	2.4	3.6	1.46	27.57	1.35	22.27	33.15	21.51	19.85	0.46	40.08
Area B	6	Indicated	3.7	5.3	1.43	27.09	1.43	22.50	33.08	21.60	19.95	0.46	39.87
		Sub-total	6.2	8.9	1.44	27.28	1.40	22.41	33.11	21.56	19.91	0.46	39.96
Area B	5	Inferred	5.4	6.8	1.26	19.23	0.90	27.13	33.59	26.69	26.48	0.12	33.82
Area B	5	Indicated	11.9	14.9	1.25	18.66	0.88	27.30	33.55	26.77	26.61	0.12	33.78
		Sub-total	17.4	21.8	1.25	18.84	0.89	27.25	33.56	26.74	26.57	0.12	33.79
	Total	Mining Area B	70.0	95.2	1.36	22.28	1.05	24.86	33.62	24.33	24.25	0.34	38.57

– 326 –

COMPETENT PERSON’S REPORT

APPENDIX VI

TABLE 5-8

BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESOURCE; JORC CLASSIFICATION BY SEAM (COAL ONLY) AS AT NOVEMBER 2010

					Density
	JORC		Volume	Tonnes	(ard)	Raw Ash	Moisture	Qbd	Qbdaf	Qgrd	Qnetd	Sulphur	Volatiles
District	Classification	Seam	(M m3)	(Mt)	(g/cm3)	(ad) (%)	(ad) (%)	(MJ/kg)	(MJ/kg)	(MJ/kg)	(MJ/kg)	(%)	(daf) (%)
Area A	Indicated	10	2.3	3.2	1.37	21.02	0.96	25.11	34.17	24.10	25.33	0.43	39.88
Area A	Indicated	9	0.7	1.0	1.36	21.91	0.83	24.89	34.07	23.77	23.89	0.37	40.20
Area A	Indicated	8	0.9	1.3	1.44	26.85	1.62	23.64	33.10	25.21	22.72	0.33	39.52
Area A	Indicated	7	1.0	1.4	1.40	23.21	0.88	23.34	33.20	22.33	21.70	0.46	40.51
Area A	Indicated	6	0.7	1.0	1.41	26.40	1.46	22.41	33.03	21.42	20.02	0.46	39.89
Area A	Indicated	5	2.2	2.8	1.26	18.21	0.87	27.38	33.47	26.96	26.59	0.11	33.74
	Total Mining Area A		8.2	11.1	1.35	21.93	1.05	24.99	33.61	24.44	24.19	0.34	38.39
Area B	Inferred	10	9.3	13.1	1.40	22.09	1.02	24.31	34.01	23.60	25.42	0.43	40.16
Area B	Inferred	9	4.2	5.6	1.34	21.77	0.84	25.05	34.09	23.91	24.47	0.36	40.08
Area B	Inferred	8	3.7	5.3	1.43	27.47	1.69	23.32	32.88	25.03	22.57	0.34	39.75
Area B	Inferred	7	4.0	5.7	1.40	22.51	0.88	23.65	33.22	22.57	21.98	0.45	40.34
Area B	Inferred	6	2.4	3.6	1.46	27.57	1.35	22.27	33.15	21.51	19.85	0.46	40.08
Area B	Inferred	5	5.4	6.8	1.26	19.23	0.90	27.13	33.59	26.69	26.48	0.12	33.82
	Sub-total		29.3	40.2	1.37	22.82	1.07	24.49	33.61	24.02	24.10	0.36	39.03
Area B	Indicated	10	10.3	14.1	1.37	21.18	0.98	24.97	34.15	24.07	25.62	0.43	39.92
Area B	Indicated	9	3.8	5.0	1.33	20.98	0.82	25.53	34.18	24.21	24.55	0.36	40.01
Area B	Indicated	8	4.6	6.6	1.44	27.04	1.52	23.92	33.35	25.67	22.93	0.32	39.44
Area B	Indicated	7	6.3	8.8	1.39	21.95	0.88	24.02	33.17	22.72	22.19	0.45	40.16
Area B	Indicated	6	3.7	5.3	1.43	27.09	1.43	22.50	33.08	21.60	19.95	0.46	39.87
Area B	Indicated	5	11.9	14.9	1.25	18.66	0.88	27.30	33.55	26.77	26.61	0.12	33.78
	Sub-total		40.7	55.0	1.35	21.88	1.03	25.14	33.63	24.56	24.37	0.33	38.23
	Total Mining Area B		70,0	95.2	1.36	22.28	1.05	24.86	33.62	24.33	24.25	0.34	38.57

– 327 –

COMPETENT PERSON’S REPORT

APPENDIX VI

TABLE 5-9

BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESOURCE; SEAM BY JORC CLASSIFICATION (COMPOSITE SEAM – INCLUDING STONE PARTINGS) AS AT NOVEMBER 2010

					Density
		JORC	Volume	Tonnes	(ard)	Raw Ash	Moisture	Qbd	Qbdaf	Qgrd	Qnetd	Sulphur	Volatiles
District	Seam	Classification	(M m3)	(Mt)	(g/cm3)	(ad) (%)	(ad) (%)	(MJ/kg)	(MJ/kg)	(MJ/kg)	(MJ/kg)	(%)	(daf) (%)
Area A	10	Indicated	2.5	3.6	1.43	26.56	0.89	23.19	31.66	22.28	23.41	0.42	37.00
Area A	9	Indicated	0.7	1.0	1.36	21.91	0.83	24.89	34.07	23.77	23.89	0.37	40.20
Area A	8	Indicated	0.9	1.3	1.44	26.85	1.62	23.64	33.10	25.21	22.72	0.33	39.52
Area A	7	Indicated	1.0	1.4	1.40	23.21	0.88	23.34	33.20	22.33	21.70	0.46	40.51
Area A	6	Indicated	0.8	1.2	1.49	34.16	1.29	19.85	29.33	18.99	17.77	0.43	35.45
Area A	5	Indicated	2.2	2.8	1.27	19.41	0.86	26.95	32.94	26.54	26.18	0.11	33.21
			8.4	11.7
Area B	10	Inferred	10.0	14.5	1.45	27.36	0.95	22.53	31.58	21.88	23.57	0.41	37.32
Area B	10	Indicated	10.9	15.6	1.42	26.26	0.91	23.22	31.84	22.40	23.84	0.42	37.26
		Sub-total	20.9	30.1	1.44	26.79	0.93	22.89	31.71	22.15	23.71	0.42	37.29
Area B	9	Inferred	4.2	5.6	1.34	21.77	0.84	25.05	34.09	23.91	24.47	0.36	40.08
Area B	9	Indicated	3.8	5.0	1.33	20.98	0.82	25.53	34.18	24.21	24.55	0.36	40.01
		Sub-total	8.0	10.6	1.33	21.40	0.83	25.28	34.13	24.05	24.51	0.36	40.05
Area B	8	Inferred	3.7	5.3	1.43	27.47	1.69	23.32	32.88	25.03	22.57	0.34	39.75
Area B	8	Indicated	4.6	6.6	1.44	27.04	1.52	23.92	33.35	25.67	22.93	0.32	39.44
		Sub-total	8.3	11.9	1.43	27.23	1.60	23.65	33.14	25.39	22.77	0.33	39.58
Area B	7	Inferred	4.0	5.7	1.40	22.51	0.88	23.65	33.22	22.57	21.98	0.45	40.34
Area B	7	Indicated	6.3	8.8	1.39	21.95	0.88	24.02	33.17	22.72	22.19	0.45	40.16
		Sub-total	10.4	14.5	1.40	22.17	0.88	23.87	33.19	22.66	22.11	0.45	40.23
Area B	6	Inferred	2.8	4.3	1.55	36.51	1.16	19.29	28.78	18.65	17.23	0.42	34.82
Area B	6	Indicated	4.1	6.3	1.51	35.28	1.25	19.75	29.12	18.98	17.55	0.43	35.12
		Sub-total	7.0	10.7	1.53	35.78	1.21	19.56	28.98	18.84	17.42	0.43	35.00
Area B	5	Inferred	5.4	6.9	1.26	19.73	0.89	26.95	33.36	26.51	26.30	0.12	33.60
Area B	5	Indicated	12.0	15.1	1.26	19.26	0.87	27.08	33.29	26.56	26.40	0.12	33.51
		Sub-total	17.5	22.1	1.26	19.41	0.88	27.04	33.31	26.54	26.37	0.12	33.54
	Total	Mining Area B	72.3	100.2	1.39	24.93	1.01	23.94	32.42	23.43	23.36	0.34	37.21

– 328 –

COMPETENT PERSON’S REPORT

APPENDIX VI

TABLE 5-10

BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESOURCE; JORC CLASSIFICATION BY SEAM (COMPOSITE SEAM – INCLUDING STONE PARTINGS) AS AT NOVEMBER 2010

					Density
	JORC		Volume	Tonnes	(ard)	Raw Ash	Moisture	Qbd	Qbdaf	Qgrd	Qnetd	Sulphur	Volatiles
District	Classification	Seam	(M m3)	(Mt)	(g/cm3)	(ad) (%)	(ad) (%)	(MJ/kg)	(MJ/kg)	(MJ/kg)	(MJ/kg)	(%)	(daf) (%)
Area A	Indicated	10	2.5	3.6	1.43	26.56	0.89	23.19	31.66	22.28	23.41	0.42	37.00
Area A	Indicated	9	0.7	1.0	1.36	21.91	0.83	24.89	34.07	23.77	23.89	0.37	40.20
Area A	Indicated	8	0.9	1.3	1.44	26.85	1.62	23.64	33.10	25.21	22.72	0.33	39.52
Area A	Indicated	7	1.0	1.4	1.40	23.21	0.88	23.34	33.20	22.33	21.70	0.46	40.51
Area A	Indicated	6	0.8	1.2	1.49	34.16	1.29	19.85	29.33	18.99	17.77	0.43	35.45
Area A	Indicated	5	2.2	2.8	1.27	19.41	0.86	26.95	32.94	26.54	26.18	0.11	33.21
	Total Mining Area A		8.4	11.7	1.38	24.81	1.01	23.99	32.31	23.47	23.23	0.33	36.93
Area B	Inferred	10	10.0	14.5	1.45	27.36	0.95	22.53	31.58	21.88	23.57	0.41	37.32
Area B	Inferred	9	4.2	5.6	1.34	21.77	0.84	25.05	34.09	23.91	24.47	0.36	40.08
Area B	Inferred	8	3.7	5.3	1.43	27.47	1.69	23.32	32.88	25.03	22.57	0.34	39.75
Area B	Inferred	7	4.0	5.7	1.40	22.51	0.88	23.65	33.22	22.57	21.98	0.45	40.34
Area B	Inferred	6	2.8	4.3	1.55	36.51	1.16	19.29	28.78	18.65	17.23	0.42	34.82
Area B	Inferred	5	5.4	6.9	1.26	19.73	0.89	26.95	33.36	26.51	26.30	0.12	33.60
	Sub-total		30.3	42.5	1.40	25.68	1.03	23.50	32.30	23.06	23.14	0.35	37.53
Area B	Indicated	10	10.9	15.6	1.42	26.26	0.91	23.22	31.84	22.40	23.84	0.42	37.26
Area B	Indicated	9	3.8	5.0	1.33	20.98	0.82	25.53	34.18	24.21	24.55	0.36	40.01
Area B	Indicated	8	4.6	6.6	1.44	27.04	1.52	23.92	33.35	25.67	22.93	0.32	39.44
Area B	Indicated	7	6.3	8.8	1.39	21.95	0.88	24.02	33.17	22.72	22.19	0.45	40.16
Area B	Indicated	6	4.1	6.3	1.51	35.28	1.25	19.75	29.12	18.98	17.55	0.43	35.12
Area B	Indicated	5	12.0	15.1	1.26	19.26	0.87	27.08	33.29	26.56	26.40	0.12	33.51
	Sub-total		41.9	57.6	1.37	24.37	0.99	24.26	32.51	23.71	23.53	0.33	36.98
	Total Mining Area B		72.3	100.2	1.39	24.93	1.01	23.94	32.42	23.43	23.36	0.34	37.21

– 329 –

COMPETENT PERSON’S REPORT

APPENDIX VI

FIGURE 5-1

BAICHENG PROJECT – SEAM ASH (SEAMS 5, 6, 7)

==> picture [32 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 5
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==> picture [316 x 155] intentionally omitted <==

==> picture [32 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 6
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==> picture [316 x 155] intentionally omitted <==

==> picture [32 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 7
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==> picture [362 x 86] intentionally omitted <==

----- Start of picture text -----

LEGEND
Undefined 10.00 - > 15.00 25.00 - > 30.00 30.00 - > 40.00 40.00 - > 999.00
0.00 - > 5.00 15.00 - > 20.00
5.00 - > 10.00 20.00 - > 25.00 FIGURE 5-1
Xinjiang Autonomous Region, China
Baicheng Mine
Project No : ADV-HK-03644 Seam Ash
----- End of picture text -----

– 330 –

COMPETENT PERSON’S REPORT

APPENDIX VI

FIGURE 5-2

BAICHENG PROJECT – SEAM ASH (SEAMS 8, 9, 10)

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----- Start of picture text -----

Seam 8
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==> picture [316 x 155] intentionally omitted <==

==> picture [32 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 9
----- End of picture text -----

==> picture [316 x 155] intentionally omitted <==

==> picture [37 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 10
----- End of picture text -----

==> picture [316 x 156] intentionally omitted <==

==> picture [362 x 85] intentionally omitted <==

----- Start of picture text -----

LEGEND
Undefined 10.00 - > 15.00 25.00 - > 30.00 30.00 - > 40.00 40.00 - > 999.00
0.00 - > 5.00 15.00 - > 20.00
5.00 - > 10.00 20.00 - > 25.00 FIGURE 5-2
Xinjiang Autonomous Region, China
Baicheng Mine
Project No : ADV-HK-03644 Seam Ash
----- End of picture text -----

– 331 –

COMPETENT PERSON’S REPORT

APPENDIX VI

FIGURE 5-3 BAICHENG PROJECT – SEAM TOTAL SULPHUR (SEAMS 5, 6, 7)

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----- Start of picture text -----

Seam 5
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==> picture [316 x 153] intentionally omitted <==

==> picture [32 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 6
----- End of picture text -----

==> picture [316 x 154] intentionally omitted <==

Seam 7

==> picture [316 x 154] intentionally omitted <==

==> picture [362 x 86] intentionally omitted <==

----- Start of picture text -----

LEGEND
Undefined 0.07 - > 0.10 0.25 - > 0.30 0.35 - > 0.45
0.00 - > 0.01 0.10 - > 0.15 0.30 - > 0.35 0.45 - > 0.99
0.01 - > 0.03 0.15 - > 0.20
FIGURE 5-3
0.03 - > 0.07 0.20 - > 0.25
Xinjiang Autonomous Region, China
Baicheng Mine
Project No : ADV-HK-03644 Seam Sulphur
----- End of picture text -----

– 332 –

COMPETENT PERSON’S REPORT

APPENDIX VI

FIGURE 5-4

BAICHENG PROJECT – SEAM TOTAL SULPHUR (SEAMS 8, 9, 10)

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----- Start of picture text -----

Seam 8
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==> picture [316 x 154] intentionally omitted <==

==> picture [32 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 9
----- End of picture text -----

==> picture [316 x 154] intentionally omitted <==

==> picture [37 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 10
----- End of picture text -----

==> picture [316 x 154] intentionally omitted <==

==> picture [362 x 87] intentionally omitted <==

----- Start of picture text -----

LEGEND
Undefined 0.07 - > 0.10 0.25 - > 0.30 0.35 - > 0.45
0.00 - > 0.01 0.10 - > 0.15 0.30 - > 0.35 0.45 - > 0.99
0.01 - > 0.03 0.15 - > 0.20
FIGURE 5-4
0.03 - > 0.07 0.20 - > 0.25
Xinjiang Autonomous Region, China
Baicheng Mine
Project No : ADV-HK-03644 Seam Sulphur
----- End of picture text -----

– 333 –

COMPETENT PERSON’S REPORT

APPENDIX VI

FIGURE 5-5

BAICHENG PROJECT – SEAM THICKNESS (SEAMS 5, 6, 7)

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----- Start of picture text -----

Seam 5
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==> picture [292 x 152] intentionally omitted <==

==> picture [32 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 6
----- End of picture text -----

==> picture [292 x 152] intentionally omitted <==

==> picture [32 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 7
----- End of picture text -----

==> picture [292 x 153] intentionally omitted <==

==> picture [362 x 87] intentionally omitted <==

----- Start of picture text -----

LEGEND
Undefined 1.50 - > 2.00 5.00 - > 7.50 10.00 - > 12.50 15.00 - > 999.00
0.00 - > 0.50 2.00 - > 3.00 7.50 - > 10.00 12.50 - > 15.00
0.50 - > 1.00 3.00 - > 4.00
FIGURE 5-5
1.00 - > 1.50 4.00 - > 5.00
Xinjiang Autonomous Region, China
Baicheng Mine
Project No : ADV-HK-03644 Seam Thickness
----- End of picture text -----

– 334 –

COMPETENT PERSON’S REPORT

APPENDIX VI

FIGURE 5-6

BAICHENG PROJECT – SEAM THICKNESS (SEAMS 8, 9, 10)

==> picture [32 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 8
----- End of picture text -----

==> picture [294 x 155] intentionally omitted <==

==> picture [32 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 9
----- End of picture text -----

==> picture [294 x 155] intentionally omitted <==

==> picture [37 x 8] intentionally omitted <==

----- Start of picture text -----

Seam 10
----- End of picture text -----

==> picture [294 x 155] intentionally omitted <==

==> picture [361 x 87] intentionally omitted <==

----- Start of picture text -----

LEGEND
Undefined 1.50 - > 2.00 5.00 - > 7.50 10.00 - > 12.50 15.00 - > 999.00
0.00 - > 0.50 2.00 - > 3.00 7.50 - > 10.00 12.50 - > 15.00
0.50 - > 1.00 3.00 - > 4.00
FIGURE 5-6
1.00 - > 1.50 4.00 - > 5.00
Xinjiang Autonomous Region, China
Baicheng Mine
Project No : ADV-HK-03644 Seam Thickness
----- End of picture text -----

– 335 –

COMPETENT PERSON’S REPORT

APPENDIX VI

6 JORC COAL RESERVES

A standalone detailed Coal Reserve Report and Statement (January 2011) has been prepared by MMC and contains JORC Coal Reserve estimates for each of the Relevant Asset. The report entitled “Baicheng – ITR Report Coal Reserves Report” has been compiled with the relevant “Competent Person Sign off” completed by Mr. Michael Johnson. This Report contains extracts from the standalone detailed JORC Coal Reserve Report (January 2011).

6.1 Background

The JORC code defines Coal Reserves as the economically mineable portion of a JORC Compliant Measured and/or Indicated Coal Resource after taking into account any diluting materials and allowances for losses, which may occur when the coal is mined. During the process of estimating Coal Reserves MMC has:

Characterised the deposit;
Reviewed the applied mining method and current life of mine designs;
Estimated appropriate rates of mining, coal loss and stone dilution;
Verified the applied cut off grades and design parameters in the Extension Design report and Feasibility Study as suitable for use in Coal Reserve estimate;
Completed an operating cost assessment to determine the economic viability of extraction of the Coal Reserves.

This process and the findings are outlined in more detail below.

– 336 –

COMPETENT PERSON’S REPORT

APPENDIX VI

6.2 Description of Mining Method

Determination of the applied mining method is governed by the lateral (or vertical) extensiveness of the seam and the seam thickness. The Baicheng deposit consists of seven mineable coal seams that are sub-vertical, with a dip of approximately 86 to 89 degrees. The mid-burden between these seams is also quite thin and generally falls below 25 m from seam to seam horizontally. A specific method of mining, known as the Apparent Dip Flexible Shield (“ADFS”) method, has been adopted within the mining area over the last 20 years due to the unconventional nature of the deposit. Most sedimentary coal deposits are horizontal in nature as opposed to vertical and are amenable to a different set of mining methods. The ADFS mining method is a small scale mining method that has proved successful in the current operations. This method will continue to be used to mine the A7, A8, A9, A10, and A12 seams in the future, while a modified Shortwall Top Coal Caving (“STCC”) method is planned to be adopted in the thicker A5 and A6 seams. Both the AFDS and the STCC mining methods employ drill and blast techniques.

Mining recoveries are estimated to be around 95% for coal and an additional 5% to 10% for stone, depending on coal thickness and flexible shield dimensions. It is planned to mine the A5 and A6 coal seams together as a single horizon, as the interburden (midburden) thickness between seam A5 and A6 is generally below 1.2 m. The STCC method will comprise of a 2.5 m face section and a 7.5 m top coal caving section. The horizontal face will mine three 0.8 m face passes for every top coal caving event. Recoveries have been estimated for each section and have been aggregated to determine a total recovery for each mining district, including out of seam stone dilution.

6.3 Reserve Estimation Parameters

The Coal Reserve estimates are based on the mine design and mining parameters set out in the Mining Extension Design Report and the Feasibility Report. The individual working sections of each mining method and district were broken down, and recoveries were estimated. These districts were simplified into blocks and applied to the Geological model, along with the appropriate recoveries and stone dilutions factors.

The coal price used in the Feasibility Study was 460 RMB/t, which was applied to the JORC Reserve estimation. MMC were informed that the current price of coal sold from the mine was RMB420/t for fine and RMB600/t for lump coal. The sale price of coal is reportedly directly linked to the market price.

MMC has been supplied with some historical operating data for the Project from Preliminary Design Reports. A site visit was undertaken in order to assist in determining suitable operating parameters to apply to the Coal Reserve estimation, and to qualify the extent of the current operations.

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The following mining parameters have been applied to the Coal Reserve estimate for Baicheng Mine:

Shortwall (modified top coal caving (“STCC”) system) – optimal face operating heights of between 2.5 m, Caving height of 7.5m; Recoveries of 100% from face and approximately 82% from caving profile.
Roadway dimensions are from 1.2 by 1.2, to 2.0 by 2.0 m depending on the roadway design requirements and district. This is in line with the roadway areas that were obtained from the Preliminary Designs. A mining recovery factor of 100% is calculated for the roadways and has been accounted for a part of the mining blocks total recovery.
Stone waste yield has been estimated for recoveries in working section profiles. It is estimated the 80-95% or stone (district dependent) will be removed successfully.

6.3.1 Mining Assumptions and Layout

The current mine layout for the Baicheng Project has been prepared in areas defined as Indicated Resources. The proposed layout extends beyond these areas into areas defined as Inferred Resources. According to the JORC Code only Measured and Indicated Resources can be considered for conversion to Coal Reserves, therefore no Reserves have been estimated within the Inferred Resource area. The mine layout includes protection pillars for pre-existing mining areas, drifts, incline and shaft locations, goaf protection pillars, surface protection pillars for rivers, roads and industry yards. The mine layout also takes into account identified geological anomalies such as faults, sink holes, seam thinning, partings and seam convergence. The mine plans are illustrated in Figure 6-1.

Mine geology and coal quality data has been modelled in Surpac, while mine planning has been carried out in a CAD software package. The CAD mine plan has been imported into the Surpac Geological Modelling Program and modelled for subsequent Reserve estimation.

Typical parameters used for the mine plan layout are shown in Table 6-1.

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TABLE 6-1

BAICHENG PROJECT – TYPICAL MINE PLAN PARAMETERS

Item	Units	Value
Shaft districts	No.	3
Gateroad panel roadways	No.	2 (1 each side)
Gateroad pillar length	m	<1200
Roadway width	m	2.0
Roadway height	m	2.0
STCC panel width	m	<10
STCC extraction height	m	2.5
STCC caving height	m	7.5
Goaf boundary barrier	m	10-20
All surface barrier	m	60
Licence boundary barrier	m	15

Source: Feasibility Study, 2010.

6.4 Reserve Estimation Procedure

Coal Reserves were estimated using Surpac Mine Geology Software and AutoCAD design software. The Coal Reserve estimation applied the life of mine design parameters to the 3-D geological model created for the Coal Resource estimate. The following steps were completed to estimate Coal Reserves:

All working sections for the mining methods were drawn in AutoCAD. Estimated recoveries for each of these sections were calculated.
Mining levels and districts were defined in Surpac.
Each individual mining “Block” was imported into the geological model.
The coal volumes, coal tonnes and coal qualities associated with each individual mining Block and seam were reported.
Appropriate losses and dilutions were applied to each individual mining block to estimate the total Run of Mine (ROM) tonnes.
Appropriate values (based on current and historical results) were applied to the ROM tonnes to determine the 3 product types (Lump Coal, Fine Coal, and Stone/Waste)

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Coal product tonnes, yields and qualities were determined and reported for each individual JORC Reserve Category.
The estimated Indicated Coal Resources were classified as Probable Coal Reserves based on the Mineral Resource Classification and other operating considerations. MMC has classified all Coal Reserves as Probable. There have been no Coal Resources classified as Measured and therefore no Proven Coal Reserves can be considered.

MMC estimated JORC Probable Coal Reserves as at November 2010 within the Mining Licence area to be 38.1 Mt. The JORC Probable Coal Reserve estimate can be reconciled to the Coal Resource estimate by considering “Modifying Factors”, which MMC has applied to the JORC Coal Resource estimate. Some of these Factors include mining licence boundaries, non-economical areas of the deposit, horizontal pillars which separate levels, and mining dilution factors based on historical reconciliation information. No Proved Coal Reserves were estimated for the Baicheng Mine.

The JORC Coal Reserves estimate for the Baicheng Coal Mine is summarised in Table 6-2 . All tonnes have been modelled and reported at in-situ moisture. A JORC Reserve estimate checklist is shown in Annexure D .

The A5 and A6 Seams (5_6 comp) are mined as a composite working section, which includes the stone midburden between the seams. The stone qualities have also been aggregated into the final product calculations and appropriate dilution estimations have been made.

TABLE 6-2 BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESERVES AS AT NOVEMBER 2010

							Specific
				Density		Total	Energy	Total	Volatile
	JORC	Volume	Tonnes	ARD	Ash	Moisture	(MJ/kg,	Sulphur	Matter
Mining Area	Classification	(M m3)	(Mt)	(g/cm3)	(ad,%)	(ad,%)	Qbdaf)	(ad,%)	(daf,%)
Area A	Probable	4.0	5.5	1.39	28.07	1.01	30.77	0.33	34.88
Area B	Probable	23.3	32.6	1.40	28.81	1.01	30.55	0.32	34.61
Total	Probable	27.3	38.1	1.40	28.70	1.01	30.58	0.32	34.65

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FIGURE 6-1

SCHEMATIC OF MINING DISTRICTS AND MINE DEVELOPMENT PLAN

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LEGEND
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FIGURE 6-1
Xinjiang Autonomous Region, China
Baicheng Mine
Project No : ADV-HK-03644 Schematic of Reserve Mining Districts
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7 MINING

The existing mining operations utilise an Apparent Dip Flexible Shields (“ADFS”) mining method to extract the coal. The current mine plan is outlined in the Mining Extension Design Report 2007, which details the current production schedule and the mining method. A Feasibility Study has been recently completed (still awaiting approval) on the Mine, which details plans to increase production to 900 ktpa. The Feasibility Study plans to use the ADFS mining method and a modified version of the Shortwall Top Coal Caving (“STCC”) mining method utilising drill and blast techniques to mine the coal deposit.

The current mine plan and the future mine plan were reviewed and are described in Section 7.2 and Section 7.3 respectively.

7.1 General Coal Mining Process

Current and proposed mining processes at the Baicheng Mine include;

Mine development;
Apparent Dip Flexible Shields Mining;
Shortwall Top Coal Caving;

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Coal handling and stockpiling; and
Transport.

A brief description of these mining processes are provided below.

Mine Development

Mine development includes the development of shafts or inclines, roadways, crosscuts, main headings and gate roads. These developments are known as primary extraction, as they represent the first stage of mining. The mine development process is outlined below:

Shafts or inclines – Shafts or Inclines provide access from the surface to the different levels of the mine for transport, conveyors and mine services. They may be developed in stone (rock) or coal. Shafts or inclines are designed to last for the life of the mine, or the life of the district they are required to service.

Roadways – Roadways run along the strike of the coal seam and provide access to different parts of the mine for transport, conveyors and mine services.

Crosscuts – The crosscuts link each of the inseam roadways and provide access to each of the dipping seams.

Main Headings – Main Headings are a network of roads that support all the mines services. They connect coal conveyors from the mining areas to the main conveyor for transport to the underground bunker. The various roadways are used for storage of consumables. Main mine services such as underground power and pumping stations are all managed from the main headings. They may be driven in stone (rock) or coal. The life of the main headings is for the life of the mine, or as long as it is required to supply services to the working faces they are connected to. Both inclines and main headings also provide supplies and services (such as fresh air, water, and compressed air) for mining activities as well as return air roadways and waste water management (pumping lines and systems).

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COMPETENT PERSON’S REPORT

Gate Roads – Gate roads are developed on either side of a planned STCC panel and above and below a planned ADFS panel. The gate roads are connected to each other by a “face” road. The gate roads supply services to the STCC and ADFS panel, such as conveyors, fresh air, water, consumables, power, compressed air and transport and also provide an escape way for the for the “return” air (fresh air that has been contaminated by dust and gas as part of the mining process) to pass. Gate roads are usually driven in coal. The life of the gateroad is for as long as it is required by the STCC and ADFS panel it is servicing. Inclines, roadways, main headings and gate roads may be developed either in stone or coal. Development in coal and stone is performed by drill and blast techniques, which are very common and used throughout China.

Apparent Dip Flexible Shields Mining

The ADFS mining system is a modified form of longwall mining utilised in steeply dipping to vertical coal seams. Although an ADFS mining system produces a significantly lower production rate compared to a conventional longwall system, the ADFS mining system can be used where the apparent dip reaches 30˚. The face can vary from 30 m to 100 m in width and approximately 1 m to 5 m in height and is supported by metal flexible shield units. Coal extracted from a downside face is generally transported to the lower gateroad via a system of automatically slipping chutes. The ADFS mining method is illustrated in Figure 7-1 .

Shortwall Top Coal Caving

The STCC mining method is also a modified form of longwall mining and is particularly effective for mining thick seams. This mining method is usually used in sharply dipping coal deposits where the seam thickness is greater than 15 m. The STCC method allows greater coal recovery and generally has a face width of less than 100 m.

The lower part of the coal seam is mined in similar method to a conventional shortwall operation. The supports in a STCC operation have a long rear canopy, which extends out into the goaf. As the shortwall advances, the top of the coal seam caves and falls through the canopy doors onto a Rear Chain Conveyor. The STCC mining method is illustrated in Figure 7-2 .

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Coal Handling and Stockpiling

Coal is transported underground via a network of conveyors to an underground storage bin. A skip hoisting system is used to transport coal to the surface, where it is loaded into a screen processing system. This screening process will remove the waste from the coal and provides three coal products, namely:

fine coal (size: 0 – 50 mm),
lump coal (size: 50 – 150 mm), and
lump coal (size: ≥150 mm).

Transport

The lump coal is stored at a stockpile, awaiting pick up and transport by truck to local thermal coal market. The fine coal is stored separately from the lump coal, awaiting pick up and transport by truck to market, or further processing at an offsite washery. Point of sale will be from these onsite stockpiles. Transportation ex-mine will be the responsibility of the customer.

7.2 Current Operations

7.2.1 Description of Current Operations

The current mining operations are divided into two main mining areas known as the Western Mining Area and the Eastern Mining Area. The Western Mining Area is described below:

The main haulage roadway is along the A9 coal seam at an elevation of 2,120 m.
Access to the coal seams is via crosscuts, the haulage crosscut at the elevation of 2,120 m and the ventilation crosscut at an elevation of 2,220 m.
Gateways are developed along the strike of the mineable coal seams to facilitate transportation and ventilation.
Headings are developed along the dip of the mineable coal seams with 10 m spacing between dual roadways and are linked to each other by crosscuts every 8 m.

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The Eastern Mining Area is described below:

The main haulage roadway is along the A9 coal seam at an elevation of 2,120 m.
Headings are developed along the strike of the mineable coal seams and contain at least 60 m of light rail infrastructure at the pit bottom. Headings are developed with 10 m spacing between dual roadways and are linked to each other by crosscuts every 8 m.
Access to the coal seams is via crosscuts, the haulage crosscut at the elevation of 2,157 m and the ventilation crosscut at an elevation of 2,157 m.
An underground bunker is established with a height of 25 m and a link haulage roadway is developed at a dip angle of 16˚ from the main haulage roadway (2,120 m elevation) to the discharge collar of the surge bunker (2,142 m elevation).
Gateways are developed along the strike of the mineable coal seams to facilitate transportation of coal, ventilation and access.
Headings are developed along the dip of the mineable coal seams with 10 m spacing between dual roadways and are linked to each other by crosscuts every 8 m.

The mine development plan is shown in Figure 6-1 .

Mining currently occurs on three levels for all coal seams. These levels, shown in Table 7-1 , have variable height and are named by elevation. The Mining Extension Design mines all of the coal seams in 3 different mining levels. The mining levels are based on the mining depth given in the mining licence between the elevations of 2,315 m to 2,060 m. The current mining levels are summarised in Table 7-1 .

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APPENDIX VI

FIGURE 7-1

BAICHENG PROJECT – APPARENT DIP FLEXIBLE SHIELD MINING METHOD

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5 Mining Sequence
1 Blast Hole Layout
4 3
2
1 LEGEND: (Dimensions in mm) 2 3 4
1 - Steel Rope 4 - Nut LEGEND
2 - Iron plate 5 - Triangular Angled Support 1 - ADFS support 4 - Drill and Blast under support to
3 - Bolts Bracket (1009070mm) 2 - Starting position with coal trough in floor lower to new floor position
3 - Drill and Blast new floor position
Mine Plan: District Section and Sequence Plan
1
Coal Mining Face - Start Location
Ventilation Road Supports
6
9 3
2 8 5 4
Belt Road Front Supports
LEGEND
1 - Top Roadway - Air Return (1.8 by 2.0m) 6 - Face Take-Off Road
2 - Belt Roadway (2.2 by 2.0m) 7 - Mining District Entrance
3 - Mining Face (2.2 by 2.0m) 8 - Coal Passes
4 - Ventilation and Man Access (1.2 by 1.2m) 9 - Direction of Mining FIGURE 7-1
5 - Coal Chute (1.2 by 1.2m)
Xinjiang Autonomous Region, China
Baicheng Mine
Project No : ADV-HK-03644 Apparent Dip Flexible Shield Mining Method
700
Steel Beam 2
135
100130 750
650
1000
Steel Beam 3
600
550
Steel Beam 1
120
30
Floor Roof Floor Roof Floor Roof
Steel Beam 4
250
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TABLE 7-1

BAICHENG PROJECT – MINING LEVEL DESIGN PARAMETERS

Mining Level	Elevation(m)	Level Height(m)
Level 1	+2177	43
Level 2	+2120	60
Level 3	+2060	57

Source: 2007 Mining Extension Design Report (210 ktpa) and mining site, the reserve in Chinese code.

The mining licence currently held by the Mine was issued in 2009 and specifies a production capacity of 210 ktpa. It is noted that the actual production achieved in 2009 of 208 ktpa was in line with the production capacity of 210 ktpa specified in the mining licence.

The Mining Extension Design Report 2007 (210 ktpa) and associated reports describe the applied mining methods, mine development, mine scheduling and management of safety issues for current mining operations.

The mining operations, as described in the Mining Extension Design Report include the following:

Apparent Dip Flexible Shield underground coal mining methods are applied;
Mine development will occur in both the coal and surrounding waste rock. A skip hoisting system will transport coal to the surface;
The coal will be screened and split into a lump product and a fine product. The lump coal product is estimated to be approximately 30% of total coal production;
Lump coal can reportedly be sold directly to the market, whilst fine coal can either be sold directly to the market or washed. MMC has not reviewed any detailed information with regard to the washing of fine coal.

Based on JORC Reserves within the current mining licence and at an average production rate of 210 ktpa, MMC estimate the remaining mine life to be approximately 19 years.

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7.2.2 Current Coal Mining Methods

The Baicheng mine has 7 steeply dipping (85˚ – 89˚) mineable coal seams throughout the mining area. The mine utilises an ADFS mining method and extracts the coal from the top seam (A5) to the bottom seam (A12).

The mine plan separates the coal seams into three thickness categories including;

Thin Seams – These seams have an average true thickness of between 1.41 m and 1.80 m and include the A6, A8, A9 and A12 seams;
Moderate Seams – Include the A7 and A10 seams, which have an average mineable true thickness of 2.99 m and 4.06 m respectively;
Thick Seams – Includes the A5 seam, which has an average true thickness of 7.96 m.

The mine design is based on the Chinese design code and utilises two ADFS longwall units.

MMC believe that the steeply dipping seam may slightly reduce the impact of overlapping mining activities in the other coal seams as subsidence events would be offset due to the angle of draw. A reasonable combination of heading layouts and mine planning should enable two or more seams to be mined simultaneously.

The mining methods used have previously been successfully implemented in China and MMC considers that this mining method is appropriate for coal extraction at the Baicheng Coal mine.

7.2.3 Current Mine Development

The current production at the Baicheng Mine is achieved primarily by using two ADFS units to extract the coal. This unit is supported by four roadway development faces, which undertake drill and blast activities to develop the required roadways. Only one ADFS unit operates at any given time.

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FIGURE 7-2

BAICHENG PROJECT – MINE PLAN – DETAILED VIEW

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7 1 11 2 12 3
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4
5
14 6 8 13 9
10
LEGEND
1 - West Shaft 6 - 1500m RL 11 - Pre Existing Mine Workings
2 - Central Shaft 7 - Surface 12 - Goaf/Mined Out Areas
3 - East Shaft 8 - Central Shaft Protection Pillar 13 - Planned Workings - Mine Expansion Project
4 - 2000m RL 9 - Licence Boundary 14 - Existing Mining Licence Level
5 - 1750m RL 10 - Mining Area Barrier Pillar
FIGURE 7-2
Xinjiang Autonomous Region, China
Baicheng Mine
Mine Plan – Detailed View Current and Planned
Project No : ADV-HK-03644 Mine Extensions
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7.2.4 Shafts

Access to the mine is via a combination of an inclined and vertical shaft system. One shaft and three inclined shafts provide access for coal haulage, men and materials haulage and ventilation. The system links to the main roadway and ventilation roadway at an elevation of 2,120 m and 2,220 m respectively. The coal seams are accessed by a series of crosscuts in different mining districts from the main roadway. Main headings provide access to their relevant mining districts and the mining panels extend from these main headings.

Main (Skip Hoisting) Shaft

The Main Shaft serves as the sole means of hoisting coal to the surface whilst serving as an intake air shaft. The shaft provides access for drainage pipelines, water spray lines and power and message cables, which service the mine.

The relevant design parameters of the Main Shaft are shown in Table

7-2 .

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TABLE 7-2

BAICHENG PROJECT – MAIN INCLINED SHAFT DESIGN PARAMETERS

Design Parameters	Units	Values
Shaft diameter	m	4.5
Finished section	sq m	15.89
Depth	m	194
Inclined angle	˚	90
Supporting	–	Stone
Shaft equipment	–	Dual SkipLiftingSystem

Source: 2007 Mining Extension Design Report (210 ktpa)

Auxiliary Inclined Shaft

The Auxiliary Inclined Shaft is utilised for hoisting underground personnel, mine materials, equipment and also serves as an intake air shaft. The Auxiliary Inclined Shaft is also used as an additional emergency egress and includes pedestrian steps and handrails.

The relevant design parameters of this shaft are given in Table 7-3 .

TABLE 7-3 BAICHENG PROJECT – AUXILIARY INCLINED SHAFT DESIGN PARAMETERS

Design Parameters	Units	Values
Shaft width	m	3
Finished section	sq m	6.2
Length	m	253
Inclined angle	˚	22
Supporting	–	Bolt & Stone
Hoist	–	1 tonne coal car
		group-liftingsystem

Source: 2007 Mining Extension Design Report (210 ktpa)

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West Ventilation Shaft

The West Ventilation Shaft serves as the return air shaft for the western mining area. The main shaft and auxiliary inclined shafts provides the fresh air required for the western mining area. This shaft has sufficient cross-sectional area to ventilate the mining area while maintaining a ventilation velocity of less than 15 m/sec (Chinese code). It also provides minimal surface resistance to ensure that turbulence is minimised and therefore power costs. The shaft is also used as an additional emergency egress and includes pedestrian steps and handrails.

The relevant design parameters of this shaft are shown in Table 7-4 .

TABLE 7-4

BAICHENG PROJECT – WEST VENTILATION SHAFT DESIGN PARAMETERS

Design Parameters	Units	Values
Shaft width	m	2.50
Finished section	sq m	4.90
Length	m	96
Inclined angle	˚	86
Supporting	–	Stone

Source: 2007 Mining Extension Design Report (210 ktpa)

East Ventilation Shaft

The East Ventilation Shaft serves as the return air shaft for the eastern mining area. The main shaft and auxiliary inclined shafts provides the fresh air required for the eastern mining area. The East Ventilation Shaft is also used as an additional emergency egress and includes pedestrian steps and handrails.

The relevant design parameters of this shaft are given in Table 7-5 .

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TABLE 7-5

BAICHENG PROJECT – EAST VENTILATION SHAFT DESIGN PARAMETERS

Design Parameters	Units	Values
Shaft width	m	2.50
Finished section	sq m	4.90
Length	m	124.7
Inclined angle	˚	88
Supporting	–	Stone

Source: 2007 Mining Extension Design Report (210 ktpa)

7.2.5 Current Production Schedule and Mining Capacity

The Mining Extension Design does not provide a long term mining plan. However the two ADFS units have a total capacity of 298 ktpa. The size and height of each ADFS unit are different to allow for optimal operation in coal seams with different thicknesses. Only one ADFS longwall unit is used at any one time, with the second unit used as a backup machine if the primary unit fails. The annual production should still exceed 210 ktpa from one ADFS longwall unit in addition to the four roadway development faces.

MMC understands that the current level of mine planning might be consistent with the Chinese standard, however it is suggested that a more stringent and detailed mining schedule be completed to ensure that the mine plan reflects the likely mining and development sequences.

MMC believes that there are some potential issues that could influence the production level. These issues include the presence of steeply dipping coal seams, a complex mine plan involving the development of multiple seams and the variation of mining seam thicknesses. However, after considering that similar mining practices are used throughout China, MMC believe that with careful management, the desired production capacity could potentially be higher than 210 ktpa.

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7.2.6 Estimated Productivity

The operating parameters of the main production units implemented at the Mine are shown in Table 7-6 and Table 7-7 . The ADFS longwall units produce approximately 298 ktpa of coal based on the production assumptions outlined in the Mining Extension Design.

TABLE 7-6 BAICHENG PROJECT – EAST MINING DISTRICT A9 SEAM ADFS LONGWALL UNIT OPERATING DESIGN PARAMETERS

Design Parameters	Units	Values
Shifts per day	No.	3
Hours per shift	Hours	8
Operating days per year	Days	330
Panel width	m	74
Mining height	m	3.95
Retreat rate per shift	m/shift	0.8
Annual advance rate	m	525
Mining recovery	%	95
Output per shift	t	289
Output per day	t	433.5
Outputperyear	kt	143

Source: 2007 Mining Extension Design Report (210 ktpa)

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TABLE 7-7

BAICHENG PROJECT – WEST MINING DISTRICT A9 SEAM ADFS LONGWALL UNIT OPERATING DESIGN PARAMETERS

Design Parameters	Units	Values
Shifts per day	No.	3
Hours per shift	Hours	8
Operating days per year	Days	330
Panel width	m	80
Mining height	m	3.95
Retreat rate per shift	m/shift	0.8
Annual advance rate	m	525
Mining recovery	%	95
Output per shift	t	312
Output per day	t	468
Outputperyear	kt	155

Source: 2007 Mining Extension Design Report (210 ktpa)

7.2.7 Existing Site Infrastructure

Industrial Yard

The Mine utilises the original industrial yard, which is limited by the local topography. The current mining operation has several facility buildings that are used to house employees, serve as office space, and provide cafeteria facilities. These buildings are considered to make up a significant portion of the surface asset value in the yard.

Coal Handling

Coal is transported underground via a 0.6 m wide conveyor to an underground bin (4.5 sq m of net section and 25 m in height). A skip hoisting system (XMZS40-2.5) is then used to haul coal to the surface. This hoisting arrangement is constructed by means of a metal frame unit that is situated over the main shaft. The skip unit is dual activated with one skip rising while a second skip is lowering. The skips are powered by a manually controlled electric powered drum winch hoists.

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The loaded skips are automatically dumped by means of a roll dump assembly at the surface. Once the coal is dumped, it enters a metal screen system. The screening process produces three products including a:

fine coal (size: 0 – 50 mm),
lump coal (size: 50 – 150 mm), and
lump coal (size: ≥150 mm).

The lump coal is stored on surface stockpiles for loading into trucks for transport to market.

MMC believes that the proposed system is consistent with Xinjiang local standards and is appropriate for the Baicheng Coal mine.

Men and Materials Transport

A rail roadway and crosscut system (above 2,120 m elevation) or an additional underground rail heading system (elevation between 2,120 m to 2,220 m) is used to transport men and materials.

Water Supply

There are several possible sources of water for the Mine including:

Water from the underground aquifers within the Mine; and
Shuixi River Bed underground aquifers.

Mine water, predominately for dust management and firefighting systems, is sourced from the mine waste water treatment plant. Additional water suitable for domestic applications is sourced from Shuixi River Bed underground Quaternary aquifers.

MMC are of the opinion that the proposed system should be sufficient to satisfy the needs of the Baicheng Coal mine.

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Power supply

Dual power circuits are required to comply with Chinese regulations. The Mine currently sources its power from a 10 kV power line and maintains a diesel power generator as a standby source of power. A secondary power circuit sourced from a proposed 35 kV substation is expected to be available in 2011.

Underground Mine Water Drainage System and Pumping

The water discharge required for the Mine has been calculated in the Mining Extension Design. The normal water discharge is expected to be 110 l/s and the maximum water discharge is expected to be 166 l/s.

Two water discharge systems have been installed in the main shaft and the auxiliary inclined shaft. Each system consists of more than three pumps as it is anticipated that at any one time one pump will be operational, one pump will be on standby and one pump will be undergoing maintenance. Each pump is capable of independently handling the mine pumping requirements, which ensures that pumping continuity is maintained in the event of pump failure.

MMC believes that the proposed system is consistent with Chinese standards and is appropriate for the Baicheng Coal mine.

Ventilation

The Baicheng Mine needs a total of three roadways to match the rate of mining retreat. The total outbye ventilation requirements is 23 cu m/sec (1,380 cu m/min), which includes the ventilation required to service underground infrastructure such as underground magazines and transformer stations.

The Mine currently has a dual exhaust ventilation system with the main shaft and auxiliary inclined shaft acting as air intakes and the west and east ventilation shafts as air returns. The preliminary ventilation capacity is 23 cu m/sec (1,380 cu m/min). Two axial flow fans (BK40-4-N[o] ~~1~~ 2) are used for each inclined shaft to comply with the Chinese regulations, which require the installation of a standby or backup ventilation fan.

MMC are of the opinion that the proposed ventilation system should be sufficient to satisfy the needs of the Baicheng Coal mine.

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APPENDIX VI

Moisture system

Environmental monitoring sensors operate at strategic locations throughout the mine. All monitored data is transmitted to the surface for monitoring by site personnel. Finally, all mine monitoring systems are required to incorporate the capability of transmitting data to the safety bureau of the Xinjiang autonomous region.

The mine monitoring system for the Baicheng Mine is designed to monitor airflows, carbon monoxide (CO), carbon dioxide (CO2) and methane (CH4) in the mine atmosphere at multiple (and often remote) locations throughout the underground mine. Preset alarms are programmed into the system to warn designated personnel and to automatically de-energize trip power when gas concentrations exceed the statutory limits. In addition, the mine monitoring system monitors the performance of numerous pieces of equipment via a fiber optic interface. MMC is also of the opinion that the proposed monitoring system is consistent with Chinese standards and is appropriate for the Baicheng Coal mine.

7.3 Future Mining Operations

7.3.1 Description of Operations – Project Expansion

A Feasibility Study was recently completed for the Mine, which plans to increase production to 900 ktpa. The Feasibility Study plans to use a modified version of the STCC mining method utilising drill and blasting techniques in addition to the ADFS system. The applied mining methods, mine development, mine scheduling and safety issues are outlined in the Feasibility Study, which is prepared by the Design Institute of Hami Mining Administration Bureau. It is anticipated that the expansion will take approximately 1.5 years to develop.

According to the Feasibility Study the mine will be developed in three main mining districts consisting of the West District, Central District and the East District as shown in Figure 7-4 .

The mining area will be developed in three levels as shown in Table 7-8 .

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APPENDIX VI

TABLE 7-8

BAICHENG PROJECT – MINING LEVEL DESIGN PARAMETERS

Mining Level	Elevation(m)
Level 1	+2000
Level 2	+1750 – 2000
Level 3	+1500 – 1750

Source: Feasibility Study, 2010.

Mining operations are planned to be completed by two AFDS units and two STCC units. Four mining roadheaders and one drill and blast team will be used to develop the mining operation and support the main production units. Drill and blast techniques will be used to extract the coal in all of the mining areas, regardless of the mining method employed.

MMC believes that the government approval will still be needed for the expansion on a provincial level. As a result the Mine would need to update the mining licence, check relevant technical reports (relevant to Feasibility Study, Safety, Environment Protection) and obtain relevant construction reports.

The Feasibility Study details the plan to use the AFDS mining method to exploit the A7, A8, A9, A10 and A12 coal seams. Mining is planned to be carried out in three 45 m passes with each pass separated by a 5 to 10 m barrier pillar. The AFDS panels will be established along the strike of the deposit and mining operations will be supported by metal flexible shields.

It is planned to mine the A5 and A6 coal seams using a modified STCC mining method. MMC considers that the modified STCC method is suitable for the A5 seam as the A5 seam exists consistently across the deposit and has an average (horizontal) thickness of approximately 8 m. The A6 seam is considered to be mineable across part of the deposit and has an average (horizontal) thickness of 1.8 m. The A5 and A6 seams are separated by a thin layer of interburden, which has an average (horizontal) thickness of approximately 1.3 m. Therefore, the Feasibility Study proposes that the A5 and A6 coal seams are mined together in one horizon using a modified STCC mining method. A conventional STCC system is normally utilised in sharply dipping coal seams where the thickness of the coal seam is greater than 15 m. As a result a modified STCC method is needed to extract the thinner A5 and A6 seams.

The STCC method utilises slipping bar composite shield supports to mine the deposit. Panels will be established along the strike of the coal deposit and will be deployed at horizontal levels. The STCC method will be carried out in 10 passes in the east district and 15 passes in the central and west districts. No barrier pillar is planned to be left between passes.

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APPENDIX VI

The STCC operation will comprise of a 2.5 m face section and a 7.5 m top coal caving section. Drill and blast techniques will be used to remove the coal in the face section in 0.8 m passes. Three 0.8 m face passes will be mined before a top coal caving event occurs. See Figure 7-3 below.

FIGURE 7-3 BAICHENG PROJECT – SHORT WALL TOP COAL CAVING

==> picture [376 x 532] intentionally omitted <==

----- Start of picture text -----

Seam 5 Seam 6
2.5 m
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�� 7.5 m
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LEGEND
Primary Caving Zone
Secondary Caving Zone
Development Roadways
Ston
FIGURE 7-3
Xinjiang Autonomous Region, China
Baicheng Mine
Project No : ADV-HK-03644 Short Wall Top Coal Caving
----- End of picture text -----

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COMPETENT PERSON’S REPORT

Extensive development will be required to provide services and access to different areas of the deposit to enable mining to be carried out. A belt roadway is planned along the strike of the A8 coal seam and a rail roadway is planned to be developed along the strike of the A5 coal seam. It is also planned to construct coal bunkers along the A5 seam in each district. A rail heading will also be constructed in the auxiliary inclined shaft to facilitate the transport of men and materials. Headings and crosscuts will be developed to provide access to each seam and to maintain adequate ventilation.

Mining will commence in the east and central mining districts and will extract the coal seams from top to bottom. Mining activities will then progress to the west district where the coal seams will also be extracted from top to bottom.

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APPENDIX VI

This expansion project would probably be referred to as a technical reforming project for the governmental approval process. MMC notes that the expansion project is listed in the “11th of five years” plan of Xinjiang Autonomous Region as an expansion project with a production capacity of 450 ktpa. It is believed that the listed plan (production capacity of 450 ktpa) would become the basis for the project expansion (900 ktpa).

FIGURE 7-4

BAICHENG PROJECT – ILLUSTRATION OF DISTRICT AND LEVEL PLAN

==> picture [408 x 116] intentionally omitted <==

----- Start of picture text -----

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The suffix “ up ” refers to the subdivision of these blocks as Area A , and “ low ” is in reference to Area B . Above and beneath the Mining Licence base elevation level of 2,060 m.

7.3.2 Shafts

Access to the mine is via a combination of an inclined drift and shaft system as explained below.

Main Shaft

The Main Shaft will serve as the sole means of transporting coal to the surface and will also act as an intake air shaft. Also, the shaft will provide access for drainage pipelines, water spray lines and power and message cables.

The relevant design parameters of the Main Shaft are shown in Table 7-9 .

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APPENDIX VI

TABLE 7-9

BAICHENG PROJECT – MAIN INCLINED SHAFT DESIGN PARAMETERS

Design Parameters	Units	Values
Shaft Diameter	m	5
Finished Section	sq m	17.80
Depth	m	734
Inclined Angle	˚	25
Supporting	–	Concrete and
		concrete mesh spray
Shaft Equipment	–	Belt conveyor DX-1200

Source: Feasibility Study, 2010.

Auxiliary Inclined Shaft

The Auxiliary Inclined Shaft will be utilised for transporting underground personnel, mine materials, equipment and will also serve as an intake air shaft. The auxiliary inclined shaft will also be used as an additional emergency egress and will include pedestrian steps and handrails.

The relevant design parameters of this shaft are given in Table 7-10 .

TABLE 7-10

BAICHENG PROJECT – AUXILIARY INCLINED SHAFT DESIGN PARAMETERS

Design Parameters	Units	Values
Shaft Width	m	5
Finished Section	sq m	17.80
Length	m	663
Inclined Angle	˚	25
Supporting	–	Concrete and
		concrete mesh spray
Hoist	–	Coal car group
		liftingsystem

Source: Feasibility Study, 2010.

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APPENDIX VI

Centre Ventilation Inclined Shaft

The Centre Ventilation Inclined Shaft will serve as the return air shaft for the central mining district. The main shaft and auxiliary inclined shafts will provide the fresh air required for the central mining district. This shaft will have sufficient cross-sectional area to ventilate the mining area while maintaining a ventilation velocity of less than 15 m/sec (Chinese code). It will also provide minimal surface resistance to ensure that turbulence is minimised and therefore power costs.

The relevant design parameters of this shaft are shown in Table 7-11 .

TABLE 7-11 BAICHENG PROJECT – CENTRE VENTILATION INCLINED SHAFT DESIGN PARAMETERS

Design Parameters	Units	Values
Shaft Width	m	5
Finished Section	sq m	18
Length	m	653
Inclined Angle	˚	25
Supporting	–	Concrete and
		concrete mesh spray

Source: Feasibility Study, 2010.

East Ventilation Inclined Shaft

The East Ventilation Inclined Shaft will serve as the return air shaft for the eastern mining district. The main shaft and auxiliary inclined shafts will provide the fresh air required for the eastern mining district.

The relevant design parameters of this shaft are given in Table 7-12 .

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APPENDIX VI

TABLE 7-12

BAICHENG PROJECT – EAST VENTILATION INCLINED SHAFT DESIGN PARAMETERS

Design Parameters	Units	Values
Shaft Width	m	5
Finished Section	sq m	18
Length	m	663
Inclined Angle	˚	25
Supporting	–	Concrete and
		concrete mesh spray

Source: Feasibility Study, 2010.

West Ventilation Inclined Shaft

The West Ventilation Inclined Shaft will service the western mining district and is anticipated to be developed in the future as mining progresses to the west district.

7.3.3 Production Schedule and Mining Capacity

The main production units according to the expansion plan outlined in the Feasibility Study will have a total potential capacity of 843 ktpa and will extract coal from the A5, A6, A7, A8, A9, A10 and A12 coal seams. In the Feasibility Study it is assumed that the development units would contribute an additional 84.3 ktpa to the total mining capacity of the Baicheng Mine, which is 10% of the potential total capacity of the production units. Therefore the planned total capacity of the Baicheng Mine is 927 ktpa.

MMC understands that the level of mine planning in the Feasibility Study might be consistent with the Chinese standard, however MMC suggests that a more stringent and detailed mining schedule be completed to ensure that the mine plan reflects the likely mining and development sequences.

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APPENDIX VI

MMC believes that there are some potential issues that could influence the ability of the Mine to reach the anticipated 900 ktpa. These issues are similar to the issues associated with current operations along with the introduction of a new mining method, and include the presence of steeply dipping (near vertical) coal seams, which require a complex mine plan and schedule that involves sequential horizontal and vertical development (mining) of multiple seams, such seams being all independently variable in thicknesses. However, after the 900 kt mine construction and ramp up phase (trial production) is completed and new mining systems and processes have been established to utilise the new mining methods efficiently and after considering that similar mining practices are used throughout China, MMC believe that with careful management the desired production capacity outlined in the Feasibility Study could be achieved.

The ADFS longwall units and the STCC units produce approximately 254 ktpa and 589 ktpa of coal respectively. These estimated productivities are based on the assumptions outlined in the Feasibility Study and are summarised in Table 7-13 and Table 7-14 for the STCC units and the ADFS units respectively.

TABLE 7-13 BAICHENG PROJECT – OPERATING PARAMETERS OF STCC UNITS

		11A5-01W	12A5-01E
Design Parameters	Units	STCC Unit	STCC Unit
Shifts Per Day	No.	4	4
Hours Per Shift	Hours	6	6
Operating Days Per Year	Days	330	330
Panel Width	m	10.7	8
Mining Height	m	10	10
Retreat Rate Per Shift	m/shift	2.6	2.6
Annual Advance Rate	m	3,366	3,366
Output per shift	t	241	205
Output per day	t	965	820
Output per year	kt	318	271

Source: Feasibility Study, 2010.

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APPENDIX VI

TABLE 7-14

BAICHENG PROJECT – OPERATING PARAMETERS OF BOTH ADFS UNITS

Design Parameters	Units	ADFS Units
Shifts Per Day	No.	4
Hours Per Shift	Hours	6
Operating Days Per Year	Days	330
Panel Width	m	95
Retreat Rate Per Shift	m/shift	0.3
Annual Advance Rate	m	422
Output per shift	t	96
Output per day	t	384
Outputperyear	kt	127

Source: Feasibility Study, 2010.

7.4 Mine Characteristics

7.4.1 Gas

The No. 51 Document of Xinjiang Autonomous Region Coal Industrial Administration Bureau 2009, Approval Reply for the Gas and Carbon Dioxide Emission Identification of Mine of Baicheng County Wenzhou Mining Development Co. Ltd. outlines the following:

The Baicheng Mine has been identified as low gas;
The relative and absolute gas emissions at the Baicheng Mine are 8.41 m[3] /t and 2.18 m[3] /min respectively;
The relative and absolute carbon dioxide emissions at the Baicheng Mine are 8.75 m[3] /t and 2.27 m[3] /min respectively;

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APPENDIX VI

7.4.2 Spontaneous Combustion

Parts of the coal outcrop and the shallow regions of the mineable coal seams in the mining have effectively been burnt as a result of previous mining activities and are generally referred to as the “burnt zone”. Although two of the mineable seam outcrops are currently burning, the burnt zone does not currently extend into the abandon underground mining area. Current management state that the depth of the “burnt zone” is less than 50 m.

The mineable coal seams include the A5, A7, A8, A9 and A10 seams, which spontaneously combust naturally at the outcrop. The spontaneous combustion propensity is low from the profile line CK2 west towards CK1. Completed geophyisical exploration suggests that the limit of spontaneous combustion is 45 m below the surface. Therefore coals above an elevation of 2,272 m are affected by spontaneous combustion. The section east of CK2 to Profile II that is above an elevation of 2,200 m is also affected by spontaneous combustion.

The geological report indicates that there is currently no spontaneous combustion in virgin coal seams. However, previous testing shows that all of the coal seams present in the mining area have a tendency to spontaneously combust. The coal falls into the “II classification of spontaneous combustion” according to the Chinese Code.

MMC notes that an abandoned underground mining area, with a significant amount of coal remaining in the goaf, exists immediately above the current mining area. Inadequate sealing of the goaf would result in a high risk of spontaneous combustion due to the potential exposure of the coal to air. MMC advices that good management will be needed to prevent any accidents as a result of spontaneous combustion, CO build up from the existing “Burnt Zone” and flooding as a result of water accumulating in the original burnt zone area, if this area is ever breached by mining or mining induced failure.

The Baicheng Mine has left a barrier pillar between current mining operations and old mine workings to mitigate the risk of spontaneous combustion, and inrush potential. This is also important for the structural integrity of the mine.

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APPENDIX VI

7.4.3 Coal Dust

There is a risk of an explosion occurring at the Mine due to the generation of coal dust from mining activities. Mitigation measures should be adopted to reduce the risk of coal dust explosions.

This is a common risk for many underground coal mines and will require careful management to ensure that the associated risks are controlled. The high gas content of the seam increases the likelihood of methane explosions, which in turn will increase the likelihood of coal dust explosions.

Standard mitigating measures such as stone-dusting should be adopted to reduce the risk of coal dust explosions.

7.4.4 Hydrogeology

The hydrogeological conditions of the Mine are generally of a simple and moderate nature. The main hydrogeological risk is the risk of underground flooding due to the build up of water in the burnt zones of the coal seams and in the previously mined areas.

Mitigating measures such as a dedicated pumping system should be implemented to ensure that all the hydrogeological risks are managed appropriately.

7.4.5 Subsidence

Significant subsidence has occurred as a result of the shallow mining activities that were undertaken previously to extract the A9, A7 and A5 coal seams. MMC recommends that careful monitoring and potentially filling of the subsidence cracks would be needed to prevent flooding. Subsidence cracks could also possibly allow air to communicate to the goaf area, which could lead to potential spontaneous combustion problems.

7.4.6 Mine Closure

There are currently no existing plans detailing the mine closure procedure or rehabilitation programmes after mining has been completed.

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APPENDIX VI

8 OPERATING AND CAPITAL COSTS

8.1 Operating Cost

The Mining Extension Design and the Feasibility Study estimates total direct and indirect production costs. These estimates are based on a number of operating assumptions outlined in the Mining Extension Design and Feasibility Study respectively.

The estimated unit operating costs are shown in Table 8-1 .

TABLE 8-1

BAICHENG PROJECT – FORECAST OPERATING COST

	Feasibility Study	Extension Design
Category	(900 ktpa)	(210 ktpa)
	RMB/ROMt	RMB/ROMt
Materials	10.12	5.63
Power	11.55	4.80
Salary	34.15*	20.69
Welfare	2.89	–
Maintenance	12.76	3.38
Subsidence Compensation	0.50	0.10
Others (including Sustaining Cost)	17.42	9.11
Adjustment Cost of Resource Development	2.00	–
Direct Operating Cost	88.50	46.6
Depreciation	21.54	9.07
Sustaining	3.00	5.50
Roadway Development Fund	2.50	–
Safety Cost	15.00	10.00
Amortization	2.79	2.12
Loan Interest	0.92	0.78
Total Operating Cost	134.25	74.07

*Note: Welfare has been included in the salary cost in the Feasibility Study

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APPENDIX VI

There is a significant difference between the unit operating costs outlined in the Feasibility Study and the Extension Design. MMC believe that the main reasons for this difference include:

In contrast to the Feasibility Study, the Mining Extension Design did not include the required costs associated with the Roadway Development Fund or adequate subsidence compensation. These additional costs would add RMB2.90/ROMt to the total operating costs included in the Mining Extension Design resulting in a total operating cost of RMB76.97/ROMt.
The Mining Extension Design was completed in 2006, while the Feasibility Study was completed in 2010. The cost of mining has increased significantly over this period contributing to the difference in unit operating costs between the two studies.
It should be noted that increasing the production rate should generally result in lower unit cost as mining becomes more efficient and economies of scale are achieved. This is particularly relevant to the Baicheng Mine where the current Mining Extension Design uses one ADFS mining face, one spare ADFS unit and four blasting development faces to achieve the production rate of 210 ktpa. The Feasibility Study plans to use two ADFS units, one STCC unit and four development units, which is anticipated to be significantly more efficient. However, the increase in the cost of mining from 2006 over the past four years may have offset these expected cost savings.
According to the Feasibility Study the Company plans to invest approximately 296 M RMB in capital expenditure to increase production to 900 ktpa. This impacts upon operating costs as depreciation costs rise significantly.

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APPENDIX VI

Implementing the expansion of the mine would lead to an increase in safety cost as an increased production rate would lead to higher gas emissions and deeper mining. The risks associated with higher gas emissions and deeper mining require significant resources to manage.
The Mining Extension Design does not include an adjustment cost of Resource development.

The operating costs assumptions and the operating cost estimation methods are consistent with Chinese standards and MMC believes that the costs in the Feasibility Study are reasonable.

However, it is recommended that more accurate production forecasting should be completed along with a practical mining model based on a detailed operating plan. This will result in a more accurate forecast operating cost.

Based on MMC’s experience, the method used to report costs appear to be largely standardised across the major state owned coal mining enterprises of China. This section provides a description of each of the major operating cost categories including a general description of the type of expenses that are captured under each of the cost categories.

8.1.1 Salary

The labour cost includes the salary paid to employees and subcontractors, but excludes welfare which is costed separately.

8.1.2 Welfare

The welfare fee is typically calculated as 14% of the salary for the full time equivalent workers. The welfare fee does not apply to certain part-time workers, which is why the calculated welfare fee sometimes appears to be slightly less than the standard 14%.

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APPENDIX VI

8.1.3 Materials

Materials include all expenses associated with the supply of materials and include the following;

Timber;
Development consumables;
Explosives;
Large items;
Spare parts;
Tools;
Coal for own use;
Health and safety;
Building materials;
Fuel and lubricants;
Adjustment (inventory); and
Other.

8.1.4 Depreciation

The depreciation methodology adopted is usually based on a simple straight line method.

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APPENDIX VI

8.1.5 Electricity

Electricity charges are payable on both a fixed basis, depending on the amount of installed power available (capacity charge), and a variable basis calculated on actual electricity used (usage charge).

8.1.6 Roadway Development Fund and Maintenance Fund

The Ministry of Finance, the National Development and Reform Commission and the National Coal Mine Security Supervision Bureau are PRC organisations which together set the standards for the following funds:

Roadway Development Fund (Production Sustaining Fund);
Maintenance Fund; and
Safety Fund.

The Roadway Development Fund (or Production Sustaining Fund) is designed to ensure adequate funds are available for the continued underground roadway development required to access future mining districts. In addition to this, the fund is used to provide finance for technological renewal relating to improving the safety and productivity of the roadway development operations. The intended use of the fund as outlined in the standard is as follows:

Conducting roadway development to access future mining districts;
Upgrading existing techniques and equipment to come into line with best practice in terms of efficiency, safety, and productivity;
Renewal of fixed assets and the reconstruction and purchase of new assets to support production;
Development of programmes to maximise the efficient utilisation of waste materials with particular focus on the three key wastes including waste fluids, waste gas and waste solids;

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APPENDIX VI

Promotion of new technology including feasibility assessment and implementation;
Small mine technological transformation including such things as – mine upgrades from non mechanised to semi mechanised mining methods and upgrade of roof support, ventilation, and gas drainage technology; and
Compensation for village relocation caused by large-scale coal mine expansion.

The Maintenance Fund is similar and is designed to allow for maintenance of the mine and associated infrastructure.

For most operations the typical annual per tonne levels for each of the above funds are as follows:

Maintenance Fund – RMB6.2/t; and
Roadway Development Fund – RMB2.5/t. Although the Feasibility Study included this cost, the Mining Extension Design did not include a cost for the Roadway Development Fund.

8.1.7 Subsidence

The subsidence costs were determined based on the cost to rectify any subsidence related damage as required and to compensate landholders for subsidence related disturbance. Although the local regulation requires a cost of RMB0.5/t be set aside for subsidence, the Mining Extension Design only included a cost of RMB0.1/t. The Feasibility Study includes RMB0.5/t in the operating cost estimates.

8.1.8 Safety Fund

In order to enhance the safety performance of large coal mining companies and to encourage higher production and investment, the Chinese Treasury, the National Development & Reform Commission, and the Coal Mine Production Safety Censorial Committee have amended existing rules with respect to the safety of both large and medium scale coal mines in China.

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APPENDIX VI

The law requires coal companies to provide a minimum amount to a designated safety fund to be used to improve safety performance in the coal operations. The minimum amount to be provided to the safety fund is dependent on the type of operation as follows:

Large to medium scale coalmine (> 1.2 Mtpa)
a. High-gas-content, gas outburst, high-water-effuse coalmine, safety fee ≥ RMB8/t;
b. the 45 coalmine companies that are under key supervision, safety ≥ RMB15/t;
c. Low-gas-content coalmine, safety fee ≥ RMB5/t;
d. Opencast coalmine, safety fee ≥ RMB3/t;
Small scale coalmine (< 1.2 Mtpa)
a. High-gas-content, gas outburst, high-water-effuse coalmine, safety fee ≥ RMB10/t;
b. Low-gas-content coalmine, safety fee ≥ RMB6/t.

This standard applies to all coal mines across China. Each coal mine, in whichever category it falls, must strictly follow the standard.

Under the safety legislation, each coal mine is required to set up a safety policy in accordance with the new legislation. The safety fund must be used to improve safety in one or more of the following areas:

Ventilation system upgrades;
Gas monitoring system improvement and upgrade;
Coal and gas explosion prevention and control;

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APPENDIX VI

Fire prevention and alarm management system improvement and upgrade;
Water inrush management system improvement and upgrade;
Electromechanical device security system improvement and reconstruction;
Electricity supply system improvement and upgrade;
Transportation safety improvement and upgrade;
Coal dust management system improvement and upgrade; and
Other expense related directly to production safety.

8.1.9 Other Costs

There are a number of separate expense categories, which are captured under Other Costs. MMC concludes that the majority of the expenses (in general order of significance) relate to:

equipment leases;
senior management expenses;
water; and
heating.

8.2 Transportation Capital Costs

The forecast capital costs for the Baicheng Mine, as outlined in the Feasibility Study, are shown in Table 8.2 .

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APPENDIX VI

TABLE 8-2

BAICHENG PROJECT – FORECAST CAPITAL COSTS (M RMB)

Item	Underground	Surface	Equipment	Installation	Others	Total
Site preparation	0.0	0.7	0.4	0.8	0.0	1.8
Shaft	32.2	0.0	0.4	0.1	0.0	32.7
Pit Bottom development	3.7	0.0	0.0	0.0	0.0	3.7
Main Roadway development	4.5	0.0	11.7	0.1	0.0	16.2
Mining District	34.0	0.0	48.2	6.3	0.0	88.5
Hoisting system	0.0	0.5	9.7	1.2	0.0	11.4
Drainage system	2.3	0.0	0.2	0.3	0.0	2.9
Ventilation system	0.0	0.9	1.4	0.4	0.0	2.7
Compressed air system	0.0	0.2	1.2	1.2	0.0	2.6
Coal Screening/handling	0.0	4.4	0.0	0.6	0.0	5.0
Safety and monitoring system	0.0	0.5	11.5	4.0	0.0	16.0
Communication and computer	0.0	0.0	0.7	0.8	0.0	1.5
Power supply	0.3	1.1	7.6	3.4	0.0	12.4
Surface transportation	0.0	0.1	1.2	0.0	0.0	1.3
Water/Drainage/Heating	0.0	1.9	0.8	0.8	0.0	3.5
Store/Yard	0.0	1.9	5.0	1.7	0.0	8.6
Administration & Welfare	0.0	9.6	0.1	0.0	0.0	9.7
Industrial yard	0.0	3.9	0.0	0.0	0.0	3.9
Pollution Control	0.0	0.4	7.9	7.5	0.0	15.8
Others	0.0	0.0	0.0	0.0	22.9	22.9
Sub-total	76.8	26.1	108.1	29.2	22.9	263.1
Contingency (10%)	7.7	2.6	10.8	2.9	2.3	26.3
Sub-total	84.5	28.7	118.9	32.1	25.2	289.4
WorkingCapital						6.7
Total Investment						296.1

The estimated capital expenditure to increase the Mine’s production capacity to 900 ktpa mine plan is 296.1 M RMB. The majority of this cost is the purchase of additional mining equipment required to reach 900 ktpa. MMC believes that these costs are reasonable.

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APPENDIX VI

9 MINE SAFETY

9.1 Safety Permitting

The Mine commissioned a qualified institute to prepare a Comprehensive Safety Status Assessment Report, “Baicheng County Wenzhou Mining Development Co, Ltd No. 3 Pit of No. 1 Mine Safety Status Comprehensive Assessment Report” by Exploration Design Institute of Hami Mining Administration Bureau in March 2008. The mine obtained a Safety Production Permit by the Coal Mine Safety Supervision Bureau of Xinjiang Autonomous Region in April 2008.

The Extension Preliminary Design and the Comprehensive Safety Status Assessment Report (“Safety Report”) includes the key points as described as following:

9.1.1 Ventilation

This section gives a detailed description on ventilation requirements as described in the Extension Preliminary Design.

Ventilation mode and system : The Project uses a mechanical exhaust ventilation mode with the individual district ventilation system. The longwall face will be ventilated by the fresh air entering through air-intake gateway and returning through the air-return gateway with “U”-type form of ventilation.

Ventilation shafts : The main and auxiliary inclined drifts will act as fresh air intakes, and the ventilation shafts will act as the return air exhaust via the “central ventilation inclined shaft” and the “east ventilation inclined shaft”. The proposed surface locations to the “central ventilation inclined shaft” will be close to the industrial yard, and the “east inclined shaft” entrance will be located at the east ventilation shaft square yard. The main and auxiliary inclined shafts along with the return air shafts will service the mine for its entire life.

Development mining face ventilation : The development roadways will be developed individually in a single driven roadway face. A ventilation fan will be installed in the intake roadway. The developing face will be ventilated by means of an auxiliary fan and ventilation ducting air under positive pressure. The return air (from the mining faces) travels along the roadway to the return roadway.

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Chamber ventilation : The chambers for magazine, locomotive maintenance and charging, and mining district substation are planned to be ventilated independently. The return air from these chambers will flow into the return air roadway which connects to the ventilation shaft.

Underground ventilation facilities and structures : Underground ventilation installation and structure include ventilation doors, regulator, seal, overcast structures, and wind measurement (ventilation) stations. These facilities and structures ensure reliable air flow along the required roadway routes. Careful management and maintenance of these items is needed to ensure safety and production.

Ventilation equipment and reversed wind : the centre ventilation shafts have been equipped with, two axial flow fans with the type of FBCDZNo15B, one for running, another one for back-up. The east ventilation shafts have been equipped with, two axial flow fans with the type of FBCDZNo14B, one in operation, with the second fan used for back-up. The power of each of the motors is 45kW. For fire fighting, both of the axial flow fans enable the ventilation flow to be reversed within 10 minutes while retaining 40% of the normal airflow.

9.1.2 Dust Control

Dust is a variety of coal, rock or mineral particles generated by the mining process. Coal mines usually produce coal dust and rock dust. The two key dust hazards are coal dust explosions and long-term inhalation of dust by the underground workers. It can cause various health risks such as silicosis, and other coal induced lung diseases. Meanwhile, previous testing of the coal dust from the coal mine displays explosive properties. The Chinese regulations require implementation of a series of measures for controlling coal mine dust as follows:

The coal dust explosive testing must be identified for every level extension project. It is commissioned by the government to a qualified institute, and the results will report to the coal safety supervision agencies for registration. The mine should take measures accordingly for the coal dust control.
Ventilation is a common way of diluting dust. The minimum wind speed required for diluting dust is 0.25 ~ 0.5 m/s, and the best speed is 1.5 ~ 2.0 m/s. Wind speeds must be kept below 15 m/s to avoid generation of additional dust.

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Clean up spilled coal underground, and clean and wash the roof and rib of roadways regularly. Establish underground sprinkler water systems, and the spray, sprinkling, and dust removal equipment should be put in the charge of a specially appointed person.
Coal dust explosion-proof facilities will be installed between places with explosive danger. These include suspended water bags.
Sprays will be installed for air-cleaning in the main roadway and at development and mining faces. The sprays should form a sufficient water curtain over the whole section of roadway.
Regularly inspect coal dust concentrations.
Personal protective measures are taken for those who contact with dust.
Establish dust-proofing in the mine surface production systems.

9.1.3 Gas Disaster Prevention

The mine is defined as a low gas mine in the Extension Preliminary Design. The gas relative and absolute emission is 2.18 cu.m/t and 8.41 cu.m/min respectively. However, significant amounts of gas will still be desorbed during the mining process so rigorous measures of gas control will be taken, including:

Prevent accumulation of excessive amounts of gas developing in the longwall face.
Establish a methane degasification system.
Improve the ventilation system and strengthen the ventilation management of the developing and mining faces.
Equip with a safety monitoring system.
Strict control of flammables, explosives and detonators. Design the underground magazine chamber, locomotive maintenance charging chamber, and other special chamber in Chinese design code.

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Prevent from electrical sparks and friction caused by static electricity.

9.1.4 Fire Prevent and Extinguishment

Parts of the coal outcrop and the shallow regions of the mineable coal seams in the mining are have effectively been burnt as a result of previous mining activities and are generally referred to as the “burnt zone”.

The coal at the Project has a low propensity to spontaneously combust. To prevent fire underground the Extension Preliminary Design and the Comprehensive Safety Status Assessment Report list the following controls.

Prohibited tobacco and ignition underground.
Speed up the degree of face advance, to prevent spontaneous combustion of coal remaining in the goaf. On retreat of the coal face, once mining is completed, area should be immediately sealed, thereby restricting air flow and also the reduction of Air Leakage, to avoid spontaneous combustion of goaf area.
Timely removal of the floating coal in the roadway. Roadways are supported by incombustible material.
Regular checks of ground for splitting and potential collapsing situations, and timely closure of mined out areas. Surface subsidence to be backfilled in time to prevent air leakage to the mined area, therefore eliminating the potential for oxygen enriched environment which would increase potential for spontaneous combustion of remnant coal in the goaf.
Install fire fighting equipment at pit bottom area, mechanical and electrical chambers, parking lots and roadways near mining faces, while enhancing high-voltage underground electrical and network management and maintenance, to avoid short-circuit and cable insulation damage, which can cause flash incidents (sparking potential from severed, live electrical cables).

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Establish ventilation flow to the reversed system. Underground staff must be equipped with self-rescuer. Improve mining recovery and use a high speed recovery rate such as ADFS. This limits the time that coal is exposed to the atmosphere, reducing coal heating.
Enhance ventilation management, reduce the amount of air leakage and make it easier to isolate sections of the ventilation network from each other.
Continuous monitoring.

9.1.5 Mine Water Control

The normal water and maximum water discharge has been calculated in the Extension Preliminary Design as 743 m[3] /d and 1120 m[3] /d respectively. The following controls will be deployed:

Coal pillars will be left on both sides of goaf area, “Burnt Zone”, river bed, mining levels, and boundary of mining district and the mine.
Roadway development follows the principles of “prior to developing to detect any potential water in doubt by advanced drilling”, especially, developing roadways under the bed of surface rivers.
Established an underground drainage system including the pump station, water storage sumps, ditches, drains and other drainage facilities.
Ensure adequate pumping capacity, with redundancy for maintenance/ breakdown.
Advanced drilling for water in the roadway that may encounter faults. Establish preparation and filling drainage design for banning underground water.
Prevent water inflow from the fractured sandstone roof. Dewater the old mining goafs (if present), and surface water.

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9.1.6 Mine Safety Testing Equipment

The installation of the following mine monitoring and safety equipment is required:

Instruments for mine ventilation measurement;
Mine methane and other gas detection instruments and equipment;
Mine total dust and respirable dust inspection testing instrument;
Mine pressure and geological survey instruments and equipment;
Mine fire detection and fire extinguishing equipment;
Mine Rescue Equipment.

9.1.7 Mine Rescue Team

The Project does not plan to establish a mine rescue team, but will provide the necessary equipment onsite. A rescue team from Arkesu City (Xinjiang Mine Rescue Basement No. 3 Team) will be available for mine rescue at the Project.

MMC sighted the mine rescue service agreement copies and notes that the valid date is from 1st January 2010 to 31st December 2010, and the signed date is at 1st June 2010. MMC suggest that the mine make the rescue agreement to be completed with an affective valid duration.

9.1.8 Mine Safety

MMC comment points:

Visual safety inspection of the project by MMC was conducted as part of the several site visits undertaken throughout 2010. Safety measures and practice in the mine is generally adequate to Chinese regulation and suitable for the Baicheng mine operation. MMC suggest the following:

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Gas and dust testing regularly with Chinese regulation:

Implementation of explosion retarding devices, such as water barriers and blast doors, and the use of defensive measures such as stone dusting of exposed coal surfaces such as the ribs and roof (covering with non explosive material such as lime dust).

Due to drilling and blasting mining practices, measures should be taken to restrict access to, monitoring and cataloguing of the magazine materials so that they are managed carefully.

Advices that good management will be needed to prevent any accidents as a result of spontaneous combustion, CO poisoning from the existing ‘Burnt Zone” and flooding as a result of water accumulating in the original burnt zone area, or inrush from previously mined out areas.

10 ENVIRONMENT HEALTH AND SAFETY

10.1 Outline

Environmental Resources Management Shanghai Limited (ERM) was commissioned by Runge Limited to conduct an environmental, occupational health, safety and social (EHSS) compliance audit (“the Audit”) of the Baicheng Mine and its associated facilities located in Baicheng County, Aksu Prefecture, Xinjiang Uygur Autonomous Region, PR China. Annexure B shows the photo log of the site visit.

The Mine is located in a gully area at the southern foot of the Tianshan Moutains and is approximately 39 km north of downtown Baicheng County. Mining activities at the Mine could date back to 1958, when the mine belonged to the Public Security Department of the Xinjiang Uygur Autonomous Region. Baicheng Prison was located on the mining area and prisoners were required to work in the mine. The Baicheng Prison was then relocated and the mine was sold to a private company and renamed to the Baicheng Wenzhou Coal Mine Development Company No. 1 Mine No. 3 Pit in 2004.

Historically, the production capacity of the mine ranged between 15 ktpa to 90 ktpa. According to the site management, the actual production capacity of the Mine was 90 ktpa when it was developed in 1985. When an EIA was prepared for the Mine in 2007, the designed capacity was increased to 210 ktpa. Annual actual production since 2004 was reported to be around 200 ktpa.

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The assets to be assessed under the scope of this review are exclusively determined in Table 10-1 below.

TABLE 10-1 BAICHENG PROJECT – RELEVANT ASSETS REVIEWED

Asset Name	Mining Licence	Validity	Area
Baicheng Wenzhou	C6500002009101130052982	28/10/2009 –	5.9178 km2
Coal Mine No. 1		28/11/2017
Mine No. 3 Pit

ERM completed a reconnaissance survey of the sites, facilities and adjoining land as well as a review of available documents pertaining to EHS issues. Interviews were conducted with onsite personnel and relevant government authorities (via telephone call).

The respective site inspections where conducted by Mr. Bin Xu and Ms. Minlei Du of ERM from the 28th to the 30th October, 2010.

The scope of work delivered by ERM comprises an Environmental, Health and Safety Compliance Audit of the Mine, including:

Project risks arising from environmental, social, and health and safety issues;
Any non-governmental organisation impact on sustainability of mineral and/or exploration projects;
Compliance with Chinese laws, regulations and permits related to environmental, health and safety issues;
Payments made to local government authorities as follows:
to the local Work Safety Bureau in the form of a safety deposit;
to the Land and Resources Bureau in the form of an ecological rehabilitation deposit;
Environmental liabilities of its projects or properties related to temporary shut down or permanent shut down penalties and groundwater and soil contamination;

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The Mine’s historical experience of dealing with Chinese laws and practices, including management of differences between national and local practice; and
The Mine’s historical experience of dealing with concerns of local governments and communities on the sites of its mines, exploration properties, and relevant management arrangements.

10.2 Scope of Activity

This report is the result of applying scientific principles and professional judgments to certain facts. Professional judgments expressed herein are based on factual information available within the limits of the existing data, scope of work, budget and schedule. To the extent that more definitive conclusions are desired by the client than are warranted by the currently available facts, it is specifically ERM’s intent that the conclusions and recommendations stated herein will be intended as guidance and not necessarily as a firm course of action, except where explicitly stated as such. We make no warranties, expressed or implied, including, without limitation, warranties as to merchantability or fitness of the property for a particular purpose. In addition, the information provided in this report is not to be construed as legal advice.

No environmental sampling was undertaken as part of this compliance review.

10.3 Limitations of Compliance Audit

This review conducted by ERM covers environmental, occupational health and occupational safety compliance and performances applicable to the above-ground installations. The review of safety features of underground installations is covered in Chapter 9 – Mine Safety of this Report. Due to the heavy snowfall shortly before the site visit, most of the site surface was covered with snow during ERM’s site visit. Evidence of surface soil contamination may not have been identified by ERM during the site visit. Due to time limitations and road conditions, the areas concerning potential land subsidence could only be observed from a distance and were not accessed. The assessment of major social issues was performed mainly based on document review and description by site management.

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10.4 Overview of Environment and Social Setting

10.4.1 Environmental Setting

The project is located in Baicheng County, Aksu Prefecture in the west of Xinjiang Uyghur Autonomous Region, PRC. Aksu Prefecture covers an area of 13,130,000 km[2] and is surrounded by the Tianshan Mountains in the north and the Takla Makan Desert, the biggest desert in China, in the south. Aksu is dry in climate due to lack of precipitation, however, it has the richest water resource in Xinjiang as the surface water in this area is supplemented by melted snow or glaciers from the Tianshan Moutains. Annual average temperature ranges from 9.9˚C to 11.5˚C, while precipitation is low reaching 42.4 mm to 94.4 mm annually.

The Mine is located in a remote mountainous area with an altitude around 2,443 m to 2,258 m. According to its Environmental Impact Assessment (“EIA”) report, the nearest surface water body is the Shushan River, which flows across the mine. It originates from snow and the glaciers from the Tianshan Mountains, flows from north to south into the Baicheng Basin and disappears into the ground. It supplements the Taileweiqiuke River in the form of phreatic water. Surface water quality monitoring conducted on the 22nd January 2007 by the EIA preparation institute indicated that the water quality of the river met the quality standards for a Class II water body under the Environmental Quality Standard for Surface Water (GB3838-2002). A Class II water body in GB3838-2002 is defined as Class I protection area for drinking water sources, habitats for rare aquatic life, spawing sites for fish and shrimp and breading areas for young fish.

10.4.2 Social Setting

Aksu Prefecture has a population of approximately 2.5 million inhabitants. The population is mostly comprised of Uyghur (approx. 73%), Han (approx. 26%) and other ethnic groups. The economy of Aksu is mostly agricultural, with cotton as the main product. The local communities around the Mine consist of Uyghur people, who depend mainly on animal husbandry as the major source of income.

There was no record of public opposition to the operations of the Mine disclosed in the scope of this investigation. As such, the community presents no identified risk to the continuity of operations.

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10.5 Overview of Main Regulatory Requirements

The Mine operations are regulated by national EHS laws and regulations and local regulations and standards.

The project permits were granted by the Xinjiang Uyghur Autonomous Region. Enforcement agencies include the Aksu Prefecture Environmental Protection Bureau, Safety Bureau, Water Bureau, Land and Resources Bureau and the Occupational Health Bureau.

The main regulatory requirements applicable to the assets are detailed in the sections below.

10.6 Review of Findings

The main findings of ERM’s Environmental, Health, Safety and Social review of the Mine are:

The degree of regulatory compliance of the various assets is generally limited to that required to secure a Production Safety Permit that enables the assets to renew operating licences and purchase explosives.
ERM has identified various risks regarding environmental, occupational health and safety presently associated with the assets. Most importantly, the facilities do not hold all the valid environmental, health and safety approvals and permits. As such, the relevant authorities have the ability to halt operations until the outstanding approvals and permits are obtained, or upon repeated notification of non-compliance with these requirements could request the permanent shut down of the facilities. While there is a low likelihood of this occurring, it would be advisable to obtain the outstanding permits and approvals in a timely manner.
The environmental mitigation measures defined in the EIA Report and further confirmed in the related approval document were generally not implemented on the Site. An environmental Completion Acceptance Inspection (CAI) had not been conducted to confirm the compliance status with the EIA approval and other applicable requirements.
Environmental monitoring has not been completed during operation of the assets. As such it is difficult to determine whether the Site’s pollutant emissions meet the applicable standards.

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Although the majority of non-compliances and risks may not induce an immediate shut-down of the operation or business discontinuity, and may result in fines below the material threshold defined in this report, their accumulation may result in a cumulative impact that translates in high or even material risk to the assets.
Safety risk deposit was reported to be fully paid as per the requirement of Baicheng County Coal Industry Management Bureau. The amount paid was considered insufficient as per the applicable national regulation.
Fire-fighting design approval or fire-fighting completion inspection approval has not been obtained from the fire-fighting authority for the Site.
An Occupational Disease Hazard Pre-Assessment report and an Occupational Disease Hazard Control Effect Assessment report have not been prepared for the Site.
The suitability of the safety measures implemented in the operations conducted at the Site is not clearly established through regulatory compliance and a documented management system. In case of an accident, this could increase the liabilities of the Company.
Evidence of phased implementation of rehabilitation measures at the Site was not observed. Field efforts to implement soil and ground water protection and rehabilitation measures established in corresponding reports were not implemented at the time of site visit.

10.7 Risk Assessment

ERM Professionals have determined the risks associated with the assets using a ranking system presented in Table 11-2 below. Risks are measured based on ERM professional judgement with reference to the criteria established. Where insufficient information was available at the time of the review to rank the risk using the established criteria, such risks have been labelled as “undetermined”.

ERM assumes that such risk may occur under certain circumstances associated with the activities conducted at the asset sites reviewed.

Risks are broadly defined as Material Issues and Key Issues. These terms are defined as follows, and applied accordingly throughout the report to ERM’s findings. The full risk assessment is shown in Annexure D , together with suggested mitigates.

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TABLE 10-2 BAICHENG PROJECT – ENVIRONMENTAL HEALTH, SAFETY AND SOCIAL REVIEW RISK RANKING

Material	Material	Issue with estimated direct cost of RMB5 m or more; or that may result in immediate shutdown of facility or operation.
KEY ISSUES	High	Permitting/legal non-compliance or other risk that may affect business continuity if not addressed in the short-term Community, Government, NGO, or Media concern that if not addressed may affect business continuity International Media Coverage
	Medium	Permitting/legal non-compliance or other risk that may result in fines but is unlikely to affect business continuity Community, Government, NGO, or Media concern raised by a majority of the population, that if not addressed may result in temporary shut-down or delays National Media Coverage
	Low	Minor non-compliance and/or risk that in isolation does not affect the business continuity in the short-term. Noted for performance improvement Isolated concerns from a small number of local residents, NGOs, etc. Local media coverage

11 PROJECT RISK AND OPPORTUNITY SUMMARY

11.1 Risk Summary

Mining is a relatively high risk business when compared to other industrial and commercial operations. Each coal seam within the mine has unique quality characteristic and response during mining and processing which can never be wholly predicted. MMC s review of the assets indicate project risk profiles typical of mining projects at similar levels of resource estimation, mine planning and project development. During its review, MMC did not discover any critical or “fatal” project flaws.

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MMC has classified Risks for the projects based on the general mining industry definition such as listed below. MMC notes that in most instances it is likely that through provision of further documentation and additional technical studies these risks will be mitigated.

TABLE 11-1 OVERALL RISK ASSESSMENT

		CONSEQUENCE OF RISK
Likelihood of Risk
(within 7 years)	Minor	Moderate	Major
Likely	Moderate	High	High
Possible	Low	Moderate	High
Unlikely	Low	Low	Moderate

H – High Risk: This implies that there are key project parameters as presented in the current documentation, which if uncorrected, will have a material effect (for example >15%) on the project cash flow and performance.

S – Significant Risk: This implies that there is a danger of failure of a critical project parameter as presented in the current documentation, which if uncorrected, may have a material effect (for example 10 to 15%) on the project cash flow and performance unless mitigated by some corrective action.

M – Moderate Risk: Implies a summation of factors, which if uncorrected, could have a significant effect (>10%) on the project cash flow and performance unless mitigated by some corrective action.

L – Low Risk: Implies that if some factors are uncorrected, they will have little or no effect on project production rates or project economic performance.

TABLE 11-2 BAICHENG PROJECT – PROJECT RISK SUMMARY

Risk
Ranking	Risk Description and Suggested Further Review	Mitigant	Area of Impact
H	Geological and Geotechnical issues:Complex	Further study required for	Operating and Capital Costs
	geology and mining conditions, inclusive of vertical	ongoing management as the mine
	seams, areas of spontaneous combustion, partial	is developed.	Mining methods and scheduling
	to full seam extractions in proximity to adjacent
	seams along with the interaction of multiple mining		Coal Quality
	methods inducing different stress regimes and
	operating within difficult strata control conditions		Safety
	may result in a complex mine development and
	scheduling process

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Risk
Ranking	Risk Description and Suggested Further Review	Mitigant	Area of Impact
M	Environmental and Safety Approvals:The	Undertake an EHSS audit and	Environment, health and safety
	Project currently does not comply with all	rectify all non compliance issues
	regulatory EHSS requirements. The maximum	in a timely manner.	Risk of punitive actions from
	penalty for such non compliance includes fines and		authorities.
	thepotential haltingof operations.
M	Operating Profit Margins:The forecast increase	Observing market coal price	Project cash flow
	in production costs (associated with the 900 ktpa	fluctuations and establish long
	mine plan) will make the Mine more sensitive to	term coal sale contracts if
	variations in coalprice.	deemed appropriate.
M	Licensing:Baicheng requires a new mining	Successfully complete the	Mine life
	licence to access resources below its current	relevant approvals process for
	mining elevation limits and an associated licenced	the 900 ktpa mine plan.	Production capacity
	production increase to achieve a coal production of
	900 ktpa.
M	Spontaneous Combustion:There is a known	Careful monitoring and	Safety
	history of spontaneous combustion at the Mine.	management.
			Operating and capital costs
			Miningschedule
M	Subsidence:Subsidence has previously occurred	Careful monitoring and	Operating and capital costs
	and may worsen with further mining activities	management
			Mining schedule
			Closure Costs
M	Water Flooding:Flooding may occur from	Careful monitoring and	Underground mining and
	surrounding Quaternary aquifers of the nearby river	management	development area
	through unidentified faults and paleochannels and
	communication from subsidence cracks.
M	Water Inrush potential:There is a risk of	Ongoing management will	Safety
	uncontrolled water in-rush as water is known	be required to ensure that the
	to have accumulated in areas of spontaneous	current mine does not breach the	Underground mining and
	combustion areas andpreviouslymined areas.	old mine workings.	development area
M	Coal dust/gas explosion:A build-up of explosive	Adequate ventilation, ongoing	Safety
	gasses may lead to a gas explosion. This may	monitoring of gas levels, limiting
	stir up coal dust and lead to further coal dust	coal dust build-up, hanging water	Underground mining and
	explosions.	bags, stone dusting.	development area
M	Incendive Sparking Potential:A number of stone	Complete appropriate testing	Safety
	splits have been identified within the coal seams.	to determine the level of risk,
	If these splits have high concentrations of silica,	and develop monitoring and	Mining and development area,
	there is a potential for sparking to occur as they are	management plans to manage the	as well as abandoned roadways
	mined. This can potentially ignite pockets of gas	risk.
	which mayrapidlyescalate.
M	Coal Seam Caving Potential:The STCC methods	Better understanding of	STCC face and production rates
	require the upper levels of the coal to cave to	lithological condition of the
	enable recovery of the coal. If the coal caving	overburden, carefully control top
	properties are not favourable it may affect coal	coal caving procedures.
	production rates and overall coal recovery.

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Risk
Ranking	Risk Description and Suggested Further Review	Mitigant	Area of Impact
M	Roof Hang-ups:As the STCC units progress in	Better understanding of	STCC face and production rate
	the coal seam, the coal roof should regularly cave	lithological condition of the
	behind the advancing unit. If the coal roof does	floor, careful management of
	not regularly cave, it may slow the advance due	STCC shields.
	to the increase stresses applied to the supports by
	the competent roof strata acting as a counter lever
	above the roof supports.
M	Operating Costs:The Feasibility Study and	Completion of a detailed mine	All
	the Mining Extension Design provided are not a	planning, scheduling and
	detailed mine planning documents according to	costings studies will increase the
	western standards and only consider costs on a life	confidence in all aspects of this
	of mine basis. Potential increases to operating costs	project.
	may potentially arise from unforseen operating
	complexities.
M	Production Rate:Steeply dipping coal seams,	Careful management of mining	Production schedule
	complex mine plan and varying seam thicknesses	operations.
	may influence the ability to achieve the forecast
	production rate.
M	Schedule:The schedule is based on broad planning	Prepare a detailed mining plan.	Production schedule and
	assumptions without detailed analysis on mining		operating costs
	block characteristics.
M	Seam Thickness Variability:Variability in seam	Further drilling.	Operating costs and mine plan
	thickness may impact upon mining methods and
	therefore costs.
M	Coal Quality Variability:Variability in coal	Further drilling.	Project revenue
	qualitymayimpact the coal saleprice.
M	2010 Low Production Rate:production rate of	Detailed mining operations	Expansion capacity and Project
	87,000 tonnes was recorded for the year up until	review to be carried out to	revenue
	end November, much lower than the mining licence	justify low production rates and
	capacity of 210,000 tpa	potentially highlight problem
		areas inproduction
L	Location:Area is located in dry arid climate zone	Better understanding of the	Project costs.
	and seismically active area.	operating conditions and
		construction of suitable
		infrastructure to meet those
		conditions

11.2 Opportunity Summary

MMC has identified various opportunities which warrant further investigation in future studies.

Approval of a new mining licence to develop an estimated that 32 Mt of Probable Reserves (elevation 2,060 m to 1,500 m) that are below the current mining Licence.

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An estimated 40 Mt of Inferred Resources lie beneath the current mining licence, with increased confidence attained through additional drilling these some the Inferred Resources may be converted to Indicated Resources and therefore, following additional mine planning may be converted to Probable Coal Reserves.
Additional Drilling to the Eastern extents of the mine could increase confidence level (Inferred and Indicated Resources) of Seam 5, Seam 6, and Seam 7. There are currently no Points of Observation in this area.

12 ANNEXURE A – QUALIFICATIONS AND EXPERIENCE

Philippe Baudry – General Manager – China and Mongolia, BSc. Mineral Exploration and Mining Geology, Assoc Dip Geo science, Grad Cert Geostatistics, MAIG

Philippe is a geologist with over 14 years of experience. He has worked as a consultant geologist for over 6 years first with Resource Evaluations and subsequently with Runge after they acquired the ResEval group in 2008. During this time Philippe has worked extensively in Russia assisting with the development of two large scale copper porphyry projects from exploration to feasibility level, as well as carrying out due diligence studies on metalliferous projects throughout Russia. His work in Australia has included resource estimates for BHPB, St Barbara Mines and many other clients both in Australia and overseas on most styles of mineralisation and metals. Philippe furthered his modelling and geostatistic skills in 2008 by completing a Post Graduate Certificate in Geostatistics at Edith Cowan University. Philippe relocated to China in 2008 and has since project managed numerous Due Diligences and Independent Technical Reviews for private acquisitions and IPO listings purpose mostly in China and Mongolia.

Prior to working has a consultant Philippe spent 7 years working in the Western Australian Goldfields in various positions from mine geologist in a large scale open cut gold mine through to Senior Underground Geologist. Before this time Philippe worked as a contractor on early stage gold and metal exploration projects in central and northern Australia.

With relevant experience in a wide range of commodity and deposit types, Philippe meets the requirements for Qualified Person for 43-101 reporting, and Competent Person (“CP”) for JORC reporting for most metalliferous Mineral Resources. Philippe is a member of the Australian Institute of Geoscientists

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Dan Peel – Operations Manager – Beijing, Bachelor of Engineering, Mining – University of New South Wales, Unrestricted Quarry Manager (WA), Grad. Cert. Applied Finance – Kaplan, Diploma (Bus), Member of Australasian Institute of Mining and Metallurgy

Dan has worked as a mining engineering consultant with MMC for three years. Since joining MMC, Dan has completed a range of projects including technical valuations, lifeof-mine designs and scheduling, pit optimisation, development of economic models, mine reserves estimation and reporting.

Prior to joining MMC, Dan worked with an open cut mining contracting firm for five years where he gained significant open cut metal mining experience. During this period, Dan developed operational, engineering and project management expertise. Dan’s roles included Quarry Manager of the BHPB Jimblebar iron ore mine and Quarry Manager/Mining Superintendent of the Mt Gibson Koolan Island iron ore mine. Dan also worked at the Plutonic and Cuddingwarra gold mines and the Wodgina tantalum mine.

With relevant experience in a wide range of commodity and deposit types, Dan meets the requirements for Qualified Person for 43-101 reporting, and Competent Person (“CP”) for JORC reporting for both metalliferous and coal open cut Reserves. Dan is a member of the Australian Institute of Mining and Metallurgy.

Jeremy Clark – Senior Consultant Geologist – Beijing, BSc. with Honours in Applied Geology, Grad Cert Geostatistics, MAIG

Jeremy has over 9 years of experience working in the mining industry. During this time he has been responsible for the planning, implementation and supervision of various exploration programs, open pit and underground production duties, detailed structural and geological mapping and logging and a wide range of experience in resource estimation techniques. Jeremy’s wide range of experience within various mining operations in Australia and recent experience working in South and North America gives him an excellent practical and theoretical basis for resource estimation of various metalliferous deposits including iron ore and extensive experience in reporting resource under the recommendations of the NI-43-101 reporting code.

With relevant experience in a wide range of commodity and deposit types, Jeremy meets the requirements for Qualified Person for 43-101 reporting, and Competent Person (“CP”) for JORC reporting for most metalliferous Mineral Resources. Jeremy is a member of the Australian Institute of Geoscientists.

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Michael Johnson – Mining Consultant, Runge – Bachelor of Applied Science (Geology), Graduate Diploma of Engineering (Mining), Member of Australasian Institute of Mining and Metallurgy

Michael has over 10 years experience as a geologist, planning engineer and mining consultant. He has gained valuable experience in many technical facets of underground mining, including geology, strata control, mine planning and scheduling, and underground coal mining feasibility studies. Michael has worked on coal projects and operations in Australia, Canada, China, New Zealand, Indonesia, Philippines and Russia.

With relevant experience in coal geology and underground engineering, Michael meets the requirements for Qualified Person for 43-101 reporting, and Competent Person (“CP”) for JORC reporting for coal Resources and underground Reserves. Michael is a member of the Australian Institute of Mining and Metallurgy.

Zhao Hong, MEng, Senior Coal Geologist, Minarco-Mineconsult

Zhao is a coal geologist and a registered qualified valuator of mineral rights in China. He graduated with an engineering bachelor degree in coal geology and exploration from Huai Nan University of Mining and Technology in 1985 and was granted a engineering masters degree from Beijing Graduate School, China University of Mining and Technology with a specialty in coal geology in 1990. He has been engaged in coal mining geology at the Fengfeng Coal Mining Bureau and Beijing Coal Mining Bureau. And he did some scientific study on coal strata and environment in the Chinese Academy of Sciences and co-operated with foreign scholars for many years. From 2003 onward, he has been working as a geologist and mining consultant performed more than 60 projects in China and international mining consulting companies.

Kevin Qu – Senior Mining Engineer – B.E. Hebei Mining College, Handan City, China

Kevin is a senior coal mining engineer with more than 25 years experience on mining technology, project development and project management. He received his undergraduate B.E. degree in Mining Engineering from Hebei Mining Institute, Handan City, Hebei Province, P.R. of China. With more than 25 years of coal industrial experience, Kevin is very knowledgeable of the regulations and policies in coal mining industry of China.

Kevin recently participated in business development and management for quite a few mine projects in Chinese provinces of Shanxi, Henan, Guizhou, Inner Mongolia, and Xinjiang Uygur Autonomous Region etc. Particularly, he has worked as senior mining engineer and project manager in Gaohe Coal Mine, Chief Mining Engineer in Dengjiazhuang Coal Mine, as well as Mining Engineer of mining system designer in Jialequan Coal mine.

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APPENDIX VI

Wenqi Zhang – Project officer/Geologist, Master of Geology, Peking University, China

Wenqi has graduated from the Peking University with a masters degree in geology in 2007. He did mineral research with the university prior to joining Runge over 2 years ago. During his time working for Runge Wenqi has been involved with numerous project reviews from exploration to operating assets both for metals and coal. Recent commodities covered by Wenqi in China have included gold, iron, molybdenum, phosphate, serpentine and coal. Through his technical work Wenqi has gained a solid understanding of exploration data management and requirements to meet the recommendations of the JORC Code.

Company’s Relevant Experience

Minarco-MineConsult, part of the Runge Group, is a premier international consulting and engineering firm. It provides a full range of services from pure technical consulting through to strategic corporate advice. And undertake assignments on mining projects covering a range of commodities and countries, serving clients in most of the countries around the West Pacific Rim region.

Minarco-MineConsult maintains a full time staff of qualified specialists in the fields of mining engineering, geology, process and metallurgical engineering, environmental and geotechnical engineering, and environmental economics.

Minarco-MineConsult typically completes over 200 assignments per year and has over 300 professionals (through its parent Runge Group) available in disciplines including:

Mining Engineering;
Minerals Processing;
Coal Handling and Preparation;
Power Generation;
Environmental Management;

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APPENDIX VI

Geology;
Contracts Management;
Project Management;
Finance;
Commercial Negotiations.

The roots of Minarco-MineConsult were established in the Australian mining industry. Minarco-MineConsult is committed to compliance with the codes which regulate Australian corporations and consultants and has established an International business which has continued to give its clients and those that rely on its work the confidence that can be associated by the use of the relevant Australian codes.

These codes include:

The Australian Corporation Law;
The Australian Institute of Company Directors Code of Conduct;
The Securities Institute of Australia Code of Ethics;
The Australasian Institute of Mining and Metallurgy Code of Ethics;
The Australasian Code for Reporting of Exploration Results, Mined Resources and Ore Reserves (The JORC Code).

Minarco-MineConsult has conducted numerous mining technical due diligence programs and reporting for IPO’s and capital raisings over the past six years, with involvement in projects raising a total of over $US10 billion of capital. This and other work is summarised in Table A1 .

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APPENDIX VI

TABLE A1 – MINING RELATED IPO AND CAPITAL RAISING DUE DILIGENCE EXPERIENCE

2011 King Stone Energy Group., Ltd ; Competent Persons Report of Coal Resources and Reserves under JORC and Independent Technical Review for inclusion in a HKSE Circular to support acquisition of 2 underground coal mines in Shanxi Province, China.

2010 China Precious Metals Holdings Co., Ltd ; Competent Persons Report of Mineral Resources and Ore Reserves under JORC and Independent Technical Review for inclusion in a HKSE Circular to support the acquisition of multiple underground gold mining assets in Henan Province, China.

2010 Century Sunshine Group Holdings Limited ; Competent Persons Report of Mineral Resources and Ore Reserves under JORC and Independent Technical Review for inclusion in a HKSE Circular to support the acquisition of a serpentinite mining asset in Jiangsu Province, China.

2010 Doxen Energy Group Limited ; Independent Technical Review and estimation of Coal Resources under JORC for inclusion in a HKSE Circular to support the acquisition of a coal mining asset in Xinjiang Autonomous Region, China.

2010 Kwong Hing International Holdings (Bermuda) Limited ; Independent Technical Review for inclusion in a HKSE Circular to support a Very Substantial Acquisition.

2009 Metallurgical Corporation Of China Ltd (“MCC”) ; Independent Technical Review for inclusion in a Prospectus to support a stock exchange listing on the Hong Kong Stock Exchange.

2009 Nubrands Group Holdings Limited, Guyi Coal Mine ; Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by a listed Hong Kong Company.

2008 China Blue Chemical Limited , Wangji and Dayukou Phosphate Mines: Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by a listed Hong Kong Company.

2008 Kenfair International (Holdings) Limited , Shengping Coal Mine: Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by a listed Hong Kong Company.

2007 China Railway Company Limited , African Copper/Cobalt Assets: Capital raising for mining assets on the Hong Kong Stock Exchange. Preparation of CPR for planned IPO on the HKSE.

2007 Ko Yo Ecological Agrotech (Group) Limited Sichuan Phosphate: Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by a listed Hong Kong Company.

2007 Prosperity International Holdings Limited , Guilin Granite Project: Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by a listed Hong Kong Company.

2007 China Primary Resources – Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by China Primary Resources.

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2007 China Railway Company Limited , African Copper/Cobalt Assets: Capital raising for mining assets on the Hong Kong Stock Exchange. Preparation of CPR for planned IPO on the HKSE.

2007 Gloucester Coal Limited – Independent Technical Review for Australian Stock Exchange Scheme of Arrangement.

2007 Confidential Hong Kong Private Equity Partners – Independent Technical Review to support private equity capital raising to purchase lead/zinc mining assets in Tibet.

2007 Confidential International Investor – Independent Technical Review to support private equity capital raising to purchase iron ore assets in Hubei. Preparation of ITR.

2007 Whitehaven Coal Limited – Independent Technical Review for Australian Stock Exchange IPO.

2007 Confidential Privately Owned Coke Producer – Capital raising for purchase of Coal Mines and downstream coal washing, coke production and chemical production facilities. Preparation of CPR for planned IPO on the HKSE.

2007 China Molybdenum Group – Capital raising for large scale Molybdenum mine on the Hong Kong Stock Exchange. Preparation of CPR for IPO on the HKSE.

2007 Confidential International Investor – Independent Technical Review to support purchase of Gold Mine In Hubei Province.

2006 Excel Mining – Independent Technical Review for Australian Stock Exchange Scheme of Arrangement.

2006 Celadon Mining Investment Group (UK) – Capital raising for coal mine purchase in China and planned subsequent listing on AIM

2005 Yanzhou Coal Mining Company Limited – Independent Technical Review of coal projects to satisfy ongoing listing requirements of the HKSE and NYSE following IPO.

2004 Excel Mining – Independent Technical Review for Australian Stock Exchange IPO (current market capitalisation over $US1 billion)

2004 Excel Mining – Independent Market Review for Australian Stock Exchange IPO

2003 New Hope – Independent Market Review for Australian Stock Exchange IPO

2003 Confidential – Independent Market Review on 50 Mtpa operation in Kazakhstan for LSE listing (has not proceeded)

2003 Xstrata plc – Competent Person’s Report for London Stock Exchange Chapter 19 Report for Acquisition of MIM Assets including mines, rail and port review ($US2.5 billion)

2002 Xstrata plc – Competent Person’s Report for London Stock Exchange IPO ($US2.3 billion)

2002 Kaltim Prima, Indonesia – Independent Technical Review for advising project financiers to acquisition ($US445 million)

2001 Enex Resources – Independent Technical Review for Australian Stock Exchange IPO

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APPENDIX VI

13 ANNEXURE B – JORC RESERVE CHECKLIST

This table is a summary of Chapter 6 – JORC Coal Reserves. It has been included to ensure clear disclosure of JORC Coal Reserve estimation parameters.

TABLE 13-1 BAICHENG PROJECT – JORC RESERVE CHECKLIST

Section	Section	Comment
1.	Is the Reserve derived from JORC	The JORC Reserve estimate is derived from
	compliant Resource Statement?	a JORC compliant Coal Resource estimate
	Who are the competent persons?	signed by Mr. Michael Johnson (Runge Ltd,
		Senior Mining Consultant).
2.	What is the current project status?	The mine is currently operating. Mine
		expansion project is planned that will
		potentially increase the Licence capacity
		from 210 ktpa to 900 ktpa. The use of
		specialised equipment (STCC) is proposed
		to be employed along with the current ADFS
		mining to methods.
3.	What cut off parameters and physical	CAD program was used to optimise mine
	limits have been applied in estimating the	plan and layouts, within the known licence
	Reserves?	boundaries and areas of mining. Seam
		working sections and mining profiles were
		designed for each area of the mine and the
		mining methods. Stone dilutions have been
		incorporated into the workings sections. 10-
		20 m Barrier pillars where used to separate
		the mining areas. Recoveries range from 82
		to 100% dependent on district and mining
		method
4.	What mining and geotechnical	Geotechnical assumptions have been
	assumptions have been made?	considered in the design of the mine. Coal
		quality is as per the geological model
		combined with loss, dilution and moisture
		adjustments. Reasonable factors have been
		used for roof and floor loss, dilution and
		minimum coal parting thickness as well as
		diluting material properties.

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Section	Section	Comment
5.	Is there a metallurgical process used and	A screening process will be used to divide the
	what is suitability to the type of operation?	coal into 3 products. Reasonable assumptions
		have been applied to these calculations.
		Remaining stone has been added to product
		tonnes as dilution, and qualities have been
		weighted accordingly.
6.	How have the project capital, operating	These were derived from the Feasibility Study
	costs and royalties been derived?	Report as provided by the mine site personnel
		and compiled by the Exploration Design
		Institute of Hami Mining Administration
		Bureau
7.	What is the market demand and supply of	The coal price used in the Feasibility Study
	this commodity and what are the price and	was 460 RMB/t. MMC were informed that
	volume forecasts of the Reserves based	the current price of coal sold from the mine
	upon?	was RMB 420/t for fine and RMB 600/t for
		lump coal. The sale price of coal is reportedly
		directly linked to the market price. Volume
		forecasts were based on the Company’s
		planned production tonnes and were adjusted
		by MMC for reasonableness.
8.	Any other factors that may potentially	The Company plans to increase production for
	affect the viability of the project and the	210 ktpa to 900 ktpa. This is part of a mine
	status of titles and approvals required for	expansion process. This will be increases in
	the project?	production rates have been planned. Approvals
		are ongoing and require updating.
9.	What is the basis for the classification of	Classification of Coal Reserves has been
	the Coal Reserves and proportion of Coal	derived by considering the Indicated resources
	Reserves which have been derived from	and the level of mine planning. Probable
	Measured Coal Resources?	Reserves have been reported. Inferred
		resources have been excluded from the
		estimate. There are no Measured or Proven
		tones.
10.	Results of audits or reviews of Reserves	As per findings in this review, plus internal
	Statements	reconciliation and peer review.
11.	Relative accuracy and confidence of the	There is reasonable confidence in the accuracy
	Reserves Estimate	of the Coal Reserve estimate.

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APPENDIX VI

14 ANNEXURE C – RESERVE SUMMARY TABLES

TABLE 14-1 BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESERVES; CURRENT LICENCE +2060M ELEVATION (AREA A). CLASSIFICATION BY DISTRICT BY SEAM AS AT NOVEMBER 2010

JORC			Volume	Tonnes	ARD	Ash	Total Moisture	Specific Energy	Total Sulphur	Volatiles
Classification	District	Seam	(’000 m3)	(kt)	(g/cu.cm)	(ad) (%)	(ad)	(Qbdaf)	(%)	(daf)%
Probable	aww	10	130.6	221.0	1.69	41	0.76	26.84	0.38	33.21
Probable	aww	9	26.4	42.6	1.61	29.48	0.88	32.46	0.47	40.29
Probable	aww	8	38.5	55.4	1.44	25.09	2.38	31.15	0.29	35.96
Probable	aww	7	60.0	93.9	1.56	29.06	0.88	32.41	0.45	40.23
Probable	aww	5_6comp	156.1	206.4	1.32	20.5	1.59	31.96	0.3	34.47
	Sub-total		411.7	619.5	1.5	30.14	1.21	30.16	0.36	35.43
Probable	acw	10	217.3	356.4	1.64	35.81	0.82	28.76	0.4	34.93
Probable	acw	9	46.3	73.7	1.59	28.01	0.87	32.51	0.47	40.02
Probable	acw	8	104.4	152.6	1.46	31.45	1.59	31.84	0.34	37.91
Probable	acw	7	94.6	143.6	1.52	27.86	0.88	32.44	0.45	40.01
Probable	acw	5_6comp	345.2	486.7	1.41	37.31	1.04	26.02	0.22	27.83
	Sub-total		807.9	1,213.2	1.5	34.45	1.02	28.71	0.33	33.37
Probable	ace	10	213.1	311.7	1.46	32.24	1.01	30.43	0.4	37.04
Probable	ace	9	77.9	107.4	1.38	28.36	0.93	32.48	0.39	39.26
Probable	ace	8	94.6	132.7	1.4	33.56	1.46	31.67	0.43	39.67
Probable	ace	7	134.4	183.7	1.37	27.19	0.94	32.11	0.44	39.25
Probable	ace	5_6comp	339.2	482.2	1.42	35.29	0.87	26.87	0.19	28.06
	Sub-total		859.4	1,218.0	1.42	32.49	0.99	29.59	0.33	34.3
Probable	aew	10	94.5	120.8	1.28	19.96	1.43	32.74	0.32	37.37
Probable	aew	9	70.1	88.2	1.26	22.96	0.9	33.11	0.27	37.13
Probable	aew	8	45.3	66.9	1.48	25.44	2.88	29.81	0.26	38.74
Probable	aew	7	151.0	203.6	1.35	20.76	0.86	31.64	0.45	37.54
Probable	aew	5_6comp	470.1	645.3	1.37	29.66	0.95	30.42	0.18	31.82
	Sub-total		831.2	1,125.0	1.35	26.23	1.1	31.06	0.26	34.28
Probable	aee	10	665.3	833.1	1.25	17.05	0.8	33.87	0.46	36.81
Probable	aee	9	192.4	239.0	1.24	18.4	0.7	33.56	0.28	37.76
Probable	aee	8	184.3	270.5	1.47	24.91	1.26	33.53	0.21	37
	Sub-total		1,042.2	1,342.7	1.29	18.88	0.87	33.75	0.38	37.02
	Total		3,952.6	5,518.5	1.4	28.07	1.01	30.77	0.33	34.88

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TABLE 14-2

BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESERVES; CURRENT LICENCE +2060M ELEVATION (AREA A). CLASSIFICATION BY SEAM BY DISTRICT AS AT NOVEMBER 2010

JORC			Volume	Tonnes	ARD	Ash	Total Moisture	Specific Energy	Total Sulphur	Volatiles
Classification	Seam	District	(’000 m3)	(kt)	(g/cu.cm)	(ad) (%)	(ad)	(Qbdaf)	(%)	(daf)%
Probable	10	aww	130.6	221.0	1.69	41	0.76	26.84	0.38	33.21
Probable	10	acw	217.3	356.4	1.64	35.81	0.82	28.76	0.4	34.93
Probable	10	ace	213.1	311.7	1.46	32.24	1.01	30.43	0.4	37.04
Probable	10	aew	94.5	120.8	1.28	19.96	1.43	32.74	0.32	37.37
Probable	10	aee	665.3	833.1	1.25	17.05	0.8	33.87	0.46	36.81
		Sub-total	1,321.1	1,843.2	1.4	26.31	0.87	31.38	0.42	36.09
Probable	9	aww	26.4	42.6	1.61	29.48	0.88	32.46	0.47	40.29
Probable	9	acw	46.3	73.7	1.59	28.01	0.87	32.51	0.47	40.02
Probable	9	ace	77.9	107.4	1.38	28.36	0.93	32.48	0.39	39.26
Probable	9	aew	70.1	88.2	1.26	22.96	0.9	33.11	0.27	37.13
Probable	9	aee	192.4	239.0	1.24	18.4	0.7	33.56	0.28	37.76
		Sub-total	413.3	551.0	1.33	23.22	0.82	33.05	0.34	38.45
Probable	8	aww	38.5	55.4	1.44	25.09	2.38	31.15	0.29	35.96
Probable	8	acw	104.4	152.6	1.46	31.45	1.59	31.84	0.34	37.91
Probable	8	ace	94.6	132.7	1.4	33.56	1.46	31.67	0.43	39.67
Probable	8	aew	45.3	66.9	1.48	25.44	2.88	29.81	0.26	38.74
Probable	8	aee	184.3	270.5	1.47	24.91	1.26	33.53	0.21	37
		Sub-total	467.2	678.4	1.45	28.14	1.63	32.23	0.29	37.81
Probable	7	aww	60.0	93.9	1.56	29.06	0.88	32.41	0.45	40.23
Probable	7	acw	94.6	143.6	1.52	27.86	0.88	32.44	0.45	40.01
Probable	7	ace	134.4	183.7	1.37	27.19	0.94	32.11	0.44	39.25
Probable	7	aew	151.0	203.6	1.35	20.76	0.86	31.64	0.45	37.54
		Sub-total	440.1	624.9	1.42	25.53	0.89	32.08	0.45	39.01
Probable	5_6comp	aww	156.1	206.4	1.32	20.5	1.59	31.96	0.3	34.47
Probable	5_6comp	acw	345.2	486.7	1.41	37.31	1.04	26.02	0.22	27.83
Probable	5_6comp	ace	339.2	482.2	1.42	35.29	0.87	26.87	0.19	28.06
Probable	5_6comp	aew	470.1	645.3	1.37	29.66	0.95	30.42	0.18	31.82
		Sub-total	1,310.7	1,820.8	1.39	32.16	1.03	28.48	0.21	30.06
	Total		3,952.6	5,518.5	1.4	28.07	1.01	30.77	0.33	34.88

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APPENDIX VI

TABLE 14-3

BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESERVES; LICENCE EXTENSION AREA 1500M – 2060M ELEVATION (AREA B). CLASSIFICATION BY DISTRICT BY SEAM AS AT NOVEMBER 2010

JORC			Volume	Tonnes	ARD	Ash	Total Moisture	Specific Energy	Total Sulphur	Volatiles
Classification	District	Seam	(’000 m3)	(kt)	(g/cu.cm)	(ad) (%)	(ad)	(Qbdaf)	(%)	(daf)%
Probable	aww	10	69.0	116.7	1.69	40.91	0.76	26.88	0.38	33.24
Probable	aww	9	12.7	20.5	1.61	29.48	0.88	32.46	0.47	40.29
Probable	aww	8	23.4	33.8	1.44	25.08	2.38	31.15	0.29	35.95
Probable	aww	7	27.4	42.8	1.56	29.09	0.88	32.41	0.45	40.23
Probable	aww	5_6comp	99.6	130.1	1.31	19.28	1.5	32.3	0.27	34.42
	Sub-total		232.2	344.1	1.48	29.02	1.22	30.37	0.34	35.24
Probable	bww	10	209.3	353.5	1.69	40.56	0.76	27.01	0.38	33.39
Probable	bww	9	36.5	58.9	1.61	29.42	0.88	32.47	0.47	40.28
Probable	bww	8	81.2	117.1	1.44	25.33	2.35	31.18	0.29	36.04
Probable	bww	7	118.1	184.7	1.56	29.07	0.88	32.41	0.45	40.23
Probable	bww	5_6comp	493.3	634.2	1.29	18.06	1.32	32.66	0.24	34.24
	Sub-total		938.5	1,348.6	1.44	26.59	1.18	31.01	0.32	35.26
Probable	cww	10	26.1	43.9	1.68	39.83	0.77	27.32	0.38	33.7
Probable	cww	9	4.2	6.8	1.61	29.29	0.87	32.47	0.47	40.27
Probable	cww	8	18.5	26.8	1.44	26.09	2.25	31.27	0.3	36.3
Probable	cww	7	67.5	105.6	1.56	28.91	0.88	32.42	0.45	40.21
Probable	cww	5_6comp	295.5	384.1	1.3	19.94	1.34	32.09	0.25	33.9
	Sub-total		412.0	567.4	1.38	23.56	1.25	31.75	0.3	35.25
District	Sub-total		1,582.8	2,260.3	1.43	26.2	1.21	31.1	0.32	35.25
Probable	acw	10	212.2	347.5	1.64	35.26	0.82	28.93	0.41	35.05
Probable	acw	9	43.3	69.0	1.59	27.78	0.87	32.52	0.47	39.96
Probable	acw	8	101.4	148.3	1.46	32.07	1.55	31.88	0.34	37.89
Probable	acw	7	94.2	143.4	1.52	27.53	0.88	32.46	0.44	39.95
Probable	acw	5_6comp	339.8	476.8	1.4	36.91	1.04	26.23	0.21	28.01
	Sub-total		791.1	1,185.3	1.5	34.16	1.01	28.85	0.33	33.45
Probable	bcw	10	786.9	1,288.1	1.64	35.12	0.82	29.01	0.41	35.14
Probable	bcw	9	139.6	222.1	1.59	27.74	0.87	32.52	0.47	39.96
Probable	bcw	8	373.9	545.4	1.46	32.25	1.54	31.90	0.34	37.90
Probable	bcw	7	387.6	592.0	1.53	27.26	0.88	32.48	0.44	39.89
Probable	bcw	5_6comp	1,307.7	1,823.4	1.39	36.15	1.04	26.58	0.21	28.31
	Sub-total		2,995.9	4,471.3	1.49	33.78	1.01	29.01	0.33	33.56
Probable	ccw	10	378.9	615.7	1.62	34.65	0.84	29.24	0.41	35.46
Probable	ccw	9	72.1	113.8	1.58	27.8	0.87	32.51	0.47	39.97
Probable	ccw	8	227.7	332.0	1.46	32.3	1.49	31.92	0.35	38.15
Probable	ccw	7	375.8	573.5	1.53	27.3	0.88	32.47	0.44	39.89
Probable	ccw	5_6comp	1,156.0	1,612.9	1.4	35.63	1.06	26.91	0.23	28.87
	Sub-total		2,210.7	3,248.0	1.47	33.36	1.03	29.04	0.32	33.4
District	Sub-total		5,997.8	8,904.7	1.48	33.68	1.02	29	0.32	33.49
Probable	ace	10	223.8	328.6	1.47	32.59	1	30.35	0.4	37
Probable	ace	9	64.6	89.1	1.38	28.61	0.93	32.46	0.39	39.36
Probable	ace	8	88.7	123.8	1.4	34.12	1.36	31.82	0.44	39.71
Probable	ace	7	136.7	186.9	1.37	27.37	0.95	32.12	0.44	39.26
Probable	ace	5_6comp	344.6	484.9	1.41	33.23	0.87	27.64	0.19	28.69
	Sub-total		858.5	1,213.4	1.41	31.91	0.97	29.84	0.33	34.48
Probable	bce	10	979.5	1,434.4	1.46	31.91	1.03	30.44	0.39	36.96
Probable	bce	9	260.0	360.3	1.39	28.42	0.93	32.47	0.39	39.33
Probable	bce	8	302.7	423.8	1.4	34.02	1.37	31.82	0.44	39.68
Probable	bce	7	571.6	780.9	1.37	26.93	0.96	32.11	0.44	39.11
Probable	bce	5_6comp	1,346.0	1,866.8	1.39	30.63	0.88	28.73	0.19	29.63
	Sub-total		3,459.9	4,866.3	1.41	30.55	0.98	30.32	0.33	34.9

– 405 –

APPENDIX VI

COMPETENT PERSON’S REPORT

JORC			Volume	Tonnes	ARD	Ash	Total Moisture	Specific Energy	Total Sulphur	Volatiles
Classification	District	Seam	(’000 m3)	(kt)	(g/cu.cm)	(ad) (%)	(ad)	(Qbdaf)	(%)	(daf)%
Probable	cce	10	581.8	846.2	1.45	30.67	1.06	30.66	0.39	36.97
Probable	cce	9	211.7	296.2	1.4	28.02	0.92	32.52	0.39	39.28
Probable	cce	8	248.9	351.0	1.41	33.13	1.56	31.54	0.41	39.54
Probable	cce	7	494.6	673.6	1.36	25.23	0.93	32	0.44	38.69
Probable	cce	5_6comp	958.3	1,395.1	1.46	38.7	0.91	25.93	0.2	27.02
	Sub-total		2,495.5	3,562.3	1.43	32.81	1.01	29.3	0.33	33.84
District Sub-total			6,814.0	9,642.2	1.42	31.55	0.99	29.89	0.33	34.46
Probable	aew	10	82.5	105.2	1.27	19.86	1.46	32.75	0.31	37.42
Probable	aew	9	63.2	79.4	1.26	23.02	0.91	33.11	0.27	37.08
Probable	aew	8	35.8	53.1	1.48	25.14	3.01	29.57	0.25	38.77
Probable	aew	7	123.6	166.4	1.35	19.69	0.84	31.56	0.45	37.26
Probable	aew	5_6comp	347.8	480.2	1.38	30.82	0.96	30.11	0.19	31.55
	Sub-total		653.2	884.4	1.35	26.38	1.12	30.93	0.26	34.25
Probable	bew	10	343.5	442.6	1.29	21.43	1.38	32.49	0.33	37.37
Probable	bew	9	284.1	359.4	1.26	23.74	0.9	33.01	0.29	37.47
Probable	bew	8	167.7	246.4	1.47	26.11	2.77	29.95	0.27	38.79
Probable	bew	7	485.8	652.7	1.34	18.41	0.82	31.46	0.45	36.94
Probable	bew	5_6comp	1,340.3	1,859.9	1.39	31.88	0.97	29.87	0.19	31.39
	Sub-total		2,621.5	3,561.3	1.36	26.89	1.11	30.81	0.27	34.28
Probable	cew	10	136.1	179.0	1.32	23.76	1.28	32.06	0.35	37.28
Probable	cew	9	137.3	176.2	1.28	24.8	0.9	32.88	0.33	37.94
Probable	cew	8	91.0	132.1	1.45	27.89	2.47	30.37	0.31	38.94
Probable	cew	7	338.9	455.5	1.34	18.55	0.83	31.48	0.45	36.98
Probable	cew	5_6comp	756.9	1,054.1	1.39	33.51	0.98	29.28	0.18	30.61
	Sub-total		1,460.4	1,997.2	1.37	28.08	1.06	30.42	0.28	33.86
District Sub-total			4,735.2	6,443.0	1.36	27.19	1.1	30.71	0.27	34.14
Probable	aee	10	308.9	386.3	1.25	16.82	0.79	33.96	0.46	36.84
Probable	aee	9	92.3	114.6	1.24	18.2	0.69	33.59	0.28	37.76
Probable	aee	8	91.3	134.0	1.47	24.83	1.18	33.69	0.21	36.91
	Sub-total		492.6	635.1	1.29	18.76	0.85	33.84	0.38	37.02
Probable	bee	10	1,153.0	1,441.3	1.25	16.77	0.78	33.98	0.46	36.85
Probable	bee	9	388.2	482.1	1.24	18.12	0.68	33.6	0.28	37.77
Probable	bee	8	381.0	558.8	1.47	24.79	1.14	33.81	0.21	36.85
	Sub-total		1,922.4	2,482.2	1.29	18.84	0.84	33.87	0.37	37.03
Probable	cee	10	991.4	1,241.1	1.25	16.95	0.79	33.89	0.46	36.79
Probable	cee	9	407.5	506.0	1.24	18.16	0.69	33.59	0.28	37.76
Probable	cee	8	376.1	552.7	1.47	24.75	1.12	33.87	0.21	36.83
	Sub-total		1,775.1	2,299.9	1.3	19.09	0.85	33.82	0.36	37.01
District Sub-total			4,190.2	5,417.3	1.29	18.94	0.84	33.84	0.37	37.02
	Total		23,320.2	32,667.7	1.4	28.81	1.01	30.55	0.32	34.61

– 406 –

COMPETENT PERSON’S REPORT

APPENDIX VI

TABLE 14-4

BAICHENG PROJECT – MMC ESTIMATED JORC COAL RESERVES; LICENCE EXTENSION AREA 1500M – 2060M ELEVATION (AREA B). CLASSIFICATION BY SEAM BY DISTRICT AS AT NOVEMBER 2010

JORC			Volume	Tonnes	ARD	Ash	Total Moisture	Specific Energy	Total Sulphur	Volatiles
Classification	Seam	District	(’000 m3)	(kt)	(g/cu.cm)	(ad) (%)	(ad)	(Qbdaf)	(%)	(daf)%
Probable	10	aww	69.0	116.7	1.69	40.91	0.76	26.88	0.38	33.24
Probable	10	bww	209.3	353.5	1.69	40.56	0.76	27.01	0.38	33.39
Probable	10	cww	26.1	43.9	1.68	39.83	0.77	27.32	0.38	33.7
Probable	10	acw	212.2	347.5	1.64	35.26	0.82	28.93	0.41	35.05
Probable	10	bcw	786.9	1,288.1	1.64	35.12	0.82	29.01	0.41	35.14
Probable	10	ccw	378.9	615.7	1.62	34.65	0.84	29.24	0.41	35.46
Probable	10	ace	223.8	328.6	1.47	32.59	1	30.35	0.4	37
Probable	10	bce	979.5	1,434.4	1.46	31.91	1.03	30.44	0.39	36.96
Probable	10	cce	581.8	846.2	1.45	30.67	1.06	30.66	0.39	36.97
Probable	10	aew	82.5	105.2	1.27	19.86	1.46	32.75	0.31	37.42
Probable	10	bew	343.5	442.6	1.29	21.43	1.38	32.49	0.33	37.37
Probable	10	cew	136.1	179.0	1.32	23.76	1.28	32.06	0.35	37.28
Probable	10	aee	308.9	386.3	1.25	16.82	0.79	33.96	0.46	36.84
Probable	10	bee	1,153.0	1,441.3	1.25	16.77	0.78	33.98	0.46	36.85
Probable	10	cee	991.4	1,241.1	1.25	16.95	0.79	33.89	0.46	36.79
		Sub-total	6,483.6	9,170.9	1.41	27.23	0.91	31.26	0.41	36.32
Probable	9	aww	12.7	20.5	1.61	29.48	0.88	32.46	0.47	40.29
Probable	9	bww	36.5	58.9	1.61	29.42	0.88	32.47	0.47	40.28
Probable	9	cww	4.2	6.8	1.61	29.29	0.87	32.47	0.47	40.27
Probable	9	acw	43.3	69.0	1.59	27.78	0.87	32.52	0.47	39.96
Probable	9	bcw	139.6	222.1	1.59	27.74	0.87	32.52	0.47	39.96
Probable	9	ccw	72.1	113.8	1.58	27.8	0.87	32.51	0.47	39.97
Probable	9	ace	64.6	89.1	1.38	28.61	0.93	32.46	0.39	39.36
Probable	9	bce	260.0	360.3	1.39	28.42	0.93	32.47	0.39	39.33
Probable	9	cce	211.7	296.2	1.4	28.02	0.92	32.52	0.39	39.28
Probable	9	aew	63.2	79.4	1.26	23.02	0.91	33.11	0.27	37.08
Probable	9	bew	284.1	359.4	1.26	23.74	0.9	33.01	0.29	37.47
Probable	9	cew	137.3	176.2	1.28	24.8	0.9	32.88	0.33	37.94
Probable	9	aee	92.3	114.6	1.24	18.2	0.69	33.59	0.28	37.76
Probable	9	bee	388.2	482.1	1.24	18.12	0.68	33.6	0.28	37.77
Probable	9	cee	407.5	506.0	1.24	18.16	0.69	33.59	0.28	37.76
		Sub-total	2,217.9	2,955.1	1.33	23.56	0.83	33.01	0.34	38.49
Probable	8	aww	23.4	33.8	1.44	25.08	2.38	31.15	0.29	35.95
Probable	8	bww	81.2	117.1	1.44	25.33	2.35	31.18	0.29	36.04
Probable	8	cww	18.5	26.8	1.44	26.09	2.25	31.27	0.3	36.3
Probable	8	acw	101.4	148.3	1.46	32.07	1.55	31.88	0.34	37.89
Probable	8	bcw	373.9	545.4	1.46	32.25	1.54	31.9	0.34	37.9
Probable	8	ccw	227.7	332.0	1.46	32.3	1.49	31.92	0.35	38.15
Probable	8	ace	88.7	123.8	1.4	34.12	1.36	31.82	0.44	39.71
Probable	8	bce	302.7	423.8	1.4	34.02	1.37	31.82	0.44	39.68
Probable	8	cce	248.9	351.0	1.41	33.13	1.56	31.54	0.41	39.54
Probable	8	aew	35.8	53.1	1.48	25.14	3.01	29.57	0.25	38.77
Probable	8	bew	167.7	246.4	1.47	26.11	2.77	29.95	0.27	38.79
Probable	8	cew	91.0	132.1	1.45	27.89	2.47	30.37	0.31	38.94
Probable	8	aee	91.3	134.0	1.47	24.83	1.18	33.69	0.21	36.91
Probable	8	bee	381.0	558.8	1.47	24.79	1.14	33.81	0.21	36.85
Probable	8	cee	376.1	552.7	1.47	24.75	1.12	33.87	0.21	36.83
		Sub-total	2,610.1	3,779.8	1.45	29.15	1.55	32.24	0.31	38.01

– 407 –

APPENDIX VI

COMPETENT PERSON’S REPORT

JORC			Volume	Tonnes	ARD	Ash	Total Moisture	Specific Energy	Total Sulphur	Volatiles
Classification	Seam	District	(’000 m3)	(kt)	(g/cu.cm)	(ad) (%)	(ad)	(Qbdaf)	(%)	(daf)%
Probable	7	aww	27.4	42.8	1.56	29.09	0.88	32.41	0.45	40.23
Probable	7	bww	118.1	184.7	1.56	29.07	0.88	32.41	0.45	40.23
Probable	7	cww	67.5	105.6	1.56	28.91	0.88	32.42	0.45	40.21
Probable	7	acw	94.2	143.4	1.52	27.53	0.88	32.46	0.44	39.95
Probable	7	bcw	387.6	592.0	1.53	27.26	0.88	32.48	0.44	39.89
Probable	7	ccw	375.8	573.5	1.53	27.3	0.88	32.47	0.44	39.89
Probable	7	ace	136.7	186.9	1.37	27.37	0.95	32.12	0.44	39.26
Probable	7	bce	571.6	780.9	1.37	26.93	0.96	32.11	0.44	39.11
Probable	7	cce	494.6	673.6	1.36	25.23	0.93	32	0.44	38.69
Probable	7	aew	123.6	166.4	1.35	19.69	0.84	31.56	0.45	37.26
Probable	7	bew	485.8	652.7	1.34	18.41	0.82	31.46	0.45	36.94
Probable	7	cew	338.9	455.5	1.34	18.55	0.83	31.48	0.45	36.98
		Sub-total	3,222.2	4,558.6	1.41	24.64	0.89	32.04	0.44	38.77
Probable	5_6comp	aww	99.6	130.1	1.31	19.28	1.5	32.3	0.27	34.42
Probable	5_6comp	bww	493.3	634.2	1.29	18.06	1.32	32.66	0.24	34.24
Probable	5_6comp	cww	295.5	384.1	1.3	19.94	1.34	32.09	0.25	33.9
Probable	5_6comp	acw	339.8	476.8	1.4	36.91	1.04	26.23	0.21	28.01
Probable	5_6comp	bcw	1,307.7	1,823.4	1.39	36.15	1.04	26.58	0.21	28.31
Probable	5_6comp	ccw	1,156.0	1,612.9	1.4	35.63	1.06	26.91	0.23	28.87
Probable	5_6comp	ace	344.6	484.9	1.41	33.23	0.87	27.64	0.19	28.69
Probable	5_6comp	bce	1,346.0	1,866.8	1.39	30.63	0.88	28.73	0.19	29.63
Probable	5_6comp	cce	958.3	1,395.1	1.46	38.7	0.91	25.93	0.2	27.02
Probable	5_6comp	aew	347.8	480.2	1.38	30.82	0.96	30.11	0.19	31.55
Probable	5_6comp	bew	1,340.3	1,859.9	1.39	31.88	0.97	29.87	0.19	31.39
Probable	5_6comp	cew	756.9	1,054.1	1.39	33.51	0.98	29.28	0.18	30.61
		Sub-total	8,786.3	12,203.0	1.39	32.72	1.01	28.33	0.2	29.78
	Total		23,320.2	32,667.7	1.4	28.81	1.01	30.55	0.32	34.61

– 408 –

COMPETENT PERSON’S REPORT

APPENDIX VI

15 ANNEXURE D – EHSS RISK ASSESSMENT

TABLE BAICHENG WENZHOU COAL MINE COAL MINE EHSS RISKS OVERVIEW

				Occupational Health and
No	Environmental Items	The Site	No	Safety Items	The Site
		Operational			Operational
	Project status	phase			phase
E-1	Environmental Permitting		H-1	Occupational Health permits
E-2	Pollutant Discharge		H-2	Occupational health
E-3	Environmental Monitoring		S-1	Monitoring for special operators Fire Fighting Permitting
E-4	Wastewater Management		S-2	Safety Permitting
E-5 E-6	Air Emission General Waste Disposal		SO-1	Community
E-7	Hazardous Waste Disposal
E-8	Water & Soil Conservation
	Permitting
E-9	Land Disturbance and
	Environmental Rehabilitation
E-10	Water reuse and recycling
E-11	Chemical Storage
E-12	Environmental risk

– 409 –

COMPETENT PERSON’S REPORT

APPENDIX VI

15.1 Material Issues

15.1.1 Environment

E1. Environmental Permitting

Each new individual industrial operation registered in China and each process modification or installation upgrade must obtain initial environmental permits, as per the Environment Protection Law (1989) and the Environmental Impact Assessment Law (2003). These permits consist of a pre-construction Environmental Impact Assessment approval, and Trial Production Permit to authorize trial production within 3 months after start up and valid for up to twelve months, and a Completion Acceptance Inspection approval. The Environmental Impact Assessment Law establishes that those entities not complying with this requirement may be served with a RMB200,000 fine and a notification to shutdown operations.

An EIA for the 210,000 tonnes production capacity of the Baicheng Wenzhou Coal Mine Development Company was prepared by a qualified institute in April 2007. The EIA was approved by Xinjiang Uygur Autonomous Region Environmental Protection Bureau (EPB) on 17 July 2007. Although an Environmental Completion Acceptance Inspection (CAI) Requesting Report was prepared and provided to ERM for review, site management confirmed that the Site had not engaged in the final phase of permitting, the CAI. The maximum penalty provisioned in relevant laws and regulations is the issuance of a shutdown order for the facility. Such an order is generally issued only after several official notifications of non-compliance with the CAI permitting requirement.

Mitigant: The Site should apply to the responsible EPB for the issuance of the Completion Acceptance Inspection approval for the facilities.

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COMPETENT PERSON’S REPORT

APPENDIX VI

15.1.2 Health and Safety

S1. Fire Fighting

According to the site management, no fire-fighting design approval or fire-fighting completion inspection approval has been obtained from the firefighting authority for the Site’s above ground facilities. The maximum penalties provisioned in the relevant the Fire-Fighting Law (2009) is the issuance of a RMB300,000 fine and a shutdown order for the Company. Such an order is generally issued only after several official notifications of non-compliance with the Fire-Fighting Law and the Regulation on Fire–fighting Supervision and Management for Construction Projects (2009).

This issue has been defined as a material risk for the Site due to the cost of defining and obtaining approval for a fire fighting plan, the investment required for the successful implementation of the plan and the potential impact from a fire at any of the assets.

Mitigant: The Site should commission the design of fire fighting installations and implement corresponding measures for above ground installation as per the confirmation of the Baicheng Fire Brigade, due to the above ground facilities and in particular the on-site residential building. The design and the installations must then be permitted by the Public Security Bureau’s Fire Brigade.

Management Response: The Company Management has implemented relevant fire prevention and fire fighting measures for the underground installations, and obtained a Production Safety Permit covering the aspects of underground fire safety. The company states that it has sought council with the local police forces in respect to surface facilities. It has been mentioned that due to the remote location and limited residential allocations (no townships in proximity) that no further permits are required for surface facilities. ERM have not been privileged to any official documentation to confirm this agreement.

– 411 –

COMPETENT PERSON’S REPORT

APPENDIX VI

15.2 High Risk

15.2.1 Environment

E2. Pollutant Discharge

Pollutant Discharge Registration (PDR) of 2007 was provided for review. However, those PDRs from 2008 to 2010 were not provided. The Pollutant Discharge Permit (PDP) issued on 29 January 2007 by the Xinjiang EPB (valid from January 2007 to December 2012) was provided for review. The PDP determined an emission target of COD 150mg/L and class I limits for dust.

Based on the reviewed EIA approval, the mass loading control (MLC) targets determined for the Site are SO2: 7.29 t/a, particulates: 2.68 t/a, COD: 1.46 t/a, NH3-N: 0.05t/a. Since there was no environmental monitoring report available for review, it was difficult to determine whether the Site had met its MLC targets. According to the telephone interview with Baicheng EPB, the official interviewed expressed concern that as an environmental CAI was not performed for the Site, pollutant generated onsite may exceed the applicable standards.

Mitigant: Implement the pollutant mitigation measures described in the approved EIA report, and commission a qualified environmental monitoring institute for regular monitoring of major pollutants.

Management’s Response: As per a follow-up comment by Baicheng Wenzhou Coal Mine Development Company, due to the newly acquired ownership, implementation has not been enacted. The mine is currently making preparation to implement the aforementioned mitigant.

– 412 –

COMPETENT PERSON’S REPORT

APPENDIX VI

15.2.2 Health and Safety

H1. Occupational Health Permits

There was no Occupational Disease Hazard Pre-Assessment report and Occupational Disease Hazard Control Effect Assessment report prepared for the Site, as required by the Law of Occupational Disease Prevention and Control (2002). The maximum penalty for such non-compliance is a fine up to RMB500,000 or temporary shutdown of the Site until the reports are approved by the relevant authorities, however, it is noted that a temporary shutdown of facilities is considered to be low probability outcome. Management of occupational health issues at the Site appeared to be below industry standard. Potential liabilities induced by occupational diseases may be increased by the lack of regulatory compliance of the operations.

Mitigant: Commission qualified institute to prepare Occupational Disease Hazard Control Effect Assessment report for the Site. Identify the appropriate qualified medical centre to conduct occupational medical check-ups and plan for relevant personnel to undergo job-position specific examination. Maintain records of test results.

S2. Safety Permitting

Safety Permitting, as required by the Safety Law (2002) is conducted through the preparation of a pre-construction Safety Assessment report, the review of the safety features of the design material of a new or expansion project, and finally through the conduct of a Safety Assessment for Completion after the start of operations. As per national and local regulations, all mining operations must obtain a Safety Production Permit. Although the Site hasn’t obtained the above mentioned pre-construction Safety Assessment report, Safety Assessment for Completion and its approval, it commissioned a qualified institute to prepare a Comprehensive Safety Status Assessment Report in March 2008, and obtained a Safety Production Permit in April 2008. An on-site safety inspection was reported to have been conducted before the issuance of the Safety Production Permit, however, a record of the safety inspection was not provided for review.

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COMPETENT PERSON’S REPORT

APPENDIX VI

The suitability of the safety measures implemented in the operations conducted at the Site is not clearly established through regulatory compliance and a documented management system. In case of accident, this could increase the liabilities of the company.

Mitigant: The Site should establish safety compliance and operational safety programmes.

Management’s Response: As per a follow-up comment by Baicheng Wenzhou Coal Mine Development Company, since the site visit conducted in the scope of this assessment a safety and supervision monitoring system has been established and maintains records of all such data. The system and data have not been reviewed by ERM.

15.3 Medium & Low Risk

Low and medium risks associated with the operations of the assets under consideration mostly refer to issues that individually have impacts that were not estimated to be likely to affect business continuity at the time of preparation of this report. It is not excluded that the cumulative impacts of these issues may in total present a significant risk, or that in time, these impacts may induce high risks or even become material issues with the evolution of regulatory requirements, the modification of the context around the project areas or a more stringent enforcement of applicable requirements or policies.

15.3.1 Environment

E3. Environmental Monitoring

Besides the air and wastewater baseline monitoring conducted during the EIA report preparation in 2007, there were no environmental monitoring reports available for review at the time of site visit.

The lack of implementation of several environmental measures required by the EIA approval was observed, such as the landfilling of domestic waste onsite instead of sending it to a qualified landfill site for disposal, and the discharging of wastewater into a nearby ditch instead of collecting it for reuse. Local environmental authorities may impose fines, require the implementation of environmental mitigation measures, and impose the implementation of environmental monitoring plans for each facility. Long-term non compliance and the lack of monitoring data may increase the severity of penalties imposed by the authorities, and may result in liability in case of litigation over potential sources of contamination.

– 414 –

COMPETENT PERSON’S REPORT

APPENDIX VI

E4. Wastewater Management

As per the requirement of the EIA and its approval, wastewater generated should be considered for recycle and reuse. Domestic wastewater should be treated to meet Class II limits of the Integrated Wastewater Discharge Standard (GB 8978-1996), before being reused in vegetation watering during summer, or stored in an anti-seepage paved water storage tank in winter. Mine water should be reused as much as possible, and the remaining part which cannot be reused immediately should be treated to meet Class I limits of the Integrated Wastewater Discharge Standard (GB 8978-1996) before being stored in storage tank and reused for greening during summer. The EIA approval emphasized that no wastewater should be discharged into the Shushan River.

According to site management, domestic wastewater generated from the dormitories and canteen is stored in a septic tank for natural evaporation or discharged directly into the nearby ditch. Stormwater onsite would flow away naturally without any collection or treatment. Mine water is said to be roughly treated by the onsite sedimentation tank prior to being discharged to the Shushan River. Since no environmental monitoring has been conducted in the past, the compliance status for these wastewater streams cannot be confirmed. Furthermore, such wastewater handling measure is not in line with the EIA and its approval, which could be a violation of the EIA law.

E5. Air Emission

Air emission sources identified at the Site include three stacks for boilers serving the main shaft (two stacks with height around 8m) and the west shaft (one stack with height of 8~10 m), two stacks for two coal-fired boilers (~3 m high) serving the bathroom and the canteen, and fugitive emissions from workers’ family houses onsite, the coal storage yard and coal gangue disposal areas and related transportation activities. Simple dust removal facilities are provided for the stacks of the main shaft, however, no air pollutant reduction facilities were installed for the other boiler stacks mentioned above. No air monitoring reports were available, thus, the compliance status of air emissions cannot be confirmed.

E6. General Waste Disposal

General waste generated onsite include domestic waste, coal gangue, and coal slag from the boilers. According to site management, domestic waste was landfilled onsite; coal gangue was piled onsite at a designated place; and coal slag from boilers was reused onsite for road paving or construction. Such domestic waste disposal methods are not in line with the EIA report and its approval, which require that domestic waste should be collected and sent to landfill site designated by the local EPB.

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E7. Hazardous Waste Disposal

Site management was unaware of the disposal of hazardous waste generated onsite. It is assumed that oil-contaminated rags generated from equipment maintenance was burnt directly in boilers, or disposed of together with domestic waste. According to the National Catalogue of Hazardous Wastes (2008), oil-contaminated rags are classified as hazardous waste and should be collected and disposed of by a licensed hazardous waste disposal contractor.

The Site could be fined up to RMB200,000 for non-compliance with the Solid Waste Pollution Prevention and Control Law (2005).

E8. Water & Soil Conservation Permitting

According to the Water and Soil Conservation Law (1991), a Water and Soil Conservation Plan should be prepared and be incorporated into the relevant section of the EIA report, for any mining activities in mountainous area. Water and soil conservation planning measures are to be reviewed and approved by the local Water Resources Bureau, and their implementation is to be monitored. However, site management couldn’t provide such an approved plan for review, as they were unable to provide such a document for review at the time of site visit. The EIA report didn’t include any description about water and soil conservation. Although implementation of this particular requirement is not as strongly exercised as for environmental permitting, this non-compliance may result in a temporary shutdown of the Site until the reports are submitted for approval to the relevant authorities. Furthermore, the lack of overall planning for water and soil conservation may result in longer-term liabilities and increase mine closure and reclamation costs.

E9. Land Disturbance and Environmental Rehabilitation

The Geological and Environmental Protection Plans provide generic measures for mitigating land disturbance, but at the time of site visit no evidence of implementation of these recommendations was observed. Subsidence was observed onsite, indicating geological risks from mining operations. This presents a risk of subsidence during and beyond the mine life.

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The Site has received the notification from the Xinjiang Uyghur Autonomous Region Finance Department and Land Resource Department on 30 October 2009 to pay an ecological rehabilitation deposit. The notification required payment of RMB3,213,365 before 30 November 2009, and then yearly payments of RMB688,579 from 2010 to 2016, for a total amount of RMB8,033,418. Such notification and the payment receipt of the first 40% of the deposit were provided for review during the site visit.

E10. Water reuse and recycling

According to the 11th Five Year Planning for Coal Mine Industry Development, as well as the Notice on Enhancing the Works on the Coal Mine Master Plan and Coal Mine Construction Projects Environmental Impact Assessment issued by the State Environmental Protection Administration (SEPA, now Ministry of Environmental Protection (MEP)) in November 2006, water reuse rate in coal mine industry is aimed at 70%. However, according to the site management, mine water is only partially used for dust suppression, before being discharged to the Shushan River. Thus, water reuse at the Site is insufficient to meet the applicable industry standard.

E11. Chemical Storage

The chemicals used on-site include diesel, machine oil and lubricant. Diesel is stored in an 8t steel drum, machine oil in a 5t drum, while lubricant is stored in an approximately 200-L steel drum at the points of use. No spill control measures, identification labels or Materials Safety Data Sheet (MSDS) were provided for the liquid chemicals. As such, the Site could be imposed a fine of a maximum of RMB50,000 for non-compliance with the Safety Management Rules for Dangerous Chemical Materials (2002).

E12. Environmental Risk

The degree of environmental risk preparedness throughout the Site is relatively low due to the lesser environmental sensitivity of the receptors around the project sites and the degree of regulatory enforcement at this relatively remote location.

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Further areas for improvement include the strengthening of cleaner production, the greater control over air emissions from boilers and trucking of materials, better management of wastewater and solid waste, as well as the recording of water volumes abstracted onsite.

15.3.2 Health and Safety

H2. Occupational Health Monitoring for Special Operators

The Site arranges general physical examination for workers every half year. Within 10 physical examination reports provided for review, two of the workers got a result of “lung marking increase”. This is a slight pathological change but could possibly be an early symptom of silicosis or coal workers’ pneumoconiosis (CWP), which is an occupational disease usually occurring with mine workers. However, this is a general health check conducted by the People’s Hospital of Baicheng County, not a work position-specific occupational health monitoring. Without professional judgement of baseline condition and updated monitoring of the health of employees and contractors, the Site cannot prevent future claims against damages to health due to poor working conditions. Furthermore, the efficiency of occupational health protection measures has not been monitored on site, and there is no record of enforcement of relevant procedures.

In particular, the coal storage and uploading area onsite is prone to have dust pollution on windy days. This was not observed onsite due to the coverage of thick snow, but was raised as an issue in the document named “Pollutant Mitigation Plan of the Baicheng Wenzhou Coal Mine Development Company” prepared by the Site on 27 January 2007. This Plan also pointed out that such dust pollution could cause silicosis to workers.

15.3.3 Social

According to the site management, there was a small village around 1.5 km to the south boundary of the mine. The village belongs to Yatu Pasture, and has a population of less than 200. Photos of the residential area are presented in Annex B. Considering the distance between the village and the mining area, it is unlikely that the community could be impacted by land subsidence caused by mining. The approved EIA report of the Site didn’t mention any environmental impact on this village. In addition, no evidence of community opposition to the project was found, indicating that a community risk for the Site is minimal at the time this review was conducted.

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15.4 Other relevant Aspects of the Assets under Consideration

15.4.1 Safety Risk Deposit

According to the Coal Mine Safety Risk Deposit Temporary Management Measures (2006) promulgated by Ministry of Finance and State Administration of Work Safety, coal mines with a production capacity of 150,000 tpa should pay a safety deposit of RMB3 million, and a RMB500,000 increase is applicable for every 100,000 tpa increase in production capacity. The maximum safety deposit is RMB6 million. Therefore, the safety deposit applicable to the Site is RMB3.5 million.

The Site paid a safety deposit of RMB300,000 on 12 April 2006, and another RMB300,000 on 14 December 2006, the receipts of which were provided for review. Site management reported this RMB600,000 safety deposit was paid as per the oral requirement of Baicheng County Coal Industry Management Bureau. No supporting written notice was available for review. Site management further indicated that a RMB1.2 million deposit could be required by the local Coal Industry Management Bureau in the near future, but such notice has not yet been received. According to a telephone interview with an official from the local Coal Industry Management Bureau, the official stated that they followed the applicable national regulation on safety deposit, and that the Site could consult with them about how much deposit should be paid. To be compliant with the applicable national regulation, the Site should consult the Baicheng County Coal Industry Management Bureau, obtain a written notice about the applicable deposit amount, and make the payment accordingly.

15.4.2 Industrial Policy

The “Eleventh Five Year” Development Plan for the Coal Industry issued by the National Development and Reform Commission (NDRC) in January 2007 defines that coal mines with an annual production capacity of 300,000 tpa or less are considered as small-scale coal mines. According to the Circular on Assigning the Plan for Closing Small Scale Coal Mines in the Last Three Years of the “Eleventh Five Year” issued by the NDRC, National Energy Bureau, State Administration of Work Safety and State Administration of Coal Mine Safety in October 2008, small scale coal mines throughout China will be closed, merged or limited. According to this Circular, the number of small scale coal mines in Xinjiang should be limited to no more than 250 by the end of 2010. The approved annual production capacity of the Site is 210,000 tpa. This poses a risk to the Site that it might be closed, merged or limited even though it has not yet received any such notice from authorities at this stage. To reduce any such risk, the Site’s production capacity needs to be expanded to 300,000 tpa or above.

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COMPETENT PERSON’S REPORT

According to the Notice on Enhancing the Works on the Coal Mine Master Plan and Coal Mine Construction Projects Environmental Impact Assessment issued by the SEPA in November 2006, coal mines shall be approved only in areas covered by an approved coal mine master plan and planning EIA. The EIA for individual coal mines within areas covered by a coal mine master plan may not be approved until a planning EIA of the coal mine master plan has been approved. Site management indicated that the production capacity of the mine was planned to be expanded to 600,000 tpa. However, according to the Baicheng EPB, there has been no coal mine planning EIA prepared for mines in Baicheng County. Although the above mentioned Notice is not currently strictly enforced, there could be future risk that the corresponding EIA of the Site’s expansion could not be approved by the authority due to the absence of a planning EIA for this area.

15.5 Overview of the Site’s Experience in Dealing with Applicable Laws and Practices

The Site was unaware of the extent of environmental, health and safety requirements applicable to its operations. The company has focused on complying with the basic requirements allowing them to obtain Safety Production Permits and Mining Licenses and has not addressed compliance with broader EHS permitting requirements or management of the range of risks detailed in this report.

Mining activities at this Site dated back to 1958, when the mine belonged to the Public Security Department of Xinjiang. This is well before relevant EHS laws and regulations came into force, thus the Site did not fully follow the regulatory requirements to obtain some required but not basic reports/approvals when it was privatized and renamed as Baicheng Wenzhou Coal Mine in 2004. Such reports/approvals include:

Fire-fighting design approval and fire-fighting completion inspection approval;
Occupational Disease Hazard Pre-Assessment report and Occupational Disease Hazard Control Effect Assessment report; and
Pre-construction Safety Assessment report and the Safety Assessment for Completion.

An official from the Baicheng EPB indicated there have been no environmental fines or pollution accidents occur at the Site in the past, however, there was concern that as an environmental CAI was not performed for the Site, pollutants generated onsite may exceed the applicable standards.

The Site does not have a record of dealing with communities, which are located beyond the potential area of impact from its operating facilities.

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16 ANNEXURE E – GLOSSARY OF TERMS

The key terms used in this report include:

$ refers to United States dollar currency
Asset means the Baicheng Coal Mine
AUSIMM stands for Australasian Institute of Mining and Metallurgy
CV stands for Caloric Value
Company means Baicheng Wenzhou Mining Development Co., Ltd
daf stands for dry ash free
HKEX stands for Hong Kong Stock Exchange
ITR stands for Independent Technical Review
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 determine resources and 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
km stands for kilometre
LOM plan stands for Life of Mine Plan
m stands for metres
MMC refers to Minarco-MineConsult
mine production is the total raw production from any particular mine

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mining rights means the rights to mine mineral resources and obtain mineral products in areas where mining activities are licenced
Ml stands for mega litre which is equal to one million litres
Mt stands for million tonnes
RMB stands for Chinese Renminbi Currency Unit; 10[3] RMB means 1,000 RMB
ROM stands for run-of-mine, being material as mined before beneficiation
t stands for tonne
tonne refers to metric tonne
tph stands for tonnes per hour
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 Resources and Measured and Indicated Resources are used in this report, they have the same meaning as in the JORC Code.

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17 ANNEXURE F – CHINESE AND OTHER INTERNATIONAL RESOURCE REPORTING STANDARDS

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 Resource (A-B), Indicated Resource (B-C) and Inferred Resource (D). The old standard was more prescriptive than JORC in that it specified minimum borehole spacings (see Table C1 ) for each category, along with implied levels of geological understanding.

TABLE C1 – Chinese, UN, JORC Code Comparison

	Classification
	(Chinese		JORC
(Chinese Reserve Code)	Reserve Class)	UN Code	(Dec 2004)
A	111 – 121		Measured
B	121 – 122	331	Measured
C	122 – 2 M22	332	Indicated
D	122	333	Inferred

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COMPETENT PERSON’S REPORT

The old code was essentially a geological classification, 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 C1 ) 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.

FIGURE C1 – NEW CHINESE RESOURCE/RESERVE CLASSIFICATION MATRIX (1999)

==> picture [183 x 155] intentionally omitted <==

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 prefeasibility studies carried out (2) and is well understood geologically (1). Various suffixes are used to distinguish Basic Reserves – essentially JORC Resources – (121b) from Extractable 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, and so 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.

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A tabulation of this concept is shown in Table C2 .

TABLE C2 – NEW CHINESE RESOURCE/RESERVE CATEGORIES (1999)

Economic Viability	Geological Confidence	Geological Confidence	Geological Confidence	Geological Confidence
	Identified Mineral Resource			Undiscovered Resource
	Measured(1)	Indicated(2)	Inferred(3)	Reconnaissance(4)
Economic (1)	Basic Reserve Resource – 111b
	Proved Extractable Reserve – 111
	Basic Reserve Resource – 121b	Basic Reserve Resource –122b
	Probable Extractable Reserve – 121	Probable Extractable Reserve –122
Marginally Economic (2 M)	Resource 2 M11
	Resource 2 M21	Resource 2 M22
Sub-marginally Economic (2S)	Resource 2S11
	Resource 2S21	Resource 2S22
Intrinsically Economic(3)	Resource 331	Resource 332	Resource 333	Resource 334

Note: First digit reflects Economic viability; 1 = Economic; 2 M = Marginally Economic; 2S = Submarginally 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 copper Cobalt and Gold (and other metals), there is an accompanying Chinese Professional Standard (DZ/T 0214-2002) that lays out rules for determining the level of geological confidence.

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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, and 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.

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 ranges of borehole spacings, thickness cutoffs and quality limitations that are enforced by the Chinese system would generally result in the same resource classification under the JORC Code.

The JORC Code uses the following definitions for Mineral Resources and Ore Reserves:

Measured Mineral Resource is that part of Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a high level of confidence. It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. The locations are spaced closely enough to confirm geological and grade continuity.

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COMPETENT PERSON’S REPORT

Indicated Mineral Resource is that part of Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable level of confidence. It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. The locations are too widely or inappropriately spaced to confirm geological and/or grade continuity but are spaced closely enough for continuity to be assumed.

Inferred Mineral Resource is that part of Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a low level of confidence. It is inferred from geological evidence and assumed but not verified geological and/or grade continuity. It is based on information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes which may be limited or of uncertain quality and reliability.

Exploration Target/Results includes data and information generated by exploration programmes that may be of use to investors. The reporting of such information is common in the early stages of exploration and is usually based on limited surface chip sampling, geochemical and geophysical surveys. Discussion of target size and type must be expressed so that it cannot be misrepresented as an estimate of Mineral Resources or Ore Reserves.

A “ Proved Ore Reserve ” is the economically mineable part of a Measured Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified

A Proved Ore Reserve represents the highest confidence category of Ore Reserve estimates. This requires detailed exploration and quality data “points of observation” to provide high geological confidence.

A “ Probable Ore Reserve ” is the economically mineable part of an Indicated, and in some circumstances, a Measured Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include consideration of and modification by realistic ally assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors These assessments demonstrate at the time of reporting that extraction could reasonably be justified.

A Probable Ore Reserve has a lower level of confidence than a Proved Ore Reserve but has adequate reliability as the basis of mining studies.

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1. RESPONSIBILITY STATEMENT

This circular, for which the directors of the Company collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief, the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date and immediately upon the issue of the CS Conversion Shares and the CB Conversion Shares (assuming there is no change from the current shareholding structure and 746,753,246 CB Conversion Shares are issued and allotted) will be as follows:

As at Latest Practicable Date

Authorised share capital: 5,000,000,000 Shares Issued and fully paid share capital: 2,411,463,553 Shares	HK$ 250,000,000

	120,573,178

After Completion and upon the issue of the CS Conversion Shares and the CB Conversion Shares

Issued and fully paid share capital: 2,411,463,553 Shares 941,558,441 CS Conversion Shares 746,753,246 CB Conversion Shares 4,099,775,240 Shares	HK$ 120,573,178 725,000,000 575,000,000
	142,573,178

Issued and fully paid share capital:

All the issued shares in the capital of the Company has a nominal value of HK0.05 each and rank pari passu with each other in all respects including the rights as to voting and dividends.

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3. 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 executive 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 the Model Code for Securities Transactions by Directors of Listed Issuers (the “ Model Code ”), were as follows:

Long positions in ordinary Shares and underlying Shares of the Company:

Name of Director Ma Lishan Fung Ka Pun Ng Cheuk Fan, Keith Mak Yiu Tong Fung Wing Ki, Vicky Dr. Tam Hok Lam, Tommy,J.P.	Capacity Interest of a controlled corporation Beneficial owner Beneficial owner Interest of a controlled corporation Beneficiary of trust Interest of spouse Beneficial owner Beneficial owner Beneficial owner Beneficiary of trust Beneficial owner	Nature of interest Corporate interest Personal interest Personal interest Corporate interest Other interest Spouse interest Personal interest Personal interest Personal interest Other interest Personal interest	Number of Shares of the Company held 457,600,561 (Note 1) 519,082 22,187,594 (Note 2) 80,000,000 (Note 3) 3,444,313 – – 2,337,262 80,000,000 (Note 3) 400,000	Number of underlying Shares of the Company held Total Approximate percentage of total issued share capital 317,158,822 (Note 1) 20,000,000 (Note 4) 794,759,383 32.96% 20,240,000 (Note 4) 126,390,989 5.24% 5,000,000 (Note 4) 5,000,000 0.21% 2,000,000 (Note 4) 2,000,000 0.08% 2,000,000 (Note 4) 84,337,262 3.50% – 400,000 0.02%	Number of underlying Shares of the Company held Total Approximate percentage of total issued share capital 317,158,822 (Note 1) 20,000,000 (Note 4) 794,759,383 32.96% 20,240,000 (Note 4) 126,390,989 5.24% 5,000,000 (Note 4) 5,000,000 0.21% 2,000,000 (Note 4) 2,000,000 0.08% 2,000,000 (Note 4) 84,337,262 3.50% – 400,000 0.02%
					32.96% 5.24% 0.21% 0.08% 3.50% 0.02%

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Notes:

Ma Lishan has beneficial interest in Real Power, which is owned as to 25% by China Capital Group Limited and 75% by TRXY. China Capital Group Limited is beneficially owned as to 40% by Ma Lishan. As at the Latest Practicable Date, Real Power held 457,600,561 Shares in the Company, representing approximately 18.98% of the issued share capital of the Company. In addition, Real Power was also interested in convertible notes issued by the Company on 25 January 2010 in the aggregate principal amount of US$36,007,762.08 which were convertible into 317,158,822 Shares, representing approximately 13.15%.
Fung Ka Pun has beneficial interests in Bo Hing Limited and Goodwill International (Holdings) limited, which was interested in 5,582 shares and 22,182,012 Shares in the Company as at the Latest Practicable Date, representing approximately 0.92% of the issued share capital of the Company.
The three references to 80,000,000 Shares relate to the same block of shares held by Gainbest Investments Limited which is a company wholly owned by HSBC International Trustee Limited as the trustee of a discretionary trust set up by Fung Ka Pun, of which the discretionary objects include but not limited to Choi Hon Hing, Fung Wing Ki, Vicky and Fung Wing Yee, Wynne.
These interests represented the interests in underlying Shares in respect of share options granted by the Company to these Directors as beneficial owners under the Share Option Scheme (Post–Listing Scheme) adopted on 16 May 2006.

Other than as disclosed above, as at the Latest Practicable Date, none of the Directors or their associates had any interests or short positions in any shares, underlying shares and debentures of, the Company or any of its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code.

(b) Substantial Shareholders’ Interests and Short Positions in Shares and Underlying Shares of the Company

As at the Latest Practicable Date, the following entities have interests or short positions of 5% or more in the shares and underlying shares of the Company which were recorded in the register of substantial shareholders maintained under Section 336 of the SFO or had otherwise notified to the Company:

Name TRXY Ms. Li Real Power	Number of Shares of the Company held 172,159,435 457,600,561 (Note 2) 629,759,996 (Note 3) 457,600,561	Number of underlying Shares of the Company held 114,722,577 (Note 1) 317,158,822 (Note 2) 431,881,399 (Note 3) 19,000,000 (Note 6) 317,158,822 (Note 2)	Capital Total Beneficial owner 1,061,641,395 Interest of a controlled corporation Interest of controlled corporations 1,080,641,395 Beneficial owner Beneficial owner 774,759,383	Approximate percentage of the total issued share capital 44.02% 44.81% 32.13%

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APPENDIX VII

GENERAL INFORMATION

Name Choi Hon Hing Big Wish Investments Limited CCB Financial Holdings Limited CCB International (Holdings) Limited CCB International Asset Management Limited CCB International Assets Management (Cayman) Limited CCB International Group Holdings Limited Central Huijin Investment Ltd China Construction Bank Corporation Kingston Finance Limited Ample Cheer Limited Best Forth Limited Chu Yuet Wah Atlantis Investment Management (Hong Kong) Limited Liu Yang	Number of Shares of the Company held 3,444,313 5,582 (Note 5) 80,000,000 (Note 4) 22,701,094 144,300,000 167,145,416 167,145,416 167,145,416 167,145,416 167,145,416 167,145,416 167,145,416 420,840,518 (Note 8) 420,840,518 (Note 8) 420,840,518 (Note 8) 420,840,518 (Note 8) 208,000,000 (Note 9) 208,000,000 (Note 9)	Number of underlying Shares of the Company held 20,240,000 (Note 6) 793,650,038 793,650,038 793,650,038 793,650,038 793,650,038 793,650,038 793,650,038 793,650,038 – – – – – –	Capital Total Personal interest Interest of a controlled Corporation Beneficiary of trust Spouse interest 126,390,989 Beneficial owner 937,950,038 (Note 7) Interest of a controlled Corporation 960,795,454 (Note 7) Interest of a controlled Corporation 960,795,454 (Note 7) Interest of a controlled Corporation 960,795,454 (Note 7) Interest of a controlled Corporation 960,795,454 (Note 7) Interest of a controlled Corporation 960,795,454 (Note 7) Interest of a controlled Corporation 960,795,454 (Note 7) Interest of a controlled Corporation 960,795,454 (Note 7) Beneficial owner 420,840,518 Interest of a controlled Corporation 420,840,518 Interest of a controlled Corporation 420,840,518 Interest of a controlled Corporation 420,840,518 Beneficial owner 208,000,000 Interest of a controlled Corporation 208,000,000	Approximate percentage of the total issued share capital 5.24% 38.90% 39.84% 39.84% 39.84% 39.84% 39.84% 39.84% 39.84% 17.45% 17.45% 17.45% 17.45% 8.63% 8.63%

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APPENDIX VII

Notes:

As at the Latest Practicable Date, TRXY was interested in convertible notes in the aggregate principal amount of US$13,024,714.83 which were convertible into 114,722,577 Shares, representing approximately 4.76% of the issued share capital of the Company.
Real Power is beneficially owned as to 25% by China Capital Group Limited and 75% by TRXY. China Capital Group Limited is beneficially owned as to 40% by Ma Lishan. Real Power was also interested in convertible notes issued by the Company on 25 January 2010 in the aggregate principal amount of US$36,007,762.08 which were convertible into 317,158,822 Shares, representing approximately 13.15% of the issued share capital of the Company
Ms. Li has controlling interest in TRXY which, in turn, has controlling interest in Real Power.
These 80,000,000 Shares are held by Gainbest Investments Limited which is a company wholly owned by HSBC International Trustee Limited as the trustee of a discretionary trust set up by Fung Ka Pun, the spouse of Choi Hon Hing, of which the discretionary objects include but not limited to Choi Hon Hing, Fung Wing Ki, Vicky and Fung Wing Yee, Wynne.
Choi Hon Hing has beneficial interests in Bo Hing Limited and Goodwill International (Holdings) Limited, which was interested in 5,582 Shares in the Company as at the Latest Practicable Date, representing approximately 0.00023% of the issued share capital of the Company.
These interests represented the interests in underlying Shares in respect of share options granted by the Company as beneficial owner under the Post-Listing Scheme adopted on 16 May 2006.
The seven references to 960,795,454 shares related to the same block of shares. Big Wish Investments Limited was interested in 937,950,038 shares and underlying shares in the Company. Big Wish Investments Limited is a wholly-owned subsidiary of CCB International Asset Management Limited (“CCBIAM”), in return, CCBIAM is a wholly-owned subsidiary of CCB International Assets Management (Cayman) Limited which in turn is a wholly-owned subsidiary of CCB International (Holdings) Limited. CCB International (Holdings) Limited is a wholly-owned subsidiary of CCB Financial Holdings Limited which in turn is wholly-owned by CCB International Group Holdings Limited. CCB International Group Holdings Limited is a wholly-owned subsidiary of China Construction Bank Corporation which in turn 57.09% of its interest is owned by Central Huijin Investment Limited. Accordingly, CCBIAM , CCB International Assets Management (Cayman) Limited, CCB International (Holdings) Limited, CCB Financial Holdings Limited, CCB International Group Holdings Limited, China Construction Bank Corporation and Central Huijin Investment Limited are deemed to be interested in these shares and underlying shares held in the Company by virtue of the provisions of the SFO.
The four references to 420,840,518 shares related to the same block of shares. Kingston Finance Limited was beneficial owner of these shares in the Company. Kingston Finance Limited is a wholly-owned subsidiary of Ample Cheer Limited,which in return 80% of its interest is owned by Best Forth Limited, in turn, Chu Yuet Wah has controlling interest in Best Forth Limited. Accordingly, Ample Cheer Limited, Best Forth Limited and Chu Yuet Wah are deemed to be interested in these shares held in the Company by virtue of the provisions of the SFO.
Atlantis Investment Management (Hong Kong) Limited (“Atlantis”) was beneficial owner of these shares, in turn, Atlantis was wholly owned by Liu Yang.

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GENERAL INFORMATION

APPENDIX VII

Other than as disclosed above, as at the Latest Practicable Date, no person (other than Directors) has interests or short positions in the Shares or underlying Shares of the Company which were recorded in the register of substantial shareholders maintained under Section 336 of the SFO.

Other than as disclosed above, as at the Latest Practicable Date, none of the Directors or any proposed Director is a director or employee of a company which has an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of part XV of the SFO.

4. DIRECTORS’ OTHER INTERESTS

As at the Latest Practicable Date, so far as the Directors were aware, none of themselves or their respective associates had any interest in a business which competes or may compete with the business of the Enlarged Group or any other conflicts of interests with the Enlarged Group.

As at the Latest Practicable Date, none of the Directors had any interests, either direct or indirect, in any assets which have been acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group since 31 March 2010, being the date to which the latest published audited consolidated financial statements of the Group were made up.

There was no contract or arrangement entered into by any member of the Enlarged Group subsisting at the Latest Practicable Date in which any Director is materially interested and which is significant to the business of the Enlarged Group.

5. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, save as previously disclosed (if any) in the announcement(s) of the Company, the Directors were not aware of any material adverse changes in the financial or trading position of the Group since 31 March 2010, the date to which the latest published audited consolidated accounts of the Group were made up.

6. LITIGATION

As at the Latest Practicable Date, so far as the Directors were aware, none of the members of the Group was engaged in any litigation or claim of material importance which was known to the Directors to be pending or threatened by or against any member of the Enlarged Group as at the Latest Practicable Date.

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GENERAL INFORMATION

APPENDIX VII

7. CORPORATE INFORMATION

BOARD OF DIRECTORS Executive Directors

Mr. Ma Lishan (Chairman and Chief Executive Office) Mr. Fung Ka Pun Mr. Ng Cheuk Fan, Keith Mr. Mak Yiu Tong

Non-executive Directors

Ms. Fung Wing Ki, Vicky

Independent Non-executive Directors

Dr. Tam Hok Lam, Tommy, J.P. Mr. Zhu Yongguang Mr. Chan William

AUDIT COMMITTEE

Dr. Tam Hok Lam, Tommy, J.P. (Chairman of Committee) Mr. Zhu Yongguang Mr. Chan William

REMUNERATION COMMITTEE

Mr. Fung Ka Pun (Chairman of Committee) Dr. Tam Hok Lam, Tommy, J.P. Mr. Zhu Yongguang

NOMINATION COMMITTEE

Mr. Ma Lishan (Chairman of Committee) Mr. Zhu Yongguang Dr. Tam Hok Lam, Tommy, J.P.

EXECUTIVE COMMITTEE

Mr. Ma Lishan (Chairman of Committee) Mr. Fung Ka Pun Mr. Ng Cheuk Fan, Keith Mr. Mak Yiu Tong

COMPANY SECRETARY

REGISTERED OFFICE

Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands

PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE

IN CAYMAN ISLANDS Butterfield Fulcrum Group (Cayman) Limited Butterfield House, 68 Fort Street P.O. Box 609, Grand Cayman KY1-1107 Cayman Islands

HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE

Computershare Hong Kong Investor Services Limited Shops 1712-1716, 17th Floor Hopewell Centre 183 Queen’s Road East Hong Kong

PRINCIPAL PLACE OF BUSINESS

IN HONG KONG

Unit 4803, 48/F COSCO Tower 183 Queen’s Road Central Hong Kong

PRINCIPAL BANKER

The Hongkong and Shanghai Banking Corporation Limited 1 Queen’s Road Central Hong Kong

Mr. Fok Chi Tak

WEBSITE

AUDITOR

www.haotianhk.com

Deloitte Touche Tohmatsu Certified Public Accountants 35/F One Pacific Place 88 Queensway Hong Kong

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GENERAL INFORMATION

APPENDIX VII

8. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with the Company or any member of the Enlarged Group (excluding contracts expiring or determinable by the Enlarged Group within one year without payment of compensation (other than statutory compensation)).

9. EXPERTS AND CONSENTS

The following are the qualifications of the experts who have provided its advice and reports (as the case may be), which are contained in this circular:

Name Qualification Asia Investment Management a corporation licensed to carry out type 4 (advising Limited (“ AIML” ) on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities as defined under the SFO Deloitte Touche Tohmatsu Certified Public Accountants (“ Deloitte ”) Runge Asia Limited (“ Runge ”) Competent Person Guantao Law Firm (“ Guantao ”) PRC legal adviser BMI Appraisals Limited (“ BMI ”) Competent Evaluator

AIML, Deloitte, Runge, Guantao and BMI have given and have not withdrawn their written consents to the issue of this circular with the inclusion herein of their respective letters and reports and/or references to their names in the form and context in which they respectively appear.

As at the Latest Practicable Date, none of AIML, Deloitte, Runge, Guantao and BMI was beneficially interested in the share capital of any member of the Enlarged Group, nor did they have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Enlarged Group, nor did they have any interest either direct or indirect, in any assets which had been acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group since 31 March 2010, being the date to which the latest published audited consolidated financial statements of the Group were made up.

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GENERAL INFORMATION

APPENDIX VII

10. MATERIAL CONTRACTS

The following contracts had been entered into by the Enlarged Group (not being contracts entered into in the ordinary course of business) within the two years immediately preceding the Latest Practicable Date and are or may be material:

(a) The S&P Agreement;
(b) On 21 May 2009, Wuhai City Menggang, Zhong Tie, TRXY Holding Co., Ltd（泰融信業控股有限公司）, TRXY (Tong Liao) Electronic Technology Co., Ltd（泰融信業（通遼）電子科技有限公司）, Favour Mind, Beijing Taitong Hengye Trading Development Co., Ltd（北京泰通恒業貿易發展有限公司）, and Mr. Yau Wai Ming entered into a Supplemental Agreement to the Loan Term Expansion Agreement（中鐵協議（合同）09021號借款展期協議書補充協議）, pursuant to which Zhong Tie Trust agreed that the loan interests accrued during the expansion term could be repaid in several instalments before 30 November 2009 provided that Wuhai City Menggang repays the principal of the RMB150 million loan on or before 18 September 2009, and the interests failed to be paid according to the Loan Term Expansion Agreement shall itself bear an interest calculated at a rate of 18% per year for the late payment period;
(c) On 23 May 2009, Tianyu Coal and the Land Use and Management Research Center of China Agricultural University entered into a Contract of Making a Land Reclamation Plan（土地復墾方案編製合同）, pursuant to which the Land Use and Management Research Center of China Agricultural University shall make a land reclamation plan for Tianyu Coal and submit on its behalf the land reclamation plan for approval for a total service fee of RMB50,000;
(d) On 23 May 2009, Tianyu Gongmao and the Land Use and Management Research Center of China Agricultural University entered into a Contract of Making a Land Reclamation Plan（土地復墾方案編製合同）, pursuant to which the Land Use and Management Research Center of China Agricultural University shall make a land reclamation plan for Tianyu Gongmao and submit on its behalf the land reclamation plan for approval for a total service fee of RMB50,000;
(e) On 1 September 2009, the Company, Win Team Investments Limited, Real Power and TRXY entered into a sale and purchase agreement pursuant to which the Company agreed (i) to acquire from Real Power the entire issued share capital of Merrymaking Investments Limited at a total consideration of US$144.38 million; and (ii) to acquire from TRXY the entire issued share capital of Pleasing Results Ltd. at a total consideration of US$65.63 million (the “ 2009 S&P Agreement ”);

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APPENDIX VII

GENERAL INFORMATION

(f) On 18 September 2009, Max Joyce, Zhong Tie and Wuhai City Menggang entered into a Share Transfer Agreement in respect of the shares in Wuhai City Menggang（烏海市蒙港實業發展有限公司股權轉讓協議）, pursuant to which Zhong Tie transferred its 31.25% equity interests in Wuhai City Menggang to Max Joyce at the consideration of RMB136.2 million that shall be settled before 3 December 2009. On 11 November 2009, Zhong Tie confirmed that they would not take action against Max Joyce to claim the share consideration before 23 December 2009 by issuing an extension letter;
(g) On 18 September 2009, Favour Mind and China Railway Erju Co., Ltd entered into a Supplemental Agreement to the Share Transfer Agreement in relation to the Term Expansion of the Trust Financing (Two)（股權轉讓協議補充（展期）協議二）, pursuant to which Favour Mind shall transfer its share capital contribution of HK80 million in Wuhai City Menggang to China Railway Erju Co., Ltd at the consideration of RMB1 yuan when one of the following conditions is fulfilled (i) the termination of the Supplemental Agreement to the Cooperation Framework Agreement in relation to the Term Expansion of the Trust Financing (Two), (ii) the failure of Wuhai City Menggang to fully repay the loan and its related interests and of Max Joyce to pay the consideration for the transferred shares on or before 3 December 2009;
(h) On 18 September 2009, Wuhai City Menggang, Zhong Tie, TRXY Holding Co., Ltd （泰融信業控股有限公司）, TRXY (Tong Liao) Electronic Technology Co., Ltd（泰融信業（通遼）電子科技有限公司）, Favour Mind, Beijing Taitong Hengye Trading Development Co., Ltd（北京泰通恒業貿易發展有限公司）, and Mr. Yau Wai Ming entered into a Supplemental Agreement to the Loan Term Expansion (Two)（中鐵協議（合同）09021號借款展期協議書補充協議（二））, pursuant to which term of the RMB150 million was expanded and the expanded term is from 19 September 2009 to 3 December 2009;
(i) On 18 September 2009, Wuhai City Menggang, Zhong Tie, TRXY Holding Co., Ltd （泰融信業控股有限公司）, TRXY (Tong Liao) Electronic Technology Co., Ltd（泰融信業（通遼）電子科技有限公司）, Favour Mind, Mr. Yau Wai Ming, China Railway Erju Co. Ltd, Brilliant Wise and Max Joyce entered into a Supplemental Agreement to the Cooperation Framework Agreement in relation to the Term Expansion of the Trust Financing (Two)（合作框架協議補充（展期）二）, pursuant to which both of the term of the RMB150 million trust loan offered to Wuhai City Menggang and the payment period of the consideration of the RMB100 million equity interests transferred to Max Joyce were expanded and both of the expanded periods are from 19 September 2009 to 3 December 2009;

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GENERAL INFORMATION

APPENDIX VII

(j) On 18 September 2009, Wuhai City Menggang and Zhong Tie Trust entered into a Share Charge Contract（權利質押合同）, pursuant to which Wuhai City Menggang charged its 100% equity interests in Tianyu Coal in favour of Zhong Tie Trust to secure the repayment of the principal and related interests of the RMB150 million loans and the payment of the transferred shares consideration of RMB136.2 million on or before 3 December 2009; and
(k) On 22 December 2009, the Company, Win Team Investments Limited, Real Power and TRXY entered into a supplemental agreement to amend certain terms of 2009 S&P Agreement.

Save as the aforesaid, no material contracts (not being contract entered into in the ordinary course of business) had been entered into by any member of the Enlarged Group within the two years immediately preceding the Latest Practicable Date which are or may be material.

11. SECRETARY OF THE COMPANY

The secretary of the Company is Mr. Fok Chi Tak. Mr. Fok is a member of the Hong Kong Institute of Certified Public Accountants and the Institute of Chartered Accountants of England and Wales. Mr. Fok is also a member of the Institute of Chartered Secretaries and Administrators and the Hong Kong Institute of Chartered Secretaries.

12. 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 EGM:

(a) the memorandum and articles of association of the Company;
(b) the Directors’ service contracts;
(c) the annual reports of the Company for each of the three financial years ended 31 March 2010;

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GENERAL INFORMATION

APPENDIX VII

(d) the accountants’ reports on the Venture Path Group and Baicheng Wenzhou, the text of which are set out in Appendices IIA and IIB to this circular;
(e) the PRC legal opinion in respect of the Acquisition prepared and issued by Guantao;
(f) the report in respect of the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix III to this circular;
(g) the Valuation Report prepared and issued by BMI, the text of which is set out in Appendix V to this circular;
(h) the Competent Person’s Report prepared and issued by Runge, the text of which is set out in Appendix VI to this circular;
(i) the written consents referred to under the section headed ‘‘Experts and Consents’’ in this appendix;
(j) the material contracts referred to in the paragraph headed ‘‘Material Contracts’’ in this appendix;
(k) the circular of the Company dated 15 April 2010 in relation to proposed change of company name, proposed appointment of executive director, proposed refreshment of scheme mandate limit, proposed grant of options and notice of extraordinary general meeting;
(l) the circular of the Company dated 30 July 2010 in relation to proposed re-election of directors, proposed general mandates to issue and repurchase of Shares and notice of annual general meeting;
(m) the supplemental circular of the Company dated 3 September 2010 in relation to the re-election of directors at the annual general meeting;
(n) the circular of the Company dated 10 November 2010 in relating to proposed grant of options, refreshment of general mandate and notice of extraordinary general meeting; and
(o) a copy of this circular.

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APPENDIX VII

13. MISCELLANEOUS

The principal place of business of the Company in Hong Kong is at Unit 4803, 48/F, COSCO Tower, 183 Queen’s Road Central, Hong Kong;
The registered office of the Company is at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands;
The branch share registrar and transfer office of the Company in Hong Kong is Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong; and
The English text of this circular and the accompanying form of proxy shall prevail over their respective Chinese texts in case of inconsistency.

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NOTICE OF EXTRAORDINARY GENERAL MEETING

==> picture [43 x 55] intentionally omitted <==

HAO TIAN RESOURCES GROUP LIMITED 昊天能源集團有限公司

(formerly known as “Winbox International (Holdings) Limited 永保時國際（控股）有限公司”)

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 00474)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Hao Tian Resources Group Limited (the “ Company ”) will be held at 10:00 a.m. on 13 June 2011, at Falcon Room I, Gloucester Luk Kwok Hong Kong, 72 Gloucester Road, Wanchai, Hong Kong for the purposes of considering and, if thought fit, passing the following resolutions as ordinary resolutions of the Company, with or without amendments:

ORDINARY RESOLUTIONS

“ THAT :

(a) the sale and purchase agreement (the “ S&P Agreement ”), a copy of which is produced to the meeting marked “A” and initialed by the chairman of the meeting for the purpose of identification) entered into between the Company, Champ Universe Limited (the “ Purchaser ”) and Tai Rong Xin Ye International Power Generation Inc. (the “ Vendor ”) pursuant to which the Purchaser conditionally agreed to acquire from the Vendor the entire issued share capital of the Target Company at a consideration for HK$1,550,000,000, and all transactions contemplated under the S&P Agreement and any other agreements or documents in connection therewith be and are hereby approved, confirmed and/or ratified;
(b) any one Director, or any two Directors if the affixation of the common seal is necessary, be and is/are hereby authorised for and on behalf of the Company to take all steps necessary or expedient in their opinion to implement and/or give effect to the terms of the S&P Agreement and to agree such variations, amendments or waivers thereof as are, in the opinion of such Director, in the interests of the Company;

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NOTICE OF EXTRAORDINARY GENERAL MEETING

(c) the directors of the Company be and are hereby authorized to (i) issue and allot up to 941,558,441 non-voting convertible Shares by the Company to the Vendor (“ Convertible Shares ”); and (ii) issue the convertible bond in such principal amount of HK$575,000,000 by the Company to the Vendor as may be contemplated and/or adjusted pursuant to the S&P Agreement (“ Convertible Bond ”) as part of the consideration for the acquisition under the S&P Agreement;
(d) the directors of the Company be and are hereby generally and unconditionally authorized to (i) issue and allot such number of Shares (the “ CB Conversion Shares ”), credited as fully paid, to the holders of the Convertible Bond (or its/their nominee), upon conversion of the Convertible Bond (in part or in full) in accordance with the terms of the S&P Agreement; and (ii) issue and allot such number of Shares upon conversion of the Convertible Shares (the “ CS Conversion Shares ”) in accordance with the terms of the S&P Agreement and that the CB Conversion Shares and CS Conversion Shares, when issued and allotted, shall rank pari passu in all respects with all other Shares in issue as at the date of such issue and allotment; and
(e) any one Director, or two Directors if the affixation of the common seal is necessary, be and is/are authorised for and on behalf of the Company to take all steps necessary or expedient in connection with the allotment and issue of the CS Conversion Shares and CB Conversion Shares, the share certificates or any matter in relation thereof and the Directors be and are authorised to allot, issue and deal with additional shares in the capital of the Company which may fall to be allotted and issued.
(a) the authorised share capital of the Company of HK$250,000,000 divided into 5,000,000,000 shares of HK$0.05 each be and is hereby re-designated and reclassified as (i) 2,411,463,553 ordinary shares of HK$0.05 each (“ Ordinary Shares ”) and (ii) 941,558,441 Convertible Shares of HK$0.05 each and the rights and restrictions of which are set out in the circular of the Company dated 25 May 2011 (the “ Circular ”) and all of the existing issued shares of the Company shall be re-designated as Ordinary Shares which shall have the same rights and restrictions attached thereto as are attached to the shares immediately prior to the re-designation and re-classification of the share capital of the Company;
(b) the rights and restrictions of the Convertible Shares as set out in the Circular, a copy of the Circular has been produced to this meeting marked “B” and signed by the chairman of this meeting for the purpose of identification, be and are hereby approved;

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NOTICE OF EXTRAORDINARY GENERAL MEETING

(c) the Convertible Shares shall carry equal rights and rank pari passu with one another and each Convertible Share shall have the rights and benefits and subject to the restrictions set out in the Circular; and
(d) the Directors of the Company be and are hereby authorised to do all other acts and things and execute all documents which they consider necessary, desirable or expedient for the implementation of and giving effect to the transactions contemplated under this resolution.”

By order of the Board Hao Tian Resources Group Limited Fok Chi Tak Company Secretary

Hong Kong, 25 May 2011

Notes:

(1) All the resolutions to be proposed at the extraordinary general meeting will be decided by poll.
(2) A member of the Company entitled to attend and vote at the extraordinary general meeting is entitled to appoint one or, if he is the holder of two or more shares, more than one proxy to attend and, on a poll, to vote instead of him. A proxy need not be a member of the Company.
(3) Where there are joint registered holders of any share, any one of such persons may vote at the extraordinary general meeting, either in person or by proxy, in respect of such share as if he were solely entitled thereto, but if more than one of such joint holders be present at the extraordinary general meeting personally or by proxy, that one of the said persons so present whose name stands first on the register in respect of such share, shall alone be entitled to vote in respect thereof.
(4) To be valid, the form of proxy, together with the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of such power or authority, must be deposited at the branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for holding the extraordinary general meeting or adjourned meeting. Completion and return of the form of proxy will not preclude members from attending and voting in person at the extraordinary general meeting.

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AI assistant

Aceso Life Science Group Limited — Proxy Solicitation & Information Statement 2011

49235_rns_2011-05-24_9171050c-e4b0-4c06-be43-68dda3019224.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

HAO TIAN RESOURCES GROUP LIMITED 昊天能源集團有限公司

Financial Adviser to the Company

Independent Financial Adviser to the

Asia Investment Management Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

HAO TIAN RESOURCES GROUP LIMITED 昊天能源集團有限公司

(I) MAJOR AND CONNECTED TRANSACTION; (II) RE-DESIGNATION AND RE-CLASSIFICATION OF SHARE CAPITAL, AND CREATION OF NEW CLASS OF SHARES; AND

(III) NOTICE OF EXTRAORDINARY GENERAL MEETING

1. INTRODUCTION

LETTER FROM THE BOARD

2. BACKGROUND

LETTER FROM THE BOARD

LETTER FROM THE BOARD

3. THE S&P AGREEMENT

Date

Parties

Subject matter

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Consideration

LETTER FROM THE BOARD

Conditions

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Completion

4. FINANCING OF THE ACQUISITION

5. CONVERTIBLE SHARES

LETTER FROM THE BOARD

LETTER FROM THE BOARD

6. RE-DESIGNATION AND RE-CLASSIFICATION OF SHARE CAPITAL

7. CONVERTIBLE BOND

LETTER FROM THE BOARD

LETTER FROM THE BOARD

A

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

8. EFFECT ON SHAREHOLDING STRUCTURE

LETTER FROM THE BOARD

9. INFORMATION ON THE PURCHASER

LETTER FROM THE BOARD

10. INFORMATION ON THE TARGET GROUP

11. THE TARGET MINE

(a) Licences and Approvals

Table 1 – Mining Licence Details

LETTER FROM THE BOARD

Table 2 – Mining Licence Coordinates

LETTER FROM THE BOARD

Table 4 – Coal Production Permit Details

Mine/Project

No. 3 Pit of No. 1 Coal Mine

(b) Findings of ERM’s Environmental, Health, Safety and Social review

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Material Risk

(1) Environmental Permitting

(2) Health and Safety (Fire Fighting)

LETTER FROM THE BOARD

High Risk

(1) Environmental (Pollutant Discharge)

LETTER FROM THE BOARD

(2) Occupational Health and Safety (Occupational Health Permits)

(3) Occupational Health and Safety (Safety Permitting)

LETTER FROM THE BOARD

Aceso Life Science Group Limited Proxy Solicitation & Information Statement 2011