China Qinfa Group Limited

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your licensed securities dealer or registered institution in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in China Qinfa Group Limited（中國秦發集團有限公司） , you should at once hand this circular and the accompanying form of proxy to the purchaser or transferee or to the bank, licensed securities dealer, registered institution in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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.

This circular appears for information only and does not constitute an invitation or offer to shareholders or any other persons to acquire, purchase, or subscribe for securities of the Company.

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CHINA QINFA GROUP LIMITED 中國秦發集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 866)

VERY SUBSTANTIAL ACQUISITION IN RELATION TO THE ACQUISITION OF 48% INTEREST OF HUAMEIAO ENERGY

AND

NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser to the Company

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A letter from the Board is set out on pages 6 to 33 of this circular.

A notice convening the EGM to be held at Room 2, 10/F., United Centre, 95 Queensway, Admiralty, Hong Kong on 23 December 2011 at 10:30 a.m. is set out on pages EGM-1 to EGM-2 of this circular. A form of proxy for use at the EGM is enclosed. 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 the same to the Company’s branch share registrar and transfer office in Hong Kong, Union Registrars Limited, 18th Floor, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong as soon as practicable but in any event not later than 48 hours before the time appointed for holding of the EGM or any adjournment thereof (as the case may be). Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof (as the case may be) should you so wish and in such case, the form of proxy shall be deemed to be revoked.

8 December 2011

CONTENTS

			Page
DEFINITIONS . . . . . .		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM	THE	BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
APPENDIX I	–	FINANCIAL INFORMATION OF THE GROUP . . . . . .	I-1
APPENDIX II	–	FINANCIAL INFORMATION OF HUAMEIAO
		ENERGY GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . .	II-1
APPENDIX III	–	UNAUDITED PRO FORMA FINANCIAL
		INFORMATION OF THE ENLARGED GROUP . . . .	III-1
APPENDIX IV	–	COMPETENT PERSON’S REPORT ON THE MINES .	IV-1
APPENDIX V	–	VALUATION REPORT ON THE 48% EQUITY
		INTEREST OF HUAMEIAO ENERGY GROUP . . . .	V-1
APPENDIX VI	–	LETTER IN RELATION TO DISCOUNTED
		FUTURE ESTIMATED CASH FLOWS . . . . . . . . . . .	VI-1
APPENDIX VII	–	PROPERTY VALUATION REPORT OF
		THE ENLARGED GROUP . . . . . . . . . . . . . . . . . . . . .	VII-1
APPENDIX VIII	–	GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . .	VIII-1
NOTICE OF THE EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			EGM-1

– i –

DEFINITIONS

In this circular, the following expressions shall have the following meanings unless the context indicates otherwise:

“A$” Australian dollars, the lawful currency of Australia
“Acquisition Agreement”
the agreement dated 26 October 2011 made between the Vendors and the Company in relation to the Proposed Acquisition
“Board” the board of Directors
“Business Day”
a day (other than a Saturday, Sunday or a public holiday) on which licensed banks are generally open for business in Hong Kong throughout their normal business hours
“BVI” the British Virgin Islands
“China” or “PRC”
The People’s Republic of China which excludes, for the purpose of this circular, Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan
“China Shipbuilding”
中國船舶工業貿易公司 (China Shipbuilding Trading Company, Limited*), a limited liability company established under the laws of the PRC and an Independent Third Party
“Chongsheng Coal”
山西朔州平魯區華美奧崇升煤業有限公司 (Shanxi Shuozhou Pinglu District Huameiao Chongsheng Coal Company Limited*), a limited liability company established on 21 March 1998 under the laws of the PRC and a wholly-owned subsidiary of Huameiao Energy
“Chongsheng Coal Mine”
the coal mine with a site area of approximately 2.9 square kilometers, the mining rights of which are held by Chongsheng Coal
“Coal Industry Bureau”
the Coal Industry Bureau of Shanxi Province（山西省煤炭工業廳）
“Company”
China Qinfa Group Limited （中國秦發集團有限公司）, a company incorporated in the Cayman Islands with limited liability, the issued Shares of which are listed on the Stock Exchange
“Competent Person’s Report”
has the meaning as defined in Chapter 18 of the Listing Rules and is set out in Appendix IV to this Circular

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DEFINITIONS

“Completion” completion of the Proposed Acquisition in accordance with the terms of the Acquisition Agreement
“connected persons” has the meaning ascribed to this term under the Listing Rules
“Consideration” the consideration payable by the Company to the Vendors for the Proposed Acquisition under the Acquisition Agreement
“CSSC Guangzhou Longxue” 廣州中船龍穴造船有限公司 (CSSC Guangzhou Longxue Shipbuilding Co., Ltd.*), a limited liability company established under the laws of the PRC and an Independent Third Party
“Director(s)” directors of the Company
“EGM” an extraordinary general meeting of the Company to be convened for the purpose of considering and, if thought fit, approving the Acquisition Agreement and the transactions contemplated thereunder
“Enlarged Group” the Group as enlarged by Huameiao Energy Group upon Completion
“Fengxi Coal” 山西朔州平魯區華美奧馮西煤業有限公司 (Shanxi Shuozhou Pinglu District Huameiao Fengxi Coal Company Limited*), a limited liability company established on 16 March 1998 under the laws of the PRC and a wholly-owned subsidiary of Huameiao Energy
“Fengxi Coal Mine” the coal mine with a site area of approximately 2.4 square kilometers, the mining rights of which are held by Fengxi Coal
“First Acquisition” the acquisition of 32% of Huaomeiao Energy as disclosed in the Company’s announcement dated 17 November 2010 and circular dated 30 June 2011
“First Agreement” Equity Interest Transfer Agreement dated 17 November 2010 entered into between Huiyong Jinyuan Energy, Ms. Guan, Ms. Jin and Guangfa Energy in relation to the First Acquisition
“Fortune Pearl”
Fortune Pearl International Limited, a company incorporated in the BVI on 22 January 2008 and as at the Latest Practicable Date, a Shareholder holding 1,186,000,000 Shares

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DEFINITIONS

“Group” the Company and its subsidiaries
“Guangfa Energy”
朔州市廣發能源投資有限公司 (Shuozhou Guangfa Energy Investment Company Limited*), a limited liability company established on 1 September 2010 under the laws of the PRC and a wholly-owned subsidiary of the Company
“Hong Kong” The Hong Kong Special Administrative Region of the PRC
“Huameiao Energy” 山西華美奧能源集團有限公司 (Shanxi Huameiao Energy Group Company Limited*), a limited liability company established on 12 January 2004 under the laws of the PRC
“Huameiao Energy Group” Huameiao Energy and its subsidiaries including Xingtao Coal, Fengxi Coal and Chongsheng Coal
“Huiyong Jinyuan Energy”
山西匯永金源能源技術有限責任公司 (Shanxi Huiyong Jinyuan Energy Technology Company Limited*), a limited liability company established on 4 August 2008 under the laws of the PRC, an Independent Third Party and one of the Vendors
“HK$”
Hong Kong dollars, the lawful currency of Hong Kong
“Independent Third Party(ies)”
third party(ies) who is/are independent of the Company, the Directors, chief executive or substantial shareholders of the Company or any of its subsidiaries or their respective associates as defined in the Listing Rules
“Latest Practicable Date”
8 December 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
“Mr. Jin”
靳衛國 (Jin Huiguo), an Independent Third Party and one of the Vendors
“Ms. Guan”
關革俠 (Guan Gexia), an Independent Third Party and one of the Vendors
“Ms. Suo”
索娜 (Suo Na), an Independent Third Party and one of the Vendors

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DEFINITIONS

“Mr. Xu” 徐吉華 (Xu Jihua), the chairman of the Group and an executive director
“PRC Legal Advisers” Zhong Lun Law Firm “Proposed Acquisition” the proposed acquisition of 48% equity interest of Huameiao Energy pursuant to the terms and subject to the conditions of the Acquisition Agreement
“RMB” Renminbi yuan, the lawful currency in China “Ruifeng Coal” 山西渾源瑞風煤業有限責任公司 (Shanxi Hun Yuan Rui Feng Coal Company Limited*), a company with limited liability established under the laws of the PRC and a 87.88%-owned subsidiary of the Company
“SFO” means the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“Share(s)” ordinary share(s) of HK$0.10 each in the share capital of the Company
“Shareholder(s)” holder(s) of the Shares “Stock Exchange” The Stock Exchange of Hong Kong Limited “Technological Modification” means replacement, upgrading and modification on certain production equipment so as to improve the productivity
“US$” United States dollars, the lawful currency of the United States of America
“Valuation Report” has the meaning as defined in Chapter 18 of the Listing Rules and is set out in Appendix V to this circular
“Vendors” Ms. Guan, Mr. Jin, Ms. Suo and Huiyong Jinyuan Energy
“Xingtao Coal” 山西朔州平魯區華美奧興陶煤業有限公司 (Shanxi Shuozhou Pinglu District Huameiao Xingtao Coal Company Limited*), a limited liability company established on 22 February 2010 under the laws of the PRC and a wholly-owned subsidiary of Huameiao Energy
“Xingtao Coal Mine” the coal mine with a site area of approximately 4.3 square kilometers, the mining rights of which are held by Xingtao Coal

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DEFINITIONS

“%”

per cent

* English translation for identification only

Unless otherwise specified, translation of RMB into HK$ in this circular is based on the rates of HK$1.0 = RMB0.82 for illustration purpose only.

– 5 –

LETTER FROM THE BOARD

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CHINA QINFA GROUP LIMITED 中國秦發集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 866)

Executive Directors:

Mr. Xu Jihua (Chairman) Ms. Wang Jianfei Mr. Weng Li Ms. Liu Xiaomei

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

Independent non-executive Directors:

Mr. Huang Guosheng Mr. Lau Sik Yuen Dr. Qian Pingfan

Head office and principal place of business in Hong Kong:

Room 1303, 13th Floor MassMutual Tower No. 38 Gloucester Road Wanchai Hong Kong

8 December 2011

To Shareholders

Dear Sir/Madam,

VERY SUBSTANTIAL ACQUISITION IN RELATION TO THE ACQUISITION OF 48% INTEREST OF HUAMEIAO ENERGY

AND

NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

Reference is made to the announcement dated 4 November 2011 in relation to Guangfa Energy’s acquisition of 48% equity interest in Huameiao Energy at the cash consideration of RMB2.88 billion (equivalent to approximately HK$3.51 billion).

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LETTER FROM THE BOARD

The purpose of this circular is to give you, among other things, (i) further information on the Acquisition Agreement and the transactions contemplated thereunder; (ii) the financial information of Huameiao Energy Group; (iii) the unaudited pro forma financial information of the Enlarged Group; (iv) the report on the valuation of Huameiao Energy Group and (v) notice of the EGM.

THE ACQUISITION AGREEMENT

Date: 26 October 2011 Vendors: Ms. Guan; Mr. Jin; Ms. Suo; and Huiyong Jinyuan Energy Purchaser: Guangfa Energy

To the best of the Directors’ knowledge, information and belief, and having made all reasonable enquiries, each of the Vendors and the ultimate beneficial owner of Huiyong Jinyuan Energy is an Independent Third Party.

The equity interest to be acquired

Guangfa Energy shall acquire 48% equity interest in Huameiao Energy from the Vendors in the proportion as follows:

13% equity interest from Ms. Guan;
15% equity interest from Ms. Suo; and
20% equity interest from Huiyong Jinyuan Energy

No equity interest in Huameiao Energy will be disposed of by Mr. Jin but he agreed to waive his pre-emption right in acquiring the equity interest of Huameiao Energy. Upon Completion, Huameiao Energy will be owned as to 80% by Guangfa Energy, 10% by Mr. Jin, 5% by Ms. Guan and 5% by Huiyong Jinyuan Energy.

As Guangfa Energy will become the controlling shareholder of Huameiao Energy, Huameiao Energy will be treated as a subsidiary of the Company.

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LETTER FROM THE BOARD

Shareholding structure of Huameiao Energy before and after Completion

Before Completion

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

Huiyong
Ms. Suo Guangfa Energy Ms. Guan Mr. Jin
Jinyuan Energy
15% 25% 32% 18% 10%
Huameiao Energy
100%
Xingtao Coal Fengxi Coal Chongsheng Coal
----- End of picture text -----

After Completion

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

Huiyong
Guangfa Energy Ms. Guan Mr. Jin
Jinyuan Energy
5% 80% 5% 10%
Huameiao Energy
100%
Xingtao Coal Fengxi Coal Chongsheng Coal
----- End of picture text -----

Consideration

The Consideration is in the sum of RMB2.88 billion (equivalent to approximately HK$3.51 billion) and shall be satisfied by Guangfa Energy in the following manner:

(i) RMB200 million (equivalent to approximately HK$243.9 million) has been paid by cash on or before 30 October 2011;
(ii) RMB800 million (equivalent to approximately HK$975.6 million) has been paid by cash on or before 30 November 2011;
(iii) RMB1.232 billion (equivalent to approximately HK$1.502 billion) will be payable by cash on or before 30 June 2013; and
(iv) RMB648 million (equivalent to approximately HK$790.2 million) will be settled by way of the Group taking up the responsibility to repay the banking facilities of Huameiao Energy in the amount of RMB648 million (equivalent to approximately HK$790.2 million), upon obtaining approval from the relevant PRC government authority on the transfer of equity interest of Huameiao Energy.

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LETTER FROM THE BOARD

The Consideration was arrived at after arm’s length negotiations between Guangfa Energy and the Vendors on normal commercial terms with reference to (i) the coal production volume of Huameiao Energy Group pursuant to the Acquisition Agreement; and (ii) the coal reserve set forth in the paragraph headed “Principal business of Huameiao Energy” below. Also, the Directors have considered that the valuation of Huameiao Energy Group in September 2011 of approximately RMB6 billion (equivalent to approximately HK$7.32 billion), and hence the valuation of 48% equity interest in Huameiao Energy Group is approximately RMB2.88 billion (equivalent to approximately HK$3.51 billion). Such valuation was prepared by BMI Appraisals Limited, an independent valuer, in accordance with Chapter 18 of the Listing Rules, including but not limited to the “Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports”, on the basis of discounted cashflow method. As such, the Directors (including the independent non-executive Directors) consider that the amount of the Consideration is fair and reasonable.

In the event that the approval of the change of shareholding interest of Huameiao Energy relating to the Proposed Acquisition cannot be obtained on or before 20 December 2011 (or such other date to be agreed by the parties) because of:

(a) government or policy reason, the Vendors will sign an entrustment agreement with Guangfa Energy pursuant to which the Vendors shall hold the 48% equity interest of Huameiao Energy on trust for Guangfa Energy until the change of equity interest of Huameiao Energy relating to the Proposed Acquisition has been approved by the relevant PRC government authority; or
(b) reasons other than government or policy reason, the Vendors will sign charge documents with Guangfa Energy pursuant to which the Vendors will charge the 48% equity interest of Huameiao Energy in favour of Guangfa Energy until the change of equity interest of Huameiao Energy relating to the Proposed Acquisition has been approved by the relevant PRC government authority.

To expedite the progress of obtaining the control of Huameiao Energy before year end and to be well prepared to meet the demand of the peak sales season of coal in the second quarter of 2012, the parties agreed that the application for the transfer of equity interest of Huameiao Energy would be submitted to the PRC government earlier if a substantial part of the Consideration has been received by the Vendors. The Board considers that the settlement arrangement of the Consideration is fair and reasonable in light of the Vendors agreeing to submit the relevant application to the PRC government earlier upon receipt of RMB1 billion (equivalent to approximately HK$1.22 billion).

Appointment of directors to Huameiao Energy

As at the date of the Acquisition Agreement and the Latest Practicable Date, Huameiao Energy has 5 directors. Upon the signing of the Acquisition Agreement, Guangfa Energy shall be entitled to appoint at least 3 directors to the board of directors of Huameiao Energy whereas 3 of the existing directors of Huameiao Energy as appointed by the Vendors shall resign.

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LETTER FROM THE BOARD

Conditions precedent

Completion shall be subject to the satisfaction of the following conditions precedent:

(i) the passing by the Shareholders at the EGM by way of poll, the necessary resolutions to approve the Acquisition Agreement and the transactions contemplated thereunder; and
(ii) the Company having complied, to the satisfaction of the Stock Exchange, with all requirements under the Listing Rules.

Completion

Completion shall take place within 5 days upon the fulfillment of the conditions precedent (or such other date as the parties may agree). Upon Completion, Huameiao Energy will become a subsidiary of the Company and its financial results will be consolidated into the accounts of the Group.

INFORMATION OF THE VENDORS

Huiyong Jinyuan Energy was established under the laws of the PRC as a limited liability company on 4 August 2008 with a registered capital of RMB30 million (equivalent to approximately HK$36.59 million) and its scope of business includes assets management.

All of Ms. Guan, Mr. Jin and Ms. Suo are PRC nationals.

Mr. Jin, being one of the shareholders of Huameiao Energy, has started his career in mining industry since 1987. He founded an energy company in Shanghai in 1995 and joined Huameiao Energy in 2004.

Ms. Guan, being one of the shareholders of Huameiao Energy, has started her career in mining industry since 2000. She is one of the founding members of Huameiao Energy and has been working as director of an energy company in Shanxi for four years before founding Huameiao Energy.

Ms. Suo, being one of the shareholders of Huameiao Energy, worked for Tibet Mining Geosciences Exploration Team from 1977 till her retirement. She is one of the founding members of Huameiao Energy.

INFORMATION OF HUAMEIAO ENERGY

Background of Huameiao Energy

Huameiao Energy was established under the laws of the PRC as a limited liability company on 12 January 2004 with a fully-paid registered capital of RMB300 million (equivalent to approximately HK$365.85 million), and its scope of business includes (i) wholesale and retail of construction materials and chemical products; and (ii) the mining business. According to a document in relation to the Approval of Merging and

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LETTER FROM THE BOARD

Reorganization of Coal Enterprises in Pinglu District, Shuozhou (the “ Document ”) issued in September 2009 by the Work Leading Group Office of the Merging and Reorganization of Coal Enterprises in Shanxi Province （山西省煤礦企業兼併重組整合工作領導組辦公室）, Huameiao Energy is defined as a merging and reorganization entity, with qualifications for the acquisition or integration of coal mines. Huameiao Energy has three wholly owned subsidiaries, namely Xingtao Coal, Fengxi Coal and Chongsheng Coal.

Principal business of Huameiao Energy

Huameiao Energy is allowed to acquire and consolidate three coal mines held by its wholly owned subsidiaries which are Xingtao Coal, Fengxi Coal and Chongsheng Coal, details of which are stated as follows:

Xingtao Coal

Xingtao Coal holds the mining right of the Xingtao Coal Mine with a site area of approximately 4.3 square kilometers. According to the Competent Person’s Report, Xingtao Coal Mine has coal reserve of approximately 82.4 million tonnes in the end of September 2011. Xingtao Coal Mine is a consolidated retained coal mine after the resources consolidation carried out in Shanxi Province. Xingtao Coal has obtained the Coal Production Permit （煤炭生產許可證） which is valid until 31 January 2018. According to Competent Person’s Report in page IV-65 of this circular, Xingtao Coal Mine produced approximately 4 million tonnes of raw coal for 2011 and is expected to maintain 4 million tonnes of coal production annually thereafter. The business conducted by Xingtao Coal as at the date hereof is within the scope of business stated in the business licence.

In 2007, through the comprehensive examination and inspection of mining, transport improvement, ventilation, drainage, power supply, environmental protection and site construction systems, the People’s Government of Shuozhou named Xingtao Coal Mine a standardized coal mine for the purpose of recognition.

Fengxi Coal

Fengxi Coal holds the mining right of the Fengxi Coal Mine with a site area of approximately 2.4 square kilometers. According to Competent Person’s Report, Fengxi Coal Mine has coal reserve of approximately 51 million tonnes. Fengxi Coal Mine is an individual retained coal mine after the resources consolidation carried out in Shanxi Province. The Directors expect that the Coal Production Permit and the Coal Production Safety Permit will be issued by the relevant government departments in the first quarter of 2012 after the completion of the Technological Modification and inspection and acceptance of the Fengxi Coal Mine. The Technological Modification of Fengxi Coal Mine which mainly including the necessary purchase, improvement or modification of the equipment in the mining site for the purpose of increasing the efficiency coal mining, preparation production and beneficiation in addition to improve the productivity and the standard of safety is almost completed, it should be fully operational by December 2011. Construction of the coal storage silos was in an advanced stage of development as of the time of Competent Person’s visit in October 2011 and both the yard and the wash plant should be fully operational before the end of 2011. At the time of the site visit in October 2011 the

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LETTER FROM THE BOARD

status and timing was observed or stated to be: The mine buildings were completed, the longwall equipment was fully operational since the first quarter of 2011. The wash plant appears to be substantially completed and should be operational within the last quarter of 2011. The normal production is expected to be commenced in the first quarter of 2012 with an annual designed production capacity of not less than 3.5 million tonnes of raw coal, according to the Competent Person’s Report. The business conducted by Fengxi Coal as at the date hereof is within the scope of business stated in its business licence.

Chongsheng Coal

Chongsheng Coal holds the mining right of the Chongsheng Coal Mine with a site area of approximately 2.9 square kilometers. According to the Competent Person’s Report, Chongsheng Coal Mine has coal reserve of approximately 51 million tonnes. Chongsheng Coal Mine is a consolidated retained coal mine after the resources consolidation carried out in Shanxi Province. Chongsheng Coal Mine is now under Technological Modification and is expected to commence coal production in the fourth quarter of 2011, the expected annual production capacities for year 2012 and 2013 are approximately 2.8 million and 3.5 million tonnes of raw coal, respectively. The Technological Modification which mainly includes the necessary purchase, improvement or modification of the equipment in the mining site for the purpose of increasing the efficiency of coal mining, preparation production and beneficiation in addition to improve the productivity and the standard of safety is in advanced construction phase. The decline for the conveyor was completed. Total underground development of 944 meters planned for 2011 was substantially completed, in addition to the approximately 300 meters already driven in 2010. The wash plant was substantially completed. The two raw coal storage silos were substantially completed. The surface facilities were also substantially completed at the time of Competent Person’s visit. The cost of Technological Modification is responsible for by the Vendors. The Directors expect that the Coal Production Permit and the Coal Production Safety Permit will be issued by the relevant government departments by the end of first quarter of 2012 after the completion of the Technological Modification and inspection and acceptance of the coal mines. The business conducted by Chongsheng Coal as at the date hereof is within the scope of business stated in its business licence.

The main products of the three coal mines mentioned above are long flame coal and gas coal which could be used in power generation and coke making.

The Competent Person believes that the way the mines are constructed or are being constructed, and with the operating experience from the longwall operations at Xingtao Coal Mine, that all three mines will be able to produce at the levels or higher as shown in Competent Person’s Report, page IV-65 of this circular, table 6-1.

The PRC Legal Advisers confirmed that there is no obstacles in obtaining the Coal Production Permit and the Coal Production Safety Permit for Fengxi Coal Mine and Chongsheng Coal Mine. The applications for the renewal of the Mining Licences of Xingtao Coal, Fengxi Coal and Chongsheng Coal have been submitted to the government bureaus and it is expected that the renewal can be completed by the end of first quarter of 2012. The PRC Legal Advisers also confirmed that Xingtao Coal, Fengxi Coal and Chongsheng Coal are in the course of renewing their Mining Licenses and there is no legal obstacles in

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LETTER FROM THE BOARD

obtaining renewal of the same. The PRC Legal Advisers also confirmed that various licenses will still be renewable in the future if proper procedures established by the licensing agencies are followed. Save and except the three coal mines, Huameiao Energy Group does not have other material assets. No capital commitment on modifying the three coal mines has been required from the Group pursuant to the First Agreement.

The Company is a leading buyer, shipper and marketer of coal from the three coal mines. In becoming the controlling shareholder of Huameiao Energy Group, the three coal mines will form part of the Group’s fully integrated thermal coal supply chain and enable the Group to secure an upstream supply of quality thermal coal. The liquidity of the Group will then enhance as no deposit is required to make on the purchase of coal from Huameiao. With this acquisition and increased cashflow, the Group could increase the trading volume of coal in PRC and overseas market by obtaining coal from the three coal mines and/or purchasing coal from existing coal suppliers in PRC and overseas.

Being a leading non-state owned coal supply chain operator by trading volume in PRC, the Company has direct access to the PRC domestic coal transportation network and possessed shipping transportation facilities. The increased cashflow would be used to purchase coals. Huameiao Energy Group has developed its own distribution network in Shanxi Province and established business relationship with Shanxi coal traders and coal loading stations, the increased supply of coal from the three coal mines would be sold to its existing customers which has not possessed any coal mine and sourced coal supply when they receive orders from their customers. With the extensive transportation facilities of the Group, the Group could also sell the coal from the three coal mines to its existing customers mainly located in Guangdong Province and along the costal regions in China, including but not limited to, power plant and cement factory in the event that the Shanxi coal traders could not absorb the trading of coals from the three mines and such transactions will contribute higher profitability to the Group. If the coals from the three coal mines are sold to the Group members, the Group members will act as distributor and marketer.

The expected wash coal of the three coal mines will be 7,150,000 tonnes per annum after reaching its full production capacity with the wash yield rate of 65% as per the Competent Person’s Report, which only accounts for 65.6% of the trading volume of the Company in 2010. As such, it is reasonable to believe that the expected wash coal of the three coal mines could be absorbed by the Company through its existing distribution network.

In accordance with Table 6-1 of the Competent Person’s Report set out in page IV-65 of this circular, it is clearly shown that (i) the production of Xingtao Coal Mine in 2011 is 4 million tonnes; (ii) the production of Fengxi Coal Mine in 2011 is 1.75 million tonnes and is expected to have 100% growth, amounting to 3.5 million tonnes; and (iii) the production of Chongsheng Coal Mine in 2011 is 0.8 million tonnes and is expected to have 3.5 million tonnes in 2013. According to the Competent Person’s Report, pages IV-76, IV-77 and IV-80 of this circular, the planned wash plant of Fengxi Coal is similar in design to the Xingtao Coal and the type of plant for Fengxi Coal is based on good design and will function similar to the Xingtao Coal wash plant. The type of plant for Chongsheng is also based on good design and will function similar to Xingtao Coal wash plant.

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LETTER FROM THE BOARD

In addition, since Xingtao Coal, Fengxi Coal and Chongsheng Coal are all located in Shuozhou area, and will function with similar facilities and structure, as such, the projection of Fengxi and Chongsheng Coal Mines is based on the production of Xingtao Coal Mine which is currently in full operation in 2011. The projection of Fengxi Coal Mine and Chongsheng Coal Mine has been reviewed and updated by Gustavson Associates, LLC during its recent visit to China in October 2011. As such it is reasonable to believe that the three coal mines will be able to produce a total output of 11 million tonnes in 2013.

As mentioned in a research report issued in November 2011, the demand of coal in PRC will be increased as the consumption of electricity in PRC will increase in the foreseeable future. As such, the increased supply of coal from the three coal mines is expected to be absorbed by the existing customers of the Enlarged Group in PRC.

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

Based on the audited consolidated financial information of the Huameiao Energy Group, as of 30 June 2011, audited total assets and net assets of Huameiao Energy Group amounted to approximately RMB2.43 billion and RMB488.7 million respectively. Please refer to the accountants’ report of the Huameiao Energy Group prepared in accordance with International Financial Reporting Standards as set out in Appendix II to this circular.

MANAGEMENT DISCUSSION AND ANALYSIS OF HUAMEIAO ENERGY GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2008, 2009 AND 2010

Financial results

Revenue

For the three financial years ended 31 December 2008, 2009 and 2010, Huameiao Energy Group recorded revenue of approximately RMB322.8 million, RMB341.4 million and RMB914.5 million, respectively. In both 2008 and 2009, the revenue and profits were contributed by only one single mine, the Xingtao Coal Mine, whereas during 2010, Fengxi Coal Mine produced 860,000 tonnes of coal, which was all development coal from construction of the coal mine, and contributed revenue of approximately RMB190.1 million. In addition, more capitals were invested in Xingtao Coal Mine to increase its annual production capacity. In 2010, the global economy recovered from the financial crisis which occurred in 2009 and there was a revival in the demand of coal-fired electricity, and hence an increase in the demand of coal in 2010. Hence, the total revenue for 2010 increased significantly by approximately 167.9% compared to 2009.

Gross profit margin

For the three financial years ended 31 December 2008, 2009 and 2010, the gross profits margin was approximately 18.1%, 23.8% and 30.2%, respectively. The increase in gross profit margin was in line with the increasing trend in coal selling prices in the market and was attributable to the increased production efficiency of Xingtao Coal Mine as the cost of sales included some direct fixed costs such as depreciation of plant and machinery.

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Other revenue

For the three financial years ended 31 December 2008, 2009 and 2010, Huameiao Energy Group recorded other revenue of approximately RMB3.7 million, RMB0.1 million and RMB38.2 million, respectively. The significant increase in 2010 compared to 2008 and 2009 was primarily attributable to the purchase bargain gain of approximately RMB37.0 million on the acquisition of 山西朔州洪泉煤業有限公司 (Shanxi ShuoZhou Hong Quan Coal Company Limited*) (“Hong Quan Coal”) during 2010.

Administrative expenses

For the three financial years ended 31 December 2008, 2009 and 2010, Huameiao Energy Group recorded administrative expenses of approximately RMB31.5 million, RMB44.6 million and RMB114.2 million, respectively. The administrative expenses mainly represented staff costs, consultancy services fee for the development of coal mines and other office expenses. The increasing trend throughout the three years was in line with the business expansion as described above.

Finance costs

The finance costs for the year ended 31 December 2008 and 2009 were trivial (less than RMB0.1 million), but the finance costs significantly increased to approximately RMB38.0 million in 2010 because new bank loans with a total amount of RMB900.0 million were drawn in 2010 for the purpose of financing the acquisition of coal mines and as working capital.

Profit and total comprehensive income for the year

For the three financial years ended 31 December 2008, 2009 and 2010, Huameiao Energy Group recorded profit and total comprehensive income of approximately RMB15.6 million, RMB20.8 million and RMB108.3 million, respectively. The increasing trend throughout the three years was in line with the business expansion as described above and the increasing production capacity and efficiency of Xingtao Coal Mine.

Liquidity and Financial resources

During 2008 and 2009, Huameiao Energy Group funded its operations through equity funding and operating cash flows and had no bank borrowings as at 31 December 2008 and 2009. During 2010, due to the increased capital requirements for business expansions, Huameiao Energy Group made three new bank loans.

As at 31 December 2010, Huameiao Energy Group had outstanding secured borrowings of RMB900.0 million. The gearing ratio (calculated as interest-bearing borrowings divided by total assets) of Huameiao Energy Group as at 31 December 2010 was approximately 48.0%.

As at 31 December 2008, 2009 and 2010, the cash and cash equivalents balances of Huameiao Energy Group were approximately RMB2.0 million, RMB26.1 million and RMB107.5 million, respectively.

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Charges on assets

As at 31 December 2008 and 2009, Huameiao Energy Group did not pledge any assets. As at 31 December 2010, Huameiao Energy Group’s secured bank borrowings and bank facilities were secured by the mining rights of Xingtao Coal and Chongsheng Coal and guaranteed by a related party, 懷仁聯順璽達能源有限公司 (Huairen Lianshun Shaida Energy Limited*), which is an associate company owned as to 35% by Huiyong Jinyuan Energy. Huiyong Jinyuan Energy, being one of the Vendors. Upon Completion, Huameiao Energy will be owned as to 5% by Huiyong Jinyuan Energy.

Contingent liabilities

As at 31 December 2008, 2009 and 2010, Huameiao Energy Group had no contingent liabilities.

Capital commitment

There was no capital commitment as at 31 December 2008 and 2009.

As at 31 December 2010, the capital commitment in respect of the acquisition of property, plant and equipment was approximately RMB54.9 million.

Income tax expense

The income tax expense of Huameiao Energy Group for the three financial years ended 31 December 2008, 2009 and 2010 was approximately RMB14.9 million, RMB15.7 million and RMB52.0 million respectively. The significant increase of income tax expense in 2010 was mainly driven by the increase in profit before tax from approximately RMB36.5 million for the year ended 31 December 2009 to approximately RMB160.3 million for the year ended 31 December 2010 which resulting the notional tax on profit before tax (charged at 25%) increased from approximately RMB9.1 million in 2009 to RMB40.0 million in 2010.

Foreign exchange and currency risks

As most of Huameiao Energy Group’s transactions, assets and liabilities were denominated in RMB, the operation of Huameiao Energy Group is not subject to significant exchange risk. Accordingly, no financial instruments for hedging purposes were used by Huameiao Energy Group during the three financial years ended 31 December 2008, 2009 and 2010.

Staff and remuneration policies

The number of employees of Huameiao Energy Group as at 31 December 2008, 2009 and 2010 were 287, 328 and 784, respectively.

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For the three financial years ended 31 December 2008, 2009 and 2010, total staff costs (including salaries and other benefits and contributions to retirement benefits schemes) of Huameiao Energy Group were approximately RMB31.0 million, RMB40.5 million and RMB99.5 million, respectively.

Huameiao Energy Group remunerates their employees with respect to their employment terms, individual performance and the prevailing industry practice and maintains social insurance schemes for retirement, unemployment, personal injury and hospitalization in the PRC for its employees.

MANAGEMENT DISCUSSION AND ANALYSIS OF HUAMEIAO ENERGY GROUP FOR THE SIX MONTHS ENDED 30 JUNE 2011

Financial results

Revenue

The Huameiao Energy Group is principally engaged in coal mining and trading business. For the six months ended 30 June 2011, Huameiao Energy Group generated a turnover of approximately RMB664.2 million, which represented an increase of 81.3% compared to the same period in 2010. The increase was primarily attributable to the increase in sales to existing customers.

Gross profit margin

The gross profit margin of Huameiao Energy Group remained relatively stable at approximately 50.5% and 48.0% for the six months ended 30 June 2010 and 2011 respectively.

Other revenue

For the six months ended 30 June 2011, Huameiao Energy Group reported other revenue of approximately RMB374,000 which decreased significantly from approximately RMB37.4 million for the six months ended 30 June 2010. The significant decrease was mainly attributable to the purchase bargain gain of approximately RMB37.0 million on the acquisition of Hong Quan Coal during 2010.

Administrative expenses

The administrative expenses incurred by Huameiao Energy Group for the six months ended 30 June 2011 was approximately RMB80.0 million, which represented an increase of 31.7% compared to the same period in 2010. The increase during the two periods was generally in line with business expansion of Huameiao Energy Group.

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Finance costs

The finance costs for the six months ended 30 June 2010 and 2011 were approximately RMB5.8 million and RMB28.0 million respectively. The significant increase was primarily due to new bank loans with a total amount of RMB900.0 million were drawn in 2010 for the purpose of financing the acquisition of coal mines and as working capital.

Profit and total comprehensive income

For the six months ended 30 June 2011, Huameiao Energy Group recorded profit and comprehensive income of approximately RMB157.1 million, increased by 37.7% compared to the same period in 2010. The increase was in line with the business expansion of Huameiao Energy Group.

Liquidity and Financial Resources

Huameiao Energy Group’s cash and cash equivalents was approximately RMB103.5 million as at 30 June 2011. Huameiao Energy Group was at net current liabilities position of approximately RMB411.7 million as at 30 June 2011.

As at 30 June 2011, the gearing ratio of Huameiao Energy Group, which represented the total borrowings to total assets was approximately 36.2%.

Charges on assets

As of 30 June 2011, Huameiao Energy Group’s secured bank loans were secured by Xingtao Coal’s mining rights and Chongsheng Coal’s mining rights and guaranteed by a related company, 懷仁聯順璽達能源有限公司 (Huairen Lianshun Shaida Energy Limited*), which is an associate company owned as to 35% by Huiyong Jinyuan Energy. Huiyong Jinyuan Energy, being one of the Vendors. Upon Completion, Huameiao Energy will be owned as to 5% by Huiyong Jinyuan Energy.

Contingent liabilities

As at 30 June 2011, Huameiao Energy Group did not have any material contingent liabilities.

Amounts due to shareholders

As at 30 June 2011, there were amounts due to shareholders of approximately RMB427.6 million, which were advanced by the shareholders to Huameiao Energy Group for construction of infrastructure and roadway and acquisition of mining facilities. The amounts are unsecured, interest free and have no fixed term for repayment.

Capital commitments

As at 30 June 2011, Huameiao Energy Group had capital expenditures of approximately RMB17.0 million contracted for but not provided in the financial information.

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Capital Structure

As at 30 June 2011, the share capital of Huameiao Energy Group was RMB300 million. The share capital comprised the share capital of RMB30 million, RMB1.2 million, RMB4 million, RMB170 million and RMB100 million injected by the shareholders of Huameiao Energy Group which were registered under the capital verification reports dated 8 May 2005, 10 June 2006, 9 May 2008, 21 May 2009 and 17 May 2010 respectively. On 28 December 2006, there was a reduction of registered share capital of RMB5.2 million by Huameiao Energy Group which was registered under the capital verification report dated 28 December 2006.

Income tax expense

For the six months ended 30 June 2011, the income tax expense of Huameiao Energy Group was approximately RMB53.9 million, represented an increase of 33.9% compared to the same period in 2010. The increase was mainly attributable to the increase in profit before tax from approximately RMB154.4 million for the six months ended 30 June 2010 to approximately RMB211.0 million for the six months ended 30 June 2011, which resulted the notional tax on profit before tax (charged at 25%) increased from approximately RMB38.6 million to RMB52.7 million for the six months ended 30 June 2011.

Material investments

During the six months ended 30 June 2011, Huameiao Energy Group did not have any material investments.

Foreign exchange risk and currency risks

As most of Huameiao Energy Group’s transactions, assets and liabilities were denominated in RMB, the operation of Huameiao Energy Group is not subject to significant exchange risk. As such, no financial instruments for hedging purposes were used by Huameiao Energy Group during the six months ended 30 June 2011.

Staff and remuneration policies

As at 30 June 2011, Huameiao Energy Group had 609 employees in total. The total staff related expenses of Huameiao Energy Group amounted to approximately RMB57.4 million for the six months ended 30 June 2011. Huameiao Energy Group contributes on a monthly basis to various defined contribution retirement benefit plans administered by the PRC government. The relevant government agencies undertake to assume the retirement benefit obligation payable to all existing and future retired employees under these plans and Huameiao Energy Group has no further obligation for post-retirement benefits beyond the contributions made. Contributions to these plans are expensed as incurred.

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PRINCIPAL BUSINESS ACTIVITIES OF THE COMPANY

The Group is principally engaged in the coal operation business involving purchases and sales, filtering, storage, blending, shipping and transportation of coal. The Group has the intention to reduce its capital expenditure (i.e. reduction of fixed asset) in order to maximize the return of the Shareholders. As at the Latest Practicable Date, the Group has not entered or proposed to enter into any agreement, arrangement, understanding, or undertaking, whether formal or informal and whether express or implied, and negotiation (whether concluded or not) with the intention to dispose of/downsize its existing business.

REASON FOR THE PROPOSED ACQUISITION

On 17 November 2010, the Group entered into the First Agreement with Ms. Guan, Mr. Jin and Huiyong Jinyuan Energy relating to the acquisition of 32% equity interest of Huameiao Energy. The benefits of the First Acquisition have been disclosed in the Company’s announcement dated 17 November 2010 and circular dated 30 June 2011. Similarly, the benefits of the Proposed Acquisition include the following:

(i) Improvement in the liquidity of the Group

As stated in the interim report for the six months ended 30 June 2011 of the Group, the Group has used RMB731 million (equivalent to approximately HK$891.46 million) for the deposit and prepayment of coal trading business. Should the Group has increased its own supply of coal, the above deposit will be substantially reduced and could be used for working capital purpose. As such, the liquidity of the Group will be improved in the short term due to the reason that (i) the deposit and the prepayment of coal trading business will be reduced; (ii) part of the Consideration of RMB1.08 billion (equivalent to approximately HK$1.32 billion) will be financed by the long term loan from the bank; (iii) no capital commitment is required for the modification of the three coal mines from the Group; and (iv) strong cashflow from the sale of coal which is carried out on cash basis.

(ii) Improvement in the equity of the Group

Pursuant to the First Agreement, Guangfa Energy has the right to further acquire not less than 19% equity interest in Huameiao Energy. The benefits to the Group as a result of entering into the First Agreement have been shown and the Group has increased its confidence in the operation of Huamieao Energy as it has observed and dealt with the management of Huameiao Energy for almost 1 year. In addition, the quality of the coal from the three coal mines is recognized and confirmed with the coal traders and coal loading stations in Shanxi. The samples of the coal from the three coal mines have been sent to the Shanxi coal traders and coal loading stations after the Group acquired 32% equity interest of Huameiao Energy Group. As such the Group decided to exercise its right to further acquire 48% equity interest in Huameiao Energy. The Group is of the view that it could improve the revenue, profit, retained earnings and ultimately its equity by increasing the sale of coal after acquiring the three coal mines. The Group has no right to acquire the remaining 20% equity interest in Huameiao Energy pursuant to the First Agreement.

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(iii) Reduction of transportation cost

The Group’s overall coal transportation costs can be lowered through the procurement of coal from Huameiao Energy Group due to the close proximity of the coal mines of Huameiao Energy Group to the Group’s coal loading station in Datong, the PRC.

(iv) Potential acquisition and integration opportunity of the Group

According to the Document, Huameiao Energy is allowed to acquire coal mines in Shanxi, PRC. In view of such qualification, the Directors consider there may be potential acquisition and integration opportunity of the coal mines in the major coal production region in PRC. This will enable the Group to sustain high rate of growth in the future.

BUSINESS PLAN AND STRATEGIES

The goal of the Group is to become one of the leading coal producers through the following key strategies:

Improve the leading position in the PRC coal industry

Upon Completion, the production capacity of raw coal of the Group increases gradually as the operation of Fengxi Coal Mine and Chongsheng Coal Mine will commence in the first quarter of 2012. The commencement of the operation of the above two mines will facilitate additional growth and may help the Group to become one of the leading coal producers in PRC.

Optimize existing resources and reserve

The Group is engaged in detailed mine planning activities that provide insight of how to efficiently utilize its coal resources and reserves. Through careful geological modeling, the Group is and will be able to economically develop its mines to optimize its existing coal resources and reserves.

Exploration and acquisition as an established Shanxi mining company

The Group is considering opportunities to strategically acquire other coal mines resource in the coal industry supply chain. As a result of the foregoing, the Group believes that it is well positioned over any other mining company to pursue exploration activities in Shanxi.

The Group is selectively pursuing coal exploration opportunities in Shanxi. Each potential acquisition undergoes a thorough, multi-stage evaluation process before it is presented to the Board. Exploration targets will be evaluated internally and externally. If the outcome of the evaluation is positive, it would be reviewed by the executive management team. Final decisions are made by the Board.

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Vertical integration and improvement in the integrated coal supply chain

In order to secure a stable coal supply amid the fluctuating coal prices, the Group, capitalizing the opportunities arising from the substantial decrease in coal prices and the PRC coal industry consolidation in 2009, proposed to acquire a total of 80% equity interest in Huameiao Energy Group. The Proposed Acquisition allows the Group to play an important role in reinforcing its vertical integrated supply chain of coal, which is supported by other business segment of the Group, including shipping transportation of coal sourced from domestic and overseas market to customers.

RISK FACTORS

The operation of coal mines involve certain risks, many of which are beyond the control of the Group. These risks can be categorized into (i) risks relating to the business and industry of coal mines; and (ii) risks relating to conducting operations in the PRC. Additional risks and uncertainties that are not presently known to the Group, or not expressed or implied below, or that it currently deems to be immaterial, could also have a material adverse effect on its business, financial condition and results of operations.

Risks relating to the business and the Industry of coal mines

Huameiao Energy has not obtained land use rights and building ownership rights of the three coal mines

As of the Latest Practicable Date, Huameiao Energy has not obtained the relevant land use rights for Xingtao Coal, Fengxi Coal and Chongsheng Coal. There are 29, 28 and 15 properties and facilities erected on the lands of Xingtao Coal, Fengxi Coal and Chongsheng Coal respectively. The properties and facilities mainly include simple office building, warehouse, coal roadway and dining hall which are used for the coal mining or coal mine construction businesses. No building ownership rights have been obtained for these properties and facilities. As the coal mines and properties are the major assets of Huameiao Energy, the operating rights and coal production in connection with such mines or properties may be adversely affected if any third party claims that it is the legal or beneficial owner of any of these lands or properties. The Group cannot give assurance that such ownership dispute will not be encountered. If any such dispute or claim occurs, the coal production of the three coal mines as well as Huameiao Energy could be adversely affected. In addition, there is no assurance that Huameiao Energy would not be subject to any claims for compensation in respect of any illegal and/or unauthorized use of lands owned by any third parties. Also, the properties and facilities of Xingtao Coal, Fengxi Coal and Chongsheng Coal are not entitled to be leased, transferred or mortgaged as no building ownership rights are obtained.

Though as of the Latest Practicable Date no land use right certificates and building ownership certificates of the three coal mines are obtained, the PRC Legal Advisers are of the view that there are no legal impediments for using the lands and properties to conduct coal mining businesses by Xingtao Coal, Fengxi Coal and Chongsheng Coal as these three coal mines have previously held the legal and valid Mining Licenses. The PRC Legal Advisers also confirm that there are no legal impediments for these three coal mines to

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renew its Mining Licenses nor there is any legal impediment for Fengxi Coal and Chongsheng Coal to obtain the Coal Production Permit and Coal Production Safety Permit. In addition, based on the PRC legal opinion, the relevant officer of local government bureaus has permitted Xingtao Coal, Fengxi Coal and Chongsheng Coal to use and occupy the lands of Xingtao Coal, Fengxi Coal and Chongsheng Coal for coal mining and coal construction purpose. As such, it is reasonable to believe that the operations of Xingtao Coal, Fengxi Coal and Chongsheng Coal could be retained and continued in the foreseeable future. Though the properties and facilities of the three coal mines are not entitled to be leased, transferred or mortgaged, the Directors are of view that as those properties and facilities are currently and will continue to be used for the coal mining or coal mine construction businesses, they have no intention to transfer, lease or mortgage the properties and facilities. In addition, as the properties and facilities have been used since the establishment of the three coal mines without subject to any legal dispute or claim, it is reasonable to believe that the Group’s use of the aforesaid properties and facilities can be continued in future.

The Group has not obtained the land use rights and building ownership rights of Ruifeng Coal

As of the Latest Practicable Date, the Group has not obtained the relevant land use right of Ruifeng Coal. There are also 25 properties and facilities erected on the land of Ruifeng Coal which are mainly simple office building, warehouse, coal roadway and dining hall. No building ownership rights have been obtained for these properties and facilities as of the Latest Practicable Date. As the coal mines and properties are the major assets of Ruifeng Coal, the operating rights and coal production in connection with such mines or properties may be adversely affected if any third party claims that it is the legal or beneficial owner of the land and properties. The Group cannot give assurance that such ownership dispute will not be encountered. If any such dispute or claim occurs, the coal production of Ruifeng Coal could be adversely affected. In addition, there is no assurance that Ruifeng Coal would not be subject to any claims for compensation in respect of any illegal and/or unauthorized use of lands owned by third parties. Also, the properties and facilities of Ruifeng Coal are not entitled to be leased, transferred or mortgaged as no building ownership rights are obtained.

Ruifeng Coal was a state-owned coal mine upon its establishment for more than 10 years, during which the policies and procedures for registering and operating coal mines had not been officially formalized and complied with. The Directors are of the view that as Ruifeng Coal has been operating for more than 10 years without subject to any legal dispute and claims in previous years and based on the PRC legal opinion, the relevant officer of local government bureaus has permitted Ruifeng Coal to use and occupy the land of Ruifeng Coal for coal mining or coal mine construction purpose. Though the properties and facilities of Ruifeng Coal are not entitled to be leased, transferred or mortgaged, the Directors are of view that as those properties and facilities are currently and will continue to be used for the coal mining or coal mine construction businesses, they have no intention to transfer, lease or mortgage the properties and facilities.

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Challenges from non-government organization

The Group has acquired 32% equity interest of Huameiao Energy Group for almost 1 year and has not encountered any challenges from non-government organization which would have impact on sustainability of the operation of Huameiao Energy Group as at the Latest Practicable Date. The challenges refer to potential oppositions that may be proposed by schools and hospitals, etc nearby as they may believe that the three coal mines will adversely affect the health of citizens as well as the local environment. In the event that there is challenges from non-government organization which would have impact on the sustainability of the operation of Huameiao Energy Group, it may adversely affect on the development of the operation of Huameiao Energy Group. As of the Latest Practicable Date, Huameiao Energy has not encountered any challenge from non-government organization and the Group will continuously negotiate with the local non-government organizations in order to explain to them the economic benefits of the three coal mines for resolving the potential challenges that may be proposed.

Management experience in coal mine industry

The Group has acquired 32% equity interest of Huameiao Energy Group for almost 1 year and participated in the operation of Huameiao Energy Group. In the event that the PRC law and regulation relating to the coal mine industry has changed and/or concerns from the PRC government has been raised, the management of the Group may not have sufficient experience in dealing with (i) the changes of the law and regulation and (ii) the concerns of the PRC government.

Legal claims on Huameiao Energy Group

No legal claims have been made against Huameiao Energy Group as at the Latest Practicable Date. In the event that there is legal claims against Huameiao Energy Group, the Group may have suffered loss from the legal claims.

The business and results of operations of the Group are dependent on the market price of coal mines, which is volatile, driven by exogenous supply and demand factors, and susceptible to variations in economic cycle, and the Group may also be exposed to fluctuations in raw coal prices in the future

The business of coal trading is sensitive to movements in the market prices for raw coal, which is affected by international and domestic coal prices. Fluctuations in both global and domestic prices and demand for raw coal are beyond the control of the Group. In the event that there is a significant reduction in the market prices for raw coal for a prolonged period, it may lead to a material deterioration in the financial performance of the Group and a material write down of the acquisition of Huameiao Energy Group.

The Group faces risks associated with the mining and processing operations

The coal mining and processing operations are subject to a number of operating risks and hazards, some are beyond the control of the Group, which could delay the production and delivery of coal products or increase the cost of mining and processing at Xingtao Coal

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Mine, Fengxi Coal Mine and Chongsheng Coal Mine. These conditions include unexpected maintenance or technical problems, periodic interruptions due to inclement or hazardous weather conditions and natural disasters, industrial accidents, power or fuel supply interruptions, critical equipment failure, fires, earthquakes, flooding and unusual or unexpected variations in mineralization, geological or mining conditions. Such risks may result in damage to the mining and processing operations which may materially and adversely affect the financial condition and results of operations.

The Group may be unable to renew the mining rights of Xingtao Coal Mine, Fengxi Coal Mine and Chongsheng Coal Mine

Under the Mineral Resources Law of the PRC, all mineral resources in the PRC are owned by the PRC government. Typically, the duration for which mining rights are granted cannot exceed the projected number of years of service of a mine, and the consideration for such mining rights is appraised on the basis of such service period. There can be no assurance that the Group will be able to renew the mining rights of Xingtao Coal Mine, Fengxi Coal Mine and Chongsheng Coal Mine on favourable terms, or at all, once such rights expire. If the Group is unable to renew such rights, its financial condition and results of operation will be materially and adversely affected.

Uncertainties in coal exploration

The amounts of coal resources in the Xingtao Coal, Fengxi Coal and Chongsheng Coal may be different from the estimation by BMI Technical Consulting (Resources) Limited and there is no assurance that further exploration work to be performed by the Enlarged Group can lead to discovery of economically feasible resources.

Risks relating to conducting operations in the PRC

The political and economic situation in the PRC may affect the coal business of the Group

The PRC economy differs from the economies of most developed countries in many respects, including differences in relation to structure, government involvement, level of development, economic growth rate, control of foreign exchange, allocation of resources and balance of payment position. For the past three decades the PRC government has implemented economic reform measures emphasizing utilization of market forces in the development of the PRC economy. Although these reforms will have a positive effect on the PRC’s overall long term development, it is unpredictable that whether changes in the economic, political and social conditions of the PRC will adversely affect the current and future business of the Group. If the new policies may benefit the coal business of the Group in the long term, the Group may not be able to successfully adjust to such policies. If there is a slowdown in the economic growth of the PRC or if its economy experiences a recession, demand for coal may also decrease and the business of the Group may be materially and adversely affected.

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The outbreak of any severe communicable disease in the PRC, if uncontrolled, may materially and adversely affect the result of operations of the Group

The outbreak of any severe communicable disease in the PRC, if uncontrolled, could have a material adverse effect on the overall business sentiment and environment in the PRC. This in turn may have a material adverse impact on domestic consumption and, possibly, the overall gross domestic product growth of the PRC. Any contraction or slowdown in the growth of domestic consumption or slowdown in the gross domestic product growth of the PRC may materially and adversely affect the financial position of the Group.

FINANCING FOR THE ACQUISITION AND NO CHANGE IN THE USE OF NET PROCEEDS FROM THE GLOBAL OFFERING

To finance the payment of the Consideration, Guangfa Energy will enter into a loan agreement of RMB1.08 billion (equivalent to approximately HK$1.32 billion) with a bank to finance the Proposed Acquisition. The bank loan of RMB1.08 billion has already been approved by the relevant bank, in which RMB0.5 billion has already been received in August 2011 and the remaining balance is available upon request. To secure its repayment obligation, Guangfa Energy will pledge 48% equity interest in Huameiao Energy to the bank as security, which will be released upon full repayment of the loan and interest. The Group will finance the remaining part of the Consideration of RMB1.8 billion (equivalent to approximately HK$2.2 billion) from its own resources, including (i) its internally generated funds; (ii) proceeds from possible fund raising activities; and (iii) taking up the responsibility of part of the bank loan of Huameiao Energy.

The Consideration paid and payable by the Group did not and will not affect the use of the net proceeds from the global offering of the Shares as set out in the Company’s prospectus dated 19 June 2009.

FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

Principal activities of the Group

The Group is principally engaged in the coal operation business involving purchase and sales, filtering, storage, blending, shipping and transportation of coal.

Financial and trading prospects of the Enlarged Group

In the foreseeable future, coal prices are expected to remain at a high level in light of the steady development of China’s economy. Based on the report, “China Economic Outlook” issued by International Monetary Fund (“ IMF ”), it is predicted that the growth in real gross domestic product (“ GDP ”) of China will be 9% in 2012. According to “2013 Economic Statistics and Indicators” from the website of EconomyWatch (http:// www.economywatch.com/economic-statistics/year/2013/), the GDP growth for China in 2013 is expected to reach 9.475%. The IMF also forecast, calculated that in five years, using GDP figures based on “purchasing power parity”, the Chinese economy would represent over 18%

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of the world total, increased from around 14% for the time being. Based on IMF’s projections, China’s adjusted GDP will rise from about US$11.2 trillion in 2011 to US$19 trillion by 2016.

As such, based on the aforesaid, the Directors opine that it is reasonable to believe that the PRC economy will maintain a steady development in forthcoming years.

The Directors remain positive on the price of coal in China, after taking into account the current consumption of electricity in China which is mainly generated by coal and the projected growth for GDP by 9% in 2012 will also drive the consumption of coal to be remained in a stable and growing sequence. Based on a report issued in November 2011, the demand for downstream market is anticipated to increase in 2012 and the price of 電煤合同價 (electricity-coal agreements*) is expected to increase by 8%. Based on the foregoings, it is reasonable to believe that the coal price in China will remain relatively stable with steady growth in coming periods. In the area of business development, gearing up the efforts on optimizing coal resources consolidation has become one of the focuses of the Twelfth Five-year Plan of the national coal industry in China. Such an initiative would create a more favourable investment environment for the Enlarged Group. The Directors consider that acquisition of coal mine or equity interest in coal mining company plays an important role in reinforcing the Enlarged Group’s vertical integrated supply chain of coal. This vertical integration strategy will enable the Group to secure a supply of coal with reliable and stable quality and quantity, which can then enhance the Enlarged Group’s competitiveness as well as strengthen the relationship with the Enlarged Group’s customers. The Enlarged Group will continue to carry out plans to acquire suitable coal mines and will keep up its efforts in identifying mines in operation, exploring and studying potential projects for mergers and acquisitions in order to increase its production volume.

The Enlarged Group is actively looking for suitable locations in Shanxi Province, China for the construction, leasing or acquisition of additional coal loading stations along the Daqin Railway in order to strengthen the coal processing and transportation capacity of the Enlarged Group in the region.

In addition to maintaining established business relationship, the Group has taken initiative to deepen coal sales with the existing customers. Many of the Group’s customers are large-scale stated-owned enterprises in China which have a lot of power plants, while the Group has business relationship with some of them only. Thus, the Group can further boost coal sales via leveraging the existing business relationship.

Moreover, the Group is actively looking for opportunities to expand its customer base through developing enlarged business relationship with new sizable domestic power groups in China. The expansion of the Enlarged Group’s customer base is an important strategic step in enhancing coal sales and expanding the Enlarged Group’s income sources.

Notwithstanding policy-related factors such as the potential resources tax reform which may affect the operation cost of coal enterprises, the Directors expect that the Enlarged Group still has much room for long-term development through its highly efficient consolidating capacity and the synergies among its various mining projects.

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LETTER FROM THE BOARD

POSSIBLE FINANCIAL EFFECTS OF THE ACQUISITION

Since Completion, Huameiao Energy will be treated as a subsidiary of the Company and will be accounted for in the consolidated financial statements of the Group.

Assets and liabilities

As stated in the interim report of the Company for the six months ended 30 June 2011, the unaudited consolidated total assets and total liabilities of the Group as at 30 June 2011 were approximately RMB7,111.3 million and approximately RMB5,024.7 million, respectively.

According to the unaudited pro forma financial information of the Enlarged Group as contained in Appendix III to this circular, the unaudited pro forma total assets and total liabilities of the Enlarged Group are approximately RMB12,493.2 million and approximately RMB8,717.7 million, respectively upon Completion, as calculated based on the applicable assumptions.

Gearing ratio

According to the interim report of the Company for the six months ended 30 June 2011, the gearing ratio (calculated as total borrowings divided by total assets) of the Group as at 30 June 2011 was approximately 55.3%. Upon Completion, the gearing ratio of the Enlarged Group (calculated as total borrowings divided by total assets) as calculated based on the unaudited pro forma financial information of the Enlarged Group as contained in Appendix III to this circular is approximately 40.6%.

On this basis, and in light of the potential future prospects of the Huameiao Energy Group, it is expected that the consolidation of the financial results of the Huameiao Energy Group into the Group will have a positive effect on the Enlarged Group’s financial position after Completion.

Earnings

Huameiao Energy Group recorded an audited net profits attributable to the owners for the six months ended 30 June 2011 of RMB157.1 million. On this basis, and in light of the potential future prospects of Huameiao Energy Group, it is expected that consolidating the financial results of Huameiao Energy Group into the Group would have a positive effect on the Enlarged Group’s earnings upon Completion.

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LETTER FROM THE BOARD

VALUATION OF THE PROPERTY INTERESTS

To comply with the Listing Rules, the Company has engaged BMI Appraisals Limited, an independent valuer, to value the property interests of the Enlarged Group. Details of the valuation report are set out in Appendix VII of this circular. Disclosure of the reconciliation of the net book value and the valuation as required under Rule 5.07 of the Listing Rules is set out below:

RMB’000 (With title certificates only) Net book value of PPE & CIP & Lease prepayments as at 30 June 2011 – Less: Net book value of assets unrelated to property interests (e.g. Machinery & Equipment, Motor vehicles, Furniture, Office Equipment, etc.) – Net book value of the properties as at 30 June 2011 41,471 Add: Additions of property interests – Less: Depreciation and amortization (614) Net book value of the properties as at 30 September 2011 40,857 Valuation surplus 22,683 Market value of the properties as at 30 September 2011 63,5403 1 Assuming all title certificates have been obtained. Total market value of the properties as at 30 September 2011 is represented by: Market value of properties with title certificates Market value of properties assuming title certificates are obtained (pages VII-15, 16, 18, 29, 30, 32, 34 and 36) Depreciated replacement costs of the buildings of properties (excluding the land) (Note 4 of page VII-13) 2 Please refer to Appendix III-4 for details. The amount of RMB3,016,361,000 is represented by: PPE & CIP of the Group as at 30 June 2011 PPE & CIP of the Target Group as at 30 June 2011 Lease prepayments of the Group as at 30 June 2011 Lease prepayments of the Target Group as at 30 June 2011	RMB’000 (Total: including buildings or structures without title certificates1) 3,016,3612 2,699,1384 317,223 148,906 (4,007) 462,122 30,026 492,1481 RMB’000 492,148 63,540 428,548 60 RMB’000 1,726,189 1,160,265 129,798 109

– 29 –

LETTER FROM THE BOARD

3 Please refer to Appendix VII-5 for details.

4 Pursuant to Hong Kong Accounting Standard 16, other than property, Machinery & Equipment, Motor vehicles, Furniture and Office equipment should be classified as PPE. The Net book value of assets unrelated to property interests include shafts of approximately RMB750 million, vessels of approximately RMB1.24 billion, coal related machinery of approximately RMB400 million, and others such as motor vehicles, furniture and fixture of approximately RMB300 million.

The Group

Net book value of PPE & CIP & Lease prepayments as at 30 June 2011 Less: Net book value of assets unrelated to property interests (e.g. Machinery & Equipment, Motor vehicles, Furniture, Office Equipment, etc.) Net book value of the properties as at 30 June 2011 Add: Additions of property interests Less: Depreciation and amortization Net book value of the properties as at 30 September 2011 Valuation surplus Market value of the properties as at 30 September 2011 1 Assuming all title certificates have been obtained. 2 Please refer to Appendix III-4 for details. The amount of RMB1,855,987 is represented by: PPE & CIP of the Group as at 30 June 2011 Lease prepayments of the Group as at 30 June 2011 3 Please refer to Appendix VII-5 for details.	RMB’000 (With title certificates only) – – 41,471 – (614) 40,857 22,683 63,5403	RMB’000 (Total: including buildings or structures without title certificates1) 1,855,9872 1,699,0254 156,962 69,715 (720) 225,957 23,343 249,3001 RMB’000 1,726,189 129,798

4 Pursuant to Hong Kong Accounting Standard 16, other than property, Machinery & Equipment, Motor vehicles, Furniture and Office equipment should be classified as PPE. The Net book value of assets unrelated to property interests of the Group include shafts of approximately RMB250 million, and vessels of approximately RMB1.24 billion and others such as motor vehicles, furniture and fixture of approximately RMB200 million

– 30 –

LETTER FROM THE BOARD

The Target Group

			RMB’000
			(Total:
			including
		RMB’000	buildings or
		(With title	structures
	certificates		without title
		only)	certificates1)
Net book value of PPE & CIP & Lease prepayments as at
	30 June 2011	–	1,160,3742
Less: Net book value of assets unrelated to property
	interests (e.g. Machinery & Equipment, Motor vehicles,
	Furniture, Office Equipment, etc.)	–	1,000,1134
Net book value of the properties as at 30 June 2011		–	160,2615
Add: Additions of property interests		–	79,191
Less: Depreciation and amortization		–	(3,287)
Net book value of the properties as at 30 September 2011		–	236,165
Valuation surplus		–	6,683

Market value of the properties as at 30 September 2011		–	242,8481

1	Assuming all title certificates have been obtained.
2	Please refer to Appendix III-4 for details.
	The amount of RMB1,160,374 is represented by:
			RMB’000
PPE & CIP of the Target Group as at 30 June 2011			1,160,265
Lease prepayments of the Target Group as at 30 June 2011			109
3	Please refer to Appendix VII-5 for details.
4	Pursuant to Hong Kong Accounting Standard 16, other than property,	Machinery & Equipment, Motor
	vehicles, Furniture and Office equipment should be classified as PPE. The Net book value of assets
	unrelated to property interests include shafts of approximately	RMB500 million, coal related
	machinery of approximately RMB400 million, and others such as motor vehicles, furniture and
	fixture of approximately RMB100 million.

5 The amount is included in the carrying amount of the Buildings and mining structures of RMB654,620,000 of the Target Group as at 30 June 2011 (page II-21)

– 31 –

LETTER FROM THE BOARD

IMPLICATIONS UNDER THE LISTING RULES

The Proposed Acquisition, when aggregated with the First Acquisition (by reason of the Proposed Acquisition and the First Acquisition together constituting a series of related transactions as described in Rule 14.22 of the Listing Rules), constitutes a very substantial acquisition for the Company under Chapter 14 of the Listing Rules as the applicable percentage ratios exceed 100%. Therefore, the Proposed Acquisition is subject to the reporting, announcement and approval requirements of the Listing Rules.

The EGM will be held to consider and, if thought fit, pass the requisite resolution(s) to approve the transactions contemplated under the Acquisition Agreement. No Shareholder will be required to abstain from voting at the EGM for the approval of the transactions contemplated under the Acquisition Agreement.

The Directors (including the independent non-executive Directors) confirm that the terms and conditions of the Acquisition Agreement are fair and reasonable and negotiated on an arm’s length basis upon normal commercial terms. Having considered the terms and conditions of the Acquisition Agreement and the benefits that may be obtained from the Acquisition, the Directors (including the independent non-executive Directors) further confirm that the Acquisition Agreement and the Acquisition are in the interest of the Group and the Shareholders as a whole.

In compliance with the requirements of Chapter 18 of the Listing Rules, the Company has appointed (i) two technical advisers to issue the Competent Person’s Report to provide the estimated amounts of resources and reserves in respect of the Xingtao Coal Mine, Fengxi Coal Mine and Chongsheng Coal Mine in accordance with the Joint Ore Reserves Committee Code; and (ii) a qualified valuer to issue the Valuation Report on Huameiao Energy Group.

To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, each of the said technical advisers and the valuer and their respective ultimate beneficial owners and associates are Independent Third Parties.

The Directors and the technical advisers confirm that no material changes have occurred since the date of the independent review and the Competent Person’s Report.

RECOMMENDATION

Having considered the reasons set out herein, the Directors are of the opinion that the terms of the Acquisition Agreement and the transactions contemplated thereunder are fair and reasonable and are in the interest of the Shareholders and the Company as a whole and therefore recommend the Shareholders to vote in favour of the ordinary resolution to approve the Acquisition Agreement and the transactions contemplated thereunder to be proposed at the EGM.

– 32 –

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

Your attention is also drawn to the additional information set out in the appendices to this circular.

By the order of the Board China Qinfa Group Limited XU Jihua Chairman

– 33 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. FINANCIAL INFORMATION OF THE GROUP

Financial information of the Group for each of the three years ended 31 December 2008, 2009 and 2010 and for the six months ended 30 June 2011 is disclosed in the following documents which have been published on the websites of the Stock Exchange (http://www.hkexnews.hk) and the Company (http://www.qinfagroup.com):

interim report of the Company for the six months ended 30 June 2011 published on 30 September 2011 (pages 21 to 58);
annual report of the Company for the year ended 31 December 2010 published on 20 April 2011 (pages 67 to 188);
annual report of the Company for the year ended 31 December 2009 published on 30 April 2010 (pages 60 to 168); and
the Prospectus published on 19 June 2009 (pages I-1 to I-46)

2. INDEBTEDNESS STATEMENT

Borrowings

As at 31 October 2011, being the latest practicable date for ascertaining the information regarding this indebtedness statement of the Enlarged Group prior to the printing of this circular, the Enlarged Group had outstanding secured bank borrowings of approximately RMB3,893.9 million.

Security and guarantees

The Enlarged Group’s secured bank borrowings and bank facilities were secured by certain assets and the Group’s equity interest in Huameiao Energy Group and guaranteed by related parties. As of 31 October 2011, the Enlarged Group’s assets in an aggregate amount of approximately RMB2,514.7 million in forms of property, plant and equipment, trade and bill receivables and bank deposits were pledged to banks for credit facilities granted to the Enlarged Group.

Contingent liabilities

As at 31 October 2011, the Enlarged Group did not have any material contingent liabilities.

Commitments

As at 31 October 2011, the Enlarged Group had an outstanding commitment of approximately RMB1,539.0 million in respect of acquisition of property, plant and equipment. Save as the aforesaid, the Enlarged Group did not have any material capital commitments.

– I-1 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Disclaimers

Saved as aforesaid in the section headed “Borrowings” and apart from intra-group liabilities and normal trade payables in the ordinary course of business, as at 31 October 2011, the Enlarged Group did not have any bank loans, bank overdrafts and liabilities under acceptances (other than normal trade bills) or other similar indebtedness, debentures or other loan capital, mortgages, charges, finance leases or hire purchase commitments, guarantees or other material contingent liabilities.

The Directors have confirmed that there have been no material changes in the indebtedness and contingent liabilities of the Enlarged Group since 31 October 2011.

For the purpose of the above indebtedness statement, foreign currency amounts have been translated into RMB at the rates of the exchange prevailing as of the close of business on 31 October 2011.

3. WORKING CAPITAL

The Directors are of the opinion that the Enlarged Group has sufficient working capital for its present requirements for at least 12 months from the date of this circular after taking into account the full payment of the Consideration and the financial resources available to the Enlarged Group, including its internally generated funds and available banking facilities.

4. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2010, being the date to which the Group’s latest published audited consolidated financial statements were made up.

– I-2 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF THE GROUP

Set out below is the management discussion and analysis of the Group for the three years ended 31 December 2008, 2009 and 2010 as extracted from the Prospectus, annual report of the Group and the management discussion and analysis of the Group for the six months ended 30 June 2011 as extracted from the interim report of the Group.

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP FOR THE YEAR ENDED 31 DECEMBER 2008

FINANCIAL REVIEW

Revenue and profit

The Group reported a turnover of approximately RMB4,192.5 million, represented an increase of 14.4% compared to same period in 2007. The increase was mainly attributable to the robust performance of the Group’s coal operation and shipping operation. The Group’s gross profit in 2008 was approximately RMB559.9 million, decreased by 2.0% compared to same period in 2007. The Group’s gross profit margin decreased from 15.6% in 2007 to 13.4% in 2008.

The Group’s net profit in 2008 was approximately RMB330.7 million, showing an increase of 59.6% from 2007. The Group’s net profit margin was 7.9% in 2008 and 5.7% in 2007.

Segment results

The Group’s coal operation turnover increased by approximately 14.0% from approximately RMB3,553.2 million in 2007 to approximately RMB4,050.2 million in 2008. The growth was mainly driven by the rising average selling prices in 2008. The Group’s shipping transportation turnover increased by approximately 27.7% from approximately RMB111.4 million in 2007 to approximately RMB142.3 million in 2008. The growth in the shipping transportation turnover mainly resulted from the charter hire income from the re-chartered vessels since the second quarter of 2007 and the commencement of operations of new vessels in 2008.

Liquidity, Financial Resources

The Group had net current assets of approximately RMB51.3 million as of 31 December 2008. The Group had cash and cash equivalents of RMB 201.5 million as of 31 December 2008. The Group’s liquidity will primarily depend on the Group’s ability to generate cash flow from operations and obtain external financing to meet the Group’s debt obligations, as they become due, as well as the Group’s future capital expenditure. As at 31 December 2008, the Group’s interest borrowings amounted to approximately RMB1,168.9 million, which represented an increase of 22.6% compared to 2007.

– I-3 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Gearing ratio

The Group’s gearing ratio, which represented the amount of loans and borrowings to total assets was 56.0% as of 31 December 2008 (2007: 49.9%). The increase was primarily due to the increase in interest-bearing borrowings for its expansion of coal trading operating and vessel acquisitions.

Capital Structure

As at 31 December 2008, the equity attributable to equity holders of the Company was RMB73.5 million. The total bank and other borrowings of the Group amounted to approximately RMB1,168.9 million as of 31 December 2008 and carried interest at market rates ranging from 1.75% to 6.77% per annum.

The Group actively and regularly reviews and manages its capital structure to maintain a balance between higher shareholder returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position, and makes adjustments to the capital structure in light of changes in economic conditions.

Consistent with industry practice, the Group monitors its capital structure on the basis of debt to equity ratio (calculated by total loans and borrowings and equity as total equity attributable to equity holders of the Company.) The debt to equity ratio as at 31 December 2008 was 159.04%.

Capital Commitment

As at 31 December 2008, the Group had capital commitments outstanding but not provided for in the combined financial statement of approximately RMB50.9 million (2007: RMB329.0 million), of which RMB5 million was authorized but not contracted for and the amount contracted for was approximately RMB45.9 million.

Details of material acquisitions and disposals of subsidiaries and associated companies

The Group did not have any material acquisitions and disposals during the year.

Material investment

As at 31 December 2008, the amount due from a related party decreased from RMB150.0 million as at 31 December 2007 to nil as at 31 December 2008. The decrease was due to the repayment of amount during 2008. The available-for-sale financial assets of the Group decreased from approximately RMB100.0 million as at 31 December 2007 to nil as at 31 December 2008. The decrease was primarily due to the fact that on 24 July 2008, the Group entered into a share sale agreement with a third party to dispose of all its unlisted equity investments in Millenium Mine at a consideration of A$18,126,000 (equivalent to approximately HK$136,717,000).

– I-4 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Pledge of assets of the Group and guarantee

The Group’s interest-bearing borrowings amounted to approximately RMB1,168.9 million as of 31 December 2008 (2007: RMB953.2 million) and the increase was primarily attributable to the increase in the Group’s bank borrowings to finance its growing coal business and the acquisition of vessel. As at 30 April 2009, the Group had total and unutilized banking facilities of approximately RMB2,161 million and RMB1,151 million, respectively. The banking facilities granted to the Group are secured by inventories, trade and bill receivables, pledged deposits and property, plant and equipment of the Group. In addition, banking facilities of RMB1,845 million were guaranteed by Mr. Xu.

Contingent liabilities

As at 30 April 2009, the Group had no significant contingent liabilities.

Exposure to fluctuations in exchange rates and related hedging

The Group is exposed to foreign currency risk primarily through purchases and borrowings that are denominated in USD, while all the other operations of the Group are mainly transacted in renminbi. Changes in exchange rate affect the renminbi value of purchase costs of commodities that are denominated in foreign currencies. The Company considers to use coal derivatives in 2008 as the Directors was of the view that the exchange rate between RMB and US$ remained relatively stable without severe fluctuation at that time and the Company desired to mitigate the fluctuation of coal prices as it was considered as one of the operating risks faced by the Group and as such, the Group considered it is appropriate to use coal derivatives as a hedging instrument to leverage the coal prices. The coal derivatives traded at overseas commodity exchanges are not considered as appropriate financial instruments to conduct effective hedging against coal price in PRC as price movements of underlying products of such coal derivatives may not be correlated to coal price movement in the PRC which is affected by various factors, including but not limited to, the government policies, domestic economic conditions and natural disasters in PRC, although there are coal derivatives traded at overseas commodity exchanges. Those factors may not affect the price movement of oversea coal derivatives.

Employees and remuneration

As at 31 December 2008, the Group had approximately 348 employees. The total staff costs of the Group for the year ended 31 December 2008 was approximately RMB19.3 million. The Group has implemented a number of initiatives in recent years to enhance the productivity of the employees. The employees of the Group are selected through an established recruitment process. The Group conducts periodic performance review of the employees and the employees’ compensation packages are performance-based. In addition, the Group implements training programs for different job requirements. The Directors believe such initiatives have contributed to the increased employee productivity. The Company has adopted conditionally the Pre-IPO Share Option Scheme whereby the employees of the Group have been granted options to subscribe for the Shares.

– I-5 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP FOR THE YEAR ENDED 31 DECEMBER 2009

FINANCIAL REVIEW

Revenue and profit

For the year ended 31 December 2009, the Group reported a turnover of approximately RMB3,927 million, which decreased slightly by 6.8% from approximately RMB4,192 million for the year ended 31 December 2008. The gross profit of the Group for the year ended 31 December 2009 was approximately RMB425.7 million, which represented a 31.5% decrease compared with the same in 2008. The decrease was mainly due to the decline in the coal selling prices.

The profit attributable to equity shareholders decreased by approximately 60.8% from approximately RMB330.7 million in 2008 to approximately RMB129.5 million in 2009 and the decrease was due to the decrease in profitability of the coal trading and the shipping business as a result of economic recession and the one-off disposal gain of available-for-sale financial assets derived in 2008.

Segment results

During the year ended 31 December 2009, the Group also engaged in the business of iron ore trading. The turnover generated from the iron ore trading business in 2009 amounted to approximately RMB506.8 million. The Directors expect that these business activities will continue in 2010. The coal trading recorded a turnover of approximately RMB3,361.4 million during the year ended 31 December 2009. The Group’s shipping business has also significantly revived in the second half of 2009. The turnover of the shipping transportation of the Group was approximately RMB58.7 million.

Liquidity, Financial Resources and Capital Structure

The Group’s net current assets as of 31 December 2009 were approximately RMB570.0 million (2008: approximately RMB51.3 million). As of 31 December 2009, the cash and bank balances of the Group amounted to approximately RMB376.2 million (2008: approximately RMB201.5 million). The liquidity of the Group was significantly improved and the financial position was strengthened upon the completion of the Global Offering (as defined in the Prospectus) on 3 July 2009. As of 31 December 2009, the total bank and other borrowings of the Group were approximately RMB2,245.7 million (2008: approximately RMB1,168.9 million).

Gearing ratio

The gearing ratio of the Group, which represented the interest-bearing borrowings to total assets as at 31 December 2009 was approximately 54.0% (2008: approximately 56.0%).

– I-6 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Capital Structure

As at 31 December 2009, the equity attributable to equity holders of the Company was RMB1,377.3 million. The total bank and other borrowings of the Group amounted to approximately RMB2,245.7 million as of 31 December 2009 and carried interest at market rates ranging from 0.83% to 4.86% per annum.

Capital Commitment

As at 31 December 2009, the Group had capital commitments outstanding but not provided for in the combined financial statement of approximately RMB1,565.0 million (2008: RMB50.9 million), of which RMB313.4 million was authorized but not contracted for and the amount contracted for was approximately RMB1,251.6 million.

Details of material acquisitions and disposals of subsidiaries and associated companies

In August 2009, Datong Xiejiazhuang Jinfa Trading and Transportation Co.,Ltd., a subsidiary of the Company, entered into an equity interest transfer agreement with, amongst others, Shanxi Ruifeng Pharmaceutical Group Co., Ltd. (“Shanxi Ruifeng”), which held a 87.88% equity interest in Ruifeng Coal. In December 2009, the Group entered into an agreement to acquire 60% equity interest in Ordos Bayin Mengke Nayuan Coal for an aggregate consideration of RMB857.3 million.

Material investment

As at 31 December 2009, the Group had prepayment in investments of approximately RMB169.3 million. The amount due from subsidiaries of the Company amounted to approximately RMB800.6 million as at 31 December 2009. The available-for-sale financial assets of the Group was approximately RMB30.4 million as at 31 December 2009.

Pledge of assets of the Group and guarantee

As of 31 December 2009, the Group’s assets in an aggregate amount of approximately RMB2,003.3 million (2008: approximately RMB1,468.7 million) in forms of property, plant and equipment, inventories, trade and bill receivables and bank deposits were pledged to banks for credit facilities granted to the Group. As of 31 December 2009, Mr. Xu, issued

– I-7 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

guarantees to banks for granting banking facilities of an amount equivalent to RMB1,127 million to the Group. The Group was in the process of discussing with the banks to release the guarantees.

Contingent liabilities

As of 31 December 2009, the Group did not have any material contingent liabilities.

Exposure to fluctuations in exchange rates and related hedging

The Group’s cash and cash equivalents are held predominately in HK$, RMB and US$. Operating outgoings incurred by the Group’s subsidiaries in the PRC are mainly denominated in RMB while overseas purchases are usually denominated in USD. These subsidiaries usually receive revenue in RMB. The Directors consider that the Group’s exposure to foreign exchange rate risks is not significant as RMB is relatively stable against other currencies, and that hedging by means of derivative instruments is therefore not necessary.

Employees and remuneration

As of 31 December 2009, the Group employed 348 employees. The total staff costs of the Group for the year ended 31 December 2009 was approximately RMB35.1 million. The Group has adopted a performance-based reward system to motivate its staff and such system is reviewed on a regular basis. In addition to the basic salaries, year-end bonuses may be offered to those staff members with outstanding performance. Moreover, the Pre-IPO Share Option Scheme (as defined in the Prospectus) was adopted in June 2009 to retain staff members who have made contribution to the success of the Group. As of 31 December 2009, options to subscribe for in aggregate 8,400,000 Shares were granted to an executive Director and 25 employees of the Group.

– I-8 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP FOR THE YEAR ENDED 31 DECEMBER 2010

FINANCIAL REVIEW

Revenue and profit

The Group reported a turnover of approximately RMB6,455 million for the year ended 31 December 2010, representing an 64.6% increase as compared to 2009. The Group’s gross profit increased from approximately RMB425.7 million in 2009 to approximately RMB757.6 million in 2010 and the increase was primarily attributable to the substantial increase in the coal handling and trading volume. The Group’s overall gross profit margin remained stable at 11.7% (2009: 10.8%) for the year ended 31 December 2010.

For the year ended 31 December 2010, the profit attributable to equity shareholders was approximately RMB377.2 million (2009: RMB129.5 million) and the significant improvement was mainly due to the increase in profitability of the coal handling and trading and shipping business as a result of recovery of the global economy from financial crisis and a revival in the demand of coal-fired electricity, and hence an increasing demand of coal.

Segment results

During the year ended 31 December 2010, the coal handling and trading volume of the Group was approximately 10.9 million tonnes, represented an increase of 6.0% from 2009. The average selling price of coal during 2010 was approximately RMB579 per tonne, which was substantially higher than the average selling price of approximately RMB493 per tonne in 2009. The revenue derived from coal handling and trading was approximately RMB6,316.8 million, which significantly increased from the revenue of RMB3,361.4 million as of 2009. The increase was primarily due to the recovery of global economy from the financial crisis and more remarkable release of the Group’s entire coal supply chain capabilities. The revenue derived from shipping transportation increased from approximately RMB58.7 million in 2009 to approximately RMB139.0 million in 2010. The significant improvement was contributed by the increase in freight rates and charter hire rates compared to 2009.

During the year ended 31 December 2010, the Group did not carry out any iron ore trading activity as the Directors consider that the fluctuation in the iron ore market in 2010 might bring on additional risk to the Group.

Liquidity, Financial Resources and Capital Structure

The financial position was strengthened in 2010. The Group’s net current assets as at 31 December 2010 were approximately RMB801.4 million (2009: approximately RMB570.0 million). As at 31 December 2010, the cash and bank balances of the Group amounted to approximately RMB287.2 million (2009: approximately RMB376.2 million). As at 31 December 2010, the total bank and other borrowings of the Group were approximately RMB3,610.0 million (2009: approximately RMB2,245.7 million).

– I-9 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Gearing ratio

The gearing ratio of the Group, which represented interest-bearing borrowings to total assets as at 31 December 2010 was approximately 56.2% (2009: approximately 54.0%).

Capital Structure

As at 31 December 2010, the equity attributable to equity holders of the Company was RMB1,719.5 million. The total bank and other borrowings of the Group amounted to approximately RMB3,610 million as of 31 December 2010 and carried interest at market rates ranging from 1.05% to 6.13% per annum.

The debt to equity ratio (calculated by total loans and borrowings to total equity attributable to equity holders of the Company) of the Group as at 31 December 2010 was 209.9%.

Capital Commitment

As at 31 December 2010, the Group had capital commitments outstanding but not provided for in the combined financial statement of approximately RMB1,078.7 million (2009: RMB1,565.0 million), which the entire amount represented the capital commitment contracted for.

Details of material acquisitions and disposals of subsidiaries and associated companies

On 23 April 2010, the Group increased its equity interest in Tiaro Coal Limited (“Tiaro Coal”) from 14.09% to 30.05% through an acquisition of 8,000,000 new ordinary shares in Tiaro Coal. In November 2010, Tiaro Coal issued 10,000,000 new ordinary shares to new shareholders, whereby the Group’s equity interest in Tiaro Coal was diluted to 26.35%.

Material investment

As at 31 December 2010, the Group had prepayment in investments and assets of derivatives of RMB1,300 million and approximately RMB4.2 million respectively. The available-for-sale financial assets of the Group decreased from approximately RMB30.4 million as at 31 December 2009 to nil as at 31 December 2010.

Pledge of assets of the Group and guarantee

As at 31 December 2010, the Group’s assets in an aggregate amount of approximately RMB2,392.3 million (2009: approximately RMB2,003.3 million) in forms of property, plant and equipment, inventories, trade and bill receivables and bank deposits were pledged to

– I-10 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

banks for credit facilities granted to the Group. As at 31 December 2010, Mr. Xu, provided guarantees to banks for granting banking facilities of an amount equivalent to approximately RMB1,568.5 million to the Group.

Contingent liabilities

As at 31 December 2010, the Group did not have any material contingent liabilities.

Exposure to fluctuations in exchange rates and related hedging

The Group’s cash and cash equivalents are held predominately in HKD, RMB and USD. Operating outgoings incurred by the Group’s subsidiaries in the PRC are mainly denominated in RMB while overseas purchases are usually denominated in USD. The Group’s subsidiaries usually receive revenue in RMB.

The Group has entered into several RMB forward contracts with authorised financial institutions in order to reduce the negative impact caused by RMB appreciation. The purpose of these transactions is to control the cost of the Group’s RMB investments, in terms of foreign currencies, that are required to be injected into the PRC in the near future. As at 31 December 2010, the Group had four outstanding foreign exchange option contracts and eight outstanding non-deliverable forward portfolio contracts. The fair value of these contracts was assets of approximately RMB4.2 million as at 31 December 2010.

Employees and remuneration

As at 31 December 2010, the Group employed 486 employees. The total staff costs of the Group for the year ended 31 December 2010 was approximately RMB76.5 million. The Group has adopted a performance-based reward system to motivate its staff and such system is reviewed on a regular basis. In addition to the basic salaries, year-end bonuses may be offered to those staff members with outstanding performance. Moreover, the Pre-IPO Share Option Scheme (as defined in the Prospectus) was adopted in June 2009 to retain staff members who have made contribution to the success of the Group. As at 31 December 2010, options to subscribe for in aggregate 8,000,000 Shares were granted to an executive Director and 23 employees of the Group.

– I-11 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP FOR THE SIX MONTHS ENDED 30 JUNE 2011

FINANCIAL REVIEW

Revenue and profit

The Group reported a turnover of approximately RMB4,070 million for the six months ended 30 June 2011, represented a 46.1% increase compared to the same period in 2010. The gross profit for the six months ended 30 June 2011 increased by approximately RMB93.7 million to RMB507.8 million and the increase was principally resulted from the increase in coal handling and trading volume.

Profit attributable to equity shareholders of the Company, excluding the bargain purchase gain on the acquisition of Huameiao Energy during the six months ended 30 June 2011 was RMB306.3 million, which representing an increase of 60.4% from the profit attributable to equity shareholders of RMB191.0 million, excluding the bargain purchase gain on the acquisition of Ruifeng Coal, for the same period in 2010. The increase was mainly contributed by the increase in profitability of the coal handling and trading business as a result of the increasing demand and the average selling prices of coal during the period.

Segment results

During the six months ended 30 June 2011, the coal handling and trading volume of the Group was approximately 6.5 million tonnes, representing an increase of 33.2% as compared to the same period in 2010. The revenue generated from the coal handling and trading amounted to approximately RMB4,016.8 million, which increased by 48.5% from the same period in 2010. The revenue generated from shipping transportation was approximately RMB53.4 million for the six months ended 30 June 2011.

Liquidity and Financial Resources

As at 30 June 2011, the Group recorded net current liabilities of RMB889.8 million which were mainly due to the reclassification of the prepayments of RMB1,300 million for acquisition of 32% equity interest in Huameiao Energy to investment in associates as the acquisition had been completed as at 1 January 2011. As at 30 June 2011, the cash and bank balances of the Group amounted to RMB738.8 million (as at 31 December 2010: RMB287.2 million), representing an increase of 157.2%. As at 30 June 2011, the total bank and other borrowings of the Group were RMB3,929.4 million (as at 31 December 2010: RMB3,610.0 million).

Gearing ratio

The gearing ratio of the Group as at 30 June 2011, (calculated as interest-bearing borrowings netted off pledged deposits divided by total assets) was 49.5% (as at 31 December 2010: 41.4%).

– I-12 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Capital Structure

As at 30 June 2011, the equity attributable to equity holders of the Company of RMB1,719.5 million. The total bank and other borrowings of the Group amounted to approximately RMB3,929.4 million as of 30 June 2011 and carried interest at market rates ranging from 1.35% to 8% per annum.

The debt to equity ratio (calculated by total loans and borrowings to total equity attributable to equity holders of the Company) of the Group as at 30 June 2011 was 193.4%.

Capital Commitment

As at 30 June 2011, the Group had capital commitments outstanding but not provided for in the combined financial statement of approximately RMB1,575 million (as at 30 June 2010: RMB1,078.7 million), which the entire amount represented the capital commitment contracted for.

Details of material acquisitions and disposals of subsidiaries and associated companies

The Group did not have material acquisitions and disposals during the six months ended 30 June 2011.

Material investment

As at 30 June 2011, the Group Company had asset of derivatives and prepayment and deposits for equity investments of approximately RMB1.7 million and RMB283 million respectively. The amount due from a related company amounted to approximately RMB62.7 million as at 30 June 2011.

Pledge of assets of the Group and guarantee

As at 30 June 2011, the Group’s assets in an aggregate amount of RMB1,911.4 million (as at 31 December 2010: RMB2,392.3 million) in forms of property, plant and equipment, inventories, trade and bill receivables and bank deposits were pledged to banks for credit facilities granted to the Group.

As at 30 June 2011, Mr. Xu, provided guarantees to banks for granting banking facilities of an amount equivalent to RMB2,648.5 million (as at 31 December 2010: RMB1,568.5 million) to the Group.

Contingent liabilities

As at 30 June 2011, the Group did not have any materials contingent liabilities.

– I-13 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Exposure to fluctuations in exchange rates and related hedging

The Group’s cash and cash equivalents are held predominately in RMB, HKD and USD. Operating outgoings incurred by the Group’s subsidiaries in the PRC are mainly denominated in RMB while overseas purchases are usually denominated in USD. The Group’s subsidiaries usually receive revenue in RMB.

The Group has entered into several foreign exchange forward contracts with banks in order to reduce the negative impact caused by RMB appreciation. The purpose of these transactions is to control the cost of the Group’s RMB investments, in terms of foreign currencies, that are required to be injected into the PRC in the near future. As at 30 June 2011, the Group had three foreign exchange option contracts and three foreign exchange forward contracts. The fair value of these contracts was assets of RMB1.7 million as at 30 June 2011.

Employees and remuneration

As at 30 June 2011, the Group employed 609 employees. The total staff costs of the Group for six months ended 30 June 2011 was approximately RMB32.5 million. The Group has adopted a performance-based reward system to motivate its staff and such system is reviewed on a regular basis. In addition to the basic salaries, year-end bonuses may be offered to those staff members with outstanding performance. Moreover, a Pre-IPO share option scheme was adopted in June 2009 to retain staff members who have made contribution to the success of the Group. As at 30 June 2011, options to subscribe for in aggregate 7,800,000 Shares were granted to an executive Director and 22 employees of the Group.

FUTURE PROSPECTS

With the well-established coal supply chain along Daqin Railway and the acquisition of Huameiao Energy Group, the Directors believe that the Group’s coal handling and trading business will continue to increase by utilizing these competitive advantages to capture the market opportunities. The Group will continue to implement plans to acquire suitable coal mines and will keep up its efforts in identifying mines in operation, exploring and studying potential projects for mergers and acquisition opportunities.

Furthermore, the global thermal coal prices are expected to remain at elevated levels in 2011 and the demand from China and India are expected to continue to remain strong. Any weather disruption, changes in the government policy or the transportation bottlenecks could restrict the supply of coal and drive up the prices. The earthquake and tsunami in Japan has alerted the public awareness that nuclear electricity may not be safe, which is expected to be a positive factor for the coal industry with increasing use of coal in energy generation in future.

– I-14 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

The following is text of accountant’s report on Shanxi Huameiao Energy Group Company Limited prepared for the sole purpose of inclusion in this circular, received from the Company’s independent reporting accountant, Mabel Chan & Co. Terms defined herein shall apply to these reports only.

Mabel Chan & Co. Certified Public Accountants

Suites 2208-11, 22/F., Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong Tel: (852) 2122 9736 Fax: (852) 2180 9163

The Board of Directors China Qinfa Group Limited Room 1303, 13th floor MassMutual Tower 38 Gloucester Road Wanchai Hong Kong

Dear Sirs,

Introduction

We set out below our report on the financial information relating to Shanxi Huameiao Energy Group Company Limited (the “Target”) and its subsidiaries (the “Target Group”), including the consolidated statements of financial position of the Target Group as at 31 December 2008, 2009, 2010 and 30 June 2011, the consolidated statements of comprehensive income, the consolidated statement of changes in equity and the consolidated statements of cash flows for each of the years ended 31 December 2008, 2009 and 2010, and the six-month period ended 30 June 2011 (the “Relevant Periods”) and the financial information of the six-month period ended 30 June 2010 (the “30 June 2010 Financial Information”), together with the notes thereto (the “Financial Information”), for the inclusion in the circular of China Qinfa Group Limited (the “Company”) dated 8 December 2011 (the “Circular”).

The Target is a limited liability company established on 12 January 2004 under the laws of the People’s Republic of China (“PRC”). Its principal activity is investment holding. Details of the subsidiaries of the Target are set out in note 1 to the Financial Information.

All the companies comprising the Target Group have adopted 31 December as their financial year end date. No statutory audited financial statements of these companies have been prepared since the date of establishment.

The management of the Target Group has prepared the consolidated financial statements of the Target Group for the Relevant Periods in accordance with International Financial Reporting Standards (“IFRSs”) issued by International Accounting Standards Board (“IASB”) (the “Underlying Financial Statements”). The Underlying Financial Statements for

– II-1 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

each of the years ended 31 December 2008, 2009 and 2010 and six-month period from 1 January 2011 to 30 June 2011 were audited by us in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

The Financial Information has been prepared by the management of the Target Group based on the Underlying Financial Statements, with no adjustments made thereon and in accordance with the applicable disclosure provisions of the Hong Kong Companies Ordinance and the Rules Governing the Listing of securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”).

Respective responsibilities of the management and reporting accountants

The management of the Target Group is responsible for the preparation of the Financial Information that gives true and fair view in accordance with IFRSs issued by the IASB, the disclosure requirements of the Hong Kong Companies Ordinance and the applicable disclosure provisions of the Listing rules and for such internal control as the management of the Target Group determines is necessary to enable the preparation of the Financial Information that is free from material misstatement, whether due to fraud or error.

Our responsibility to form an opinion on the Financial Information for the Relevant Periods is based on our procedures.

Basis of opinion

As a basis for forming an opinion on the Financial Information, for the purpose of this report, we have examined the Underlying Financial Statements and have carried out such appropriate procedures as we considered necessary in accordance with Auditing Guideline 3.340 “ Prospectuses and the Reporting Accountant” issued by the HKICPA.

For the purpose of this report, we have also performed a review of the 30 June 2010 Financial Information in accordance with Hong Kong Standard on Review Engagements 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the HKICPA. A review consists principally of making enquiries of the management of the Target Group and applying analytical procedures to the financial information and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the 30 June 2010 Financial Information.

Opinion

In our opinion, for the purpose of this report, the Financial Information gives a true and fair view of the state of affairs of the Target Group as at 31 December 2008, 2009 and 2010 and 30 June 2011 and of the Target Group’s results and cash flows for the Relevant Periods.

– II-2 –

APPENDIX II FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

On the basis of our review which does not constitute an audit, we are not aware of any material modifications that should be made to the 30 June 2010 Financial Information.

Mabel Chan & Co.

Certified Public Accountants Hong Kong, 8 December 2011

– II-3 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

Consolidated statements of comprehensive income

Years ended 31 December 2008, 2009 and 2010 and six-month period ended 30 June 2011

Note
Turnover
4
Cost of sales
Gross profit
Other revenue
4
Administrative and
other operating
expenses
Other expenses
Finance costs
5
Profit before tax
6
Income tax expense
8
Profit and total
comprehensive
income for the
year

Year ended 31 December
Six-month ended
30 June
2008
2009
2010
2010
2011
RMB’000
RMB’000
RMB’000
RMB’000
RMB’000
(unaudited)
322,821
341,430
914,474
366,464
664,224
(264,535)
(260,154)
(638,374)
(181,511)
(345,573)
58,286
81,276
276,100
184,953
318,651
3,718
83
38,173
37,391
374
(31,462)
(44,570)
(114,165)
(60,755)
(80,022)
–
(285)
(1,808)
(1,396)
(27)
(25)
(38)
(37,974)
(5,832)
(27,995)
30,517
36,466
160,326
154,361
210,981
(14,901)
(15,686)
(52,006)
(40,267)
(53,900)
15,616
20,780
108,320
114,094
157,081

Information on profit per share is not presented as such information is not meaningful given the purpose of this report.

– II-4 –

APPENDIX II FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

Consolidated statements of financial position

As at 31 December 2008, 2009, 2010 and 30 June 2011

Note Non-current assets Property, plant and equipment 10 Construction in progress 11 Mining rights 12 Lease prepayments 13 Deferred tax assets 14 Goodwill 15 Current assets Inventories 16 Trade and other receivables 17 Cash and cash equivalents 18 Current liabilities Trade and other payables 19 Current tax payable Loans and borrowings, secured 20 Net current liabilities Capital and reserves Share capital 21 (Accumulated losses)/retained profits Other reserves 21 (Deficiency in shareholders’ funds)/total equity Non-current liabilities Loans and borrowings, secured 20	As at 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 200,819 623,049 976,196 – – 61,169 9,489 24,272 112,362 165 143 121 – 14,635 70,002 – 156,978 236,779 210,473 819,077 1,456,629 ------------ ------------ ------------ 8,918 60,235 67,117 100,609 280,700 242,347 1,968 26,070 107,458 111,495 367,005 416,922 332,859 1,013,536 546,699 13,590 17,247 63,233 – – 160,000 346,449 1,030,783 769,932 (234,954) (663,778) (353,010) ------------ ------------ ------------ (24,481) 155,299 1,103,619 30,000 200,000 300,000 (54,481) (44,701) 48,065 – – 15,554 (24,481) 155,299 363,619 – – 740,000 (24,481) 155,299 1,103,619	As at 30 June 2011 RMB’000 1,035,910 124,355 110,878 109 77,325 236,779 1,585,356 ------------ 78,004 660,970 103,498 842,472 989,547 69,581 195,000 1,254,128 (411,656) ------------ 1,173,700 300,000 157,021 31,679 488,700 685,000 1,173,700

– II-5 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

Consolidated statement of changes in equity

Years ended 31 December 2008, 2009 and 2010 and six-month period ended 30 June 2011

Balance at 1 January 2008 Capital injection on 9 May 2008 Total comprehensive income for the year Balance at 31 December 2008 Capital injection on 21 May 2009 Total comprehensive income for the year Dividends paid Balance at 31 December 2009 Capital injection on 17 May 2010 Total comprehensive income for the year Profit appropriation to statutory reserve Balance at 31 December 2010 Total comprehensive income for the year Interim dividends of 2011 declared and paid Profit appropriation to statutory reserve At 30 June 2011 Six-month period ended 30 June 2010 (unaudited) At 1 January 2010 Capital injection on 17 May 2010 Total comprehensive income for the year Profit appropriation to statutory reserve At 30 June 2010	Share capital (Accumulated losses)/ retained profits RMB’000 RMB’000 26,000 (70,097) 4,000 – – 15,616 30,000 (54,481) 170,000 – – 20,780 – (11,000) 200,000 (44,701) 100,000 – – 108,320 – (15,554) 300,000 48,065 – 157,081 – (32,000) – (16,125) 300,000 157,021 200,000 (44,701) 100,000 – – 114,094 – (24,463) 300,000 44,930	Statutory reserve RMB’000 – – – – – – – – – – 15,554 15,554 – – 16,125 31,679 – – – 24,463 24,463	Total RMB’000 (44,097) 4,000 15,616 (24,481) 170,000 20,780 (11,000) 155,299 100,000 108,320 – 363,619 157,081 (32,000) – 488,700 155,299 100,000 114,094 – 369,393

– II-6 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

Consolidated statements of cash flows

Years ended 31 December 2008, 2009 and 2010 and six-month period ended 30 June 2011

Operating activities
Profit before tax
Adjustments for:
Amortisation of lease
prepayments
Amortisation of intangible
assets
Gain on a bargain purchase
Depreciation of property,
plant and equipment
Interest expense
Interest income
Loss on disposal of
property, plant and
equipment
Provision for
environmental and
development funds
Operating cash flows
before movements in
working capital
Decrease/(increase) in
inventories
(Increase)/decrease in trade
and other receivables
Increase/(decrease) in trade
and other Payables
Cash generated from/(used
in) operations
PRC Income tax paid
Net cash generated
from/(used in)
operating activities

Year ended 31 December
Six-month ended
30 June
2008
2009
2010
2010
2011
RMB’000
RMB’000
RMB’000
RMB’000
RMB’000
(unaudited)
30,517
36,466
160,326
154,361
210,981
22
22
22
12
12
190
217
2,185
741
1,484
–
–
(37,023)
(37,023)
–
28,996
31,357
119,271
51,851
79,958
–
–
37,931
5,811
27,962
(138)
(73)
(833)
(190)
(326)
–
–
512
512
–
97,926
116,781
266,332
(56,794)
112,894
157,513
184,770
548,723
119,281
432,965
23,562
(51,317)
(2,741)
(86,942)
(10,887)
(180,444)
(180,091)
38,353
(125,533)
(530,702)
1,100
326,896
(793,169)
255,006
442,033
1,731
280,258
(208,834)
161,812
333,409
(1,311)
(12,029)
(22,900)
(3,464)
(54,875)
420
268,229
(231,734)
158,348
278,534

– II-7 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

Consolidated statements of cash flows (cont’d)

Years ended 31 December 2008, 2009 and 2010 and six-month period ended 30 June 2011

Investing activities
Acquisition of property,
plant and equipment and
construction in progress
Cash paid for acquisition
of assets (note 22)
Interest received
Proceeds from disposal of
property, plant and
equipment
Additional costs paid for
mining rights
Net cash used in investing
activities
Financing activities
Capital injection
Repayment of borrowings
Proceeds from borrowings
Dividends paid
Interest paid
Net cash generated
from/(used in)
financing activities
Net (decrease)/increase in
cash and cash
equivalents
Cash and cash
equivalents at
beginning of the year
Cash and cash
equivalents at end of
the year

Year ended 31 December
Six-month ended
30 June
2008
2009
2010
2010
2011
RMB’000
RMB’000
RMB’000
RMB’000
RMB’000
(unaudited)
(8,603)
(22,200)
(135,835)
(10,383)
(202,858)
–
(381,000)
(510,000)
(510,000)
–
138
73
833
190
326
–
–
11,580
11,580
–
–
–
(15,525)
(12,109)
–
(8,465)
(403,127)
(648,947)
(520,722)
(202,532)
4,000
170,000
100,000
100,000
–
–
–
–
–
(20,000)
–
–
900,000
628,000
–
–
(11,000)
–
–
(32,000)
–
–
(37,931)
(5,811)
(27,962)
4,000
159,000
962,069
722,189
(79,962)
(4,045)
24,102
81,388
359,815
(3,960)
6,013
1,968
26,070
26,070
107,458
1,968
26,070
107,458
385,885
103,498

– II-8 –

APPENDIX II FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

Notes to the financial information

Years ended 31 December 2008, 2009 and 2010 and six-month period ended 30 June 2011

1. General information

The Target is a limited company established in the People’s Republic of China. The registered address and principal place of the business of the Target are Taocum Xiang, Pinglu District, Shuozhou City, Shanxi Province.

The principal activity of the Target is investment holding. Details of the subsidiaries are as follows:

		Paid up	Proportion of
		registered	ownership	Principal
Name of entities	Place of registration	capital	interest	activities
Shanxi Shuozhou Pinglu District	The People’s	RMB129,590,000	100%	Coal mining and
Huameiao Xingtao Coal Company	Republic of China			trading
Limited
Shanxi Shuozhou Pinglu District	The People’s	RMB32,000,000	100%	Coal mining and
Huameiao Fengxi Coal Company	Republic of China			trading
Limited
Shanxi Shuozhou Pinglu District	The People’s	RMB107,290,000	100%	Coal mining and
Huameiao Chongsheng Coal	Republic of China			trading
Company Limited

2. Significant accounting policies

(a) Statement of compliance

The Financial Information has been prepared in accordance with International Financial Reporting Standards (“IFRSs”), which collective term includes IFRSs, International Accounting Standards (“IASs”) and related Interpretations promulgated by the International Accounting Standard Board (“IASB”). A summary of the significant accounting policies adopted is set out below.

The IASB has issued a number of new and revised HKFRSs. For the purpose of preparing this Financial Information, the Target Group has adopted all these new and revised IFRSs in the Relevant Periods, except for any new standards or interpretations that are not yet effective for the accounting period ended 30 June 2011. The revised and new accounting standards and interpretations issued but not yet effective for the accounting period ended 30 June 2011 are set out as below.

The Financial Information also complies with the disclosure requirements of the Hong Kong Companies Ordinance and the applicable disclosure provisions of the Listing Rules.

The accounting policies set out below have been applied consistently to all periods presented in the Financial Information.

(b) Basis of measurement

The Financial Information has been prepared under the historical cost convention and is presented in Renminbi (“RMB”), which is rounded to the nearest thousand.

– II-9 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

(c) Possible impact of amendments, new standards and interpretations issued but not yet effective

Up to the date of issue of the Financial Information, the IASB has issued the following new and revised standards, amendments or interpretations which are not yet effective for the Relevant Periods and which have not been adopted in the Financial Information.

		Effective for
		accounting
		periods beginning
		on or after
Amendments to IAS 12	Income taxes – Deferred tax: Recovery of	1 January 2012
	Underlying of financial assets
IAS27 (Revised)	Separate Financial Statements	1 January 2013
IAS28 (Revised)	Investments in Associates and Joint Ventures	1 January 2013
Amendments to IFRS 7	Financial instruments: Disclosures – Transfer of	1 July 2011
	Financial Assets
IFRS 9	Financial Instruments	1 January 2013
HKFRS10	Consolidated Financial Statements	1 January 2013
HKFRS11	Joint Arrangements	1 January 2013
HKFRS12	Disclosure of Interests in Other Entities	1 January 2013
HKFRS13	Fair Value Measurement	1 January 2013

The management of the Target Group is in the process of making an assessment of what the impact of these amendments is expected to be in the period of initial application. Up to the date of issuance of these Financial Information, the management believes that the adoption of them is unlikely to have a significant impact on the Target Group’s results of operations and financial position.

(d) Basis of combination

The Financial Information incorporates the financial statements of Target and the entities controlled by the Target (its subsidiaries). All intra-group transactions, balances, income and expenses are eliminated on consolidation. Accounting policies of the subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Target Group. There is no difference in the reporting date of the financial statements of the Target and its subsidiaries used in the preparation of the Financial Information.

(e) Business combination

Business combinations that took place prior to 1 January 2010

Acquisition of businesses was accounted for using the purchase method. The cost of the acquisition was 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 Target Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that met the relevant conditions for recognition were generally recognised at their fair value at the acquisition date.

Goodwill arising on acquisition was recognised as an asset and initially measured at cost, being the excess of the cost of the acquisition over the Target Group’s interest in the recognised amounts of the identifiable assets, liabilities and contingent liabilities recognised. If, after assessment, the Target Group’s interest in the recognised amounts of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeded the cost of the acquisition, the excess was recognised immediately in profit or loss as gain on a bargain purchase.

– II-10 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

Business combinations that took place after 1 January 2010

As the result of HKFRS 3 (revised 2008), transaction costs that the Target Group incurs in connection with a business combination, such as finder’s fees, legal fees, due diligence fees, and other professional and consulting fees, are expensed as incurred, whereas previously they were accounted for as part of the cost of the business combination and therefore impacted the amount of goodwill recognised.

(f) Goodwill

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

For the purposes of impairment testing, goodwill arising from an acquisition is allocated to each of the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination.

A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. For goodwill arising on an acquisition in a reporting period, the cash-generating unit to which goodwill has been allocated is tested for impairment before the end of that reporting period. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated first to the unit, and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss for goodwill is recognised directly in profit or loss in the consolidated statement of comprehensive income. An impairment loss recognised for goodwill is not reversed in subsequent periods.

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

(g) Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Target Group and when the revenue can be measured reliably, on the following bases:

(i) Revenue from sales of goods are recognised when the goods are delivered and title has passed.
(ii) Interest income is recognised on a time-proportion basis using the effective interest method.
(iii) Sundry income is recognised on an actual receipt basis.

(h) Retirement benefits scheme

Salaries, annual bonuses, paid annual leave, contributions to defined contribution retirement plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

The Target Group contributes on a monthly basis to various defined contribution retirement benefit plans administered by the PRC government. The relevant government agencies undertake to assume the retirement benefit obligation payable to all existing and future retired employees under these plans and the Target Group has no further obligation for post-retirement benefits beyond the contributions made. Contributions to these plans are expensed as incurred.

– II-11 –

APPENDIX II FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

(i) Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset. Other borrowing costs are recognised in profit or loss in the period in which they are incurred.

The capitalisation of borrowing costs as part of the cost of qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.

(j) Income tax

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 statements of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes profit and loss items that are never taxable or deductible. The Target 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 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 and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be recognised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

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

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset recognised. Deferred tax is charged or credited to the profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

(k) Property, plant and equipment

Items of property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.

Depreciation is charged so as to allocate the cost of assets less residual values, if any, over their estimated useful lives, using the straight-line method. The following annual rates are used for the depreciation of property, plant and equipment:

Buildings Over the shorter of the term of the lease, or 20 years Furniture and equipment 14% to 33% Plant and machinery 14% to 20% Motor vehicles 10% to 16%

Mining structures are depreciated on the units-of-production method utilising only proved and probable coal reserves in the depletion base.

– II-12 –

APPENDIX II FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

If there is an indication that there has been a significant change in the depreciation rate, useful life or residual value of an asset, the depreciation of that asset is revised prospectively to reflect the new expectations.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gain or loss on disposal or retirement of an item of property, plant and equipment is the difference between the net disposal proceeds and the carrying amount of the relevant item, and is recognised in profit or loss.

(l) Construction in progress

Construction in progress which mainly represents property, plant and equipment under construction is stated at cost less any impairment losses and is not depreciated. Cost comprises all direct and indirect costs incurred during the periods of construction, installation and testing. When the assets concerned are brought into use, the costs are reclassified to the appropriate category of property, plant and equipment and depreciation in accordance with the policies stated in note 2(k) above commences when the construction work is completed and the asset is ready for use.

(m) Lease prepayments

Lease prepayments represent land use rights which are stated at cost less accumulated amortisation and impairment losses. Cost represents consideration paid for the rights to use the land on which various plants and buildings are situated on. Amortisation of lease prepayments is calculated on a straight-line basis over the term of the land use rights.

(n) Mining rights

Mining rights are stated at cost less accumulated amortisation and impairment losses and are amortised based on the units of production method utilising only recoverable coal reserves as the depletion base.

(o) Impairment of assets

(i) Impairment of receivables

Receivables that are stated at cost or amortised cost are reviewed at each reporting date to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Target Group about one or more of the following loss events.

significant financial difficulty of the debtor; 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 trade and other receivables and other financial assets carried at amortised cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where financial assets carried at amortised cost share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.

– II-13 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

If in the 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 and 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 are written off against the corresponding assets directly, except for impairment losses recognised in respect of trade debtors included within trade and other receivables, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Target Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade debtors directly and any amounts held in allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in profit or loss.

(ii) Impairment of property, plant and equipment

At each reporting date, the Target Group reviews the carrying amounts of the items of property, plant and equipment and construction in progress to determine whether there is any indication that those assets have suffered an impairment loss. 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.

(p) Inventories

Inventories are stated at lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods comprises raw materials, consumables, direct labour, other direct costs and related production overheads (based on normal operating activity). Net realisable value is estimated selling price in the ordinary course of business, less the applicable variable selling expenses.

(q) Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost less allowance for impairment of doubtful debts, except where the receivables are interest free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less allowance for impairment of doubtful debts.

(r) Trade and other payables

Trade and other payables are initially recognised at fair value and subsequently stated at amortised cost except where the payables are interest free loans made by related parties without any fixed repayment terms or the effect of discounting would be immaterial.

(s) Interest-bearing borrowings

Interest-bearing borrowings are initially recognised at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between the amount initially recognised and redemption value being recognised in profit or loss over the period of the borrowings, together with any interest and fees payable, using the effective interest method. Interest-bearing borrowings are classified as current liabilities unless the Target Group has an unconditional right to defer settlement of the liabilities for at least 12 months after the end of the reporting period.

– II-14 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

(t) Cash and cash equivalents

Cash and cash equivalents include bank balances and cash on hand, demand deposits and other short-term highly liquid investments with original maturities of three months or less.

(u) Provisions

Provisions are recognised for liabilities of uncertain timing or amount when the Target Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events, are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(v) Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Operating lease payment are recognised as an expense on a straight-line basis over the lease term except when other systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis.

(w) Related parties

A party is considered to be related to the Target Group if:

(i) the party has the ability, directly or indirectly through one or more intermediaries, to control the Target Group or exercise significant influence over the Target Group in making financial or operational decisions, or vice versa, or where the Target Group and the party are subject to common control or common significant influence;
(ii) the party is a member of the key management personnel of the Target Group or its parent;
(iii) the party is a close member of the family of any individual referred to (i) and (ii);
(iv) the party is an entity that is controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to (ii) and (iii);
(v) the party is a post-employment benefit plan for the benefit of employees of the Target Group, or of any entity that is related party of the Target Group.

(x) Segment reporting

Operating segments, and the amounts of each segment time reported in the Financial Information, are identified from the financial information provided regularly to the Target Group’s chief operating decision maker for the purposes of allocation resources to, and assessing the performance of, the Target Group’s various lines of business and geographical locations.

– II-15 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria.

3. Critical accounting judgements and key sources of estimation uncertainty

The preparation of the Financial Information in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other resources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the appreciation of IFRSs that have significant effect on the Financial Information and major sources of estimation are described as follows:

Carrying value of non-current assets

Non-current assets, including property, plant and equipment, mining rights and lease prepayments, are carried at cost less accumulated amortisation. These carrying amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In estimating the recoverable amounts of assets, various assumptions, including future cash flows to be associated with the non-current assets and discount rates, are made. If future events do not correspond to such assumptions, the recoverable amounts will need to be revised, and this may have an impact on the Target Group’s results of operations or financial position.

Useful lives of property, plant and equipment

The Target Group’s management determines the estimated useful lives and related depreciation charges for its property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. It could change significantly as a result of technical innovations and competitor actions in response to severe industry cycles. Management will increase the depreciation charges where useful lives are less than previously estimated lives, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.

Provision for close down, restoration and environmental costs

The provision for close down, restoration and environmental costs is determined by management based on the past experience and best estimation of future expenditures, taking into account existing relevant PRC regulations. However, in so far as the effect on the land and the environment from current mining activities becomes apparent in future years, the estimate of the associated costs may be subject to revision from time to time.

Reserve estimates

As explained in note 2, mining rights are amortised using the units of production method based on the total proven reserves of the useful lives of the coal mines and mining structures are amortised using the units of production method based on the estimated production volume for which the structure was designed and over the total proven reserves of the coal mines.

– II-16 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

Engineering estimates of the Target Group’s mineral reserves involved subjective judgements by mineral engineers in developing such information. There is Chinese system, which is the national standard set by the PRC Government, regarding the engineering criteria that have to be met before estimated mineral reserves can be designated as “proved”. Proved reserve estimates are updated on a regular basis and have taken into account a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation and amortisation rates. If the expectation differs from the original reserve estimate, such difference will impact the depreciation and amortisation charged in the year in which such estimate is changed.

Recognition of income taxes and deferred tax assets

Determining income tax provision involves judgement on the future tax treatment of certain transactions. The management carefully evaluates tax implications of transactions and tax provisions are set up accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislations.

Deferred tax assets are recognised in respect of temporary deductible differences. As those deferred tax assets can only be recognised to the extent that it is probable that future taxable profit will be available against which the unused tax credits can be utilised, management’s judgement is required to assess the probability of future taxable profits. Management’s assessment is constantly reviewed and additional deferred tax assets are recognised if it becomes probable that future taxable profits will allow the deferred tax assets to be recovered.

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 Target 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 future cash flows are less than expected, a material impairment loss may arise.

4. Turnover and other revenue

Turnover represents revenue arising from the sales of coal net valued-added tax.

An analysis of turnover and other revenue for the years is as follows:

Turnover Sales of coal Other revenue Interest income Sundry income Gain on a bargain purchase (Note 22) Total revenue	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 322,821 341,430 914,474 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 138 73 833 3,580 10 317 – – 37,023 3,718 83 38,173 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 326,539 341,513 952,647	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 366,464 664,224 - - - - - - - - - - - - - - - - - - - - - - - - 190 326 178 48 37,023 – 37,391 374 - - - - - - - - - - - - - - - - - - - - - - - - 403,855 664,598	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 366,464 664,224 - - - - - - - - - - - - - - - - - - - - - - - - 190 326 178 48 37,023 – 37,391 374 - - - - - - - - - - - - - - - - - - - - - - - - 403,855 664,598
			374 - - - - - - - - - - - - 664,598

– II-17 –

APPENDIX II

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

Revenue from customers contributing 10% or more of the total sales of the Target Group are as follows:

		Year	ended 31 December		Six-month ended	30 June
		2008	2009	2010	2010	2011
		RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
					(unaudited)
Customer	A	217,066	217,843	388,942	175,696	200,577
Customer	B	–	15,385	109,649	65,761	80,135
Customer	C	–	–	94,910	–	47,265
Customer	D	–	–	–	–	103,945
Customer	E	–	–	106,441	–	–
Customer	F	64,905	55,427	–	–	–
Customer	G	–	–	–	24,855	64,331

5. Finance costs

Interest on bank loans Bank charges	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 – – 37,931 25 38 43 25 38 37,974	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 5,811 27,962 21 33 5,832 27,995	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 5,811 27,962 21 33 5,832 27,995
			27,995

6. Profit before tax

Profit before tax is arrived at after charging:

Employee benefits expense: – Salaries and other benefits – Contributions to retirement benefits schemes Amortisation of lease prepayments Amortisation of mining rights Cost of inventories recognised as an expense Depreciation for property, plant and equipment Loss on disposal of property, plant and equipment Minimum lease payments under operating leases Provision for environmental and development funds	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 26,574 32,794 79,974 4,384 7,687 19,544 30,958 40,481 99,518 22 22 22 190 217 2,185 66,913 26,381 72,479 28,996 31,357 119,271 – – 512 1,313 2,817 3,490 97,926 116,781 266,332	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 42,869 50,914 5,691 6,482 48,560 57,396 12 12 741 1,484 44,204 47,878 51,851 79,958 512 – 1,368 1,893 56,794 112,894	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 42,869 50,914 5,691 6,482 48,560 57,396 12 12 741 1,484 44,204 47,878 51,851 79,958 512 – 1,368 1,893 56,794 112,894
			57,396

			12 1,484 47,878 79,958 – 1,893 112,894

– II-18 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

7. Five highest paid employees

The aggregate of the emoluments in respect of the five individuals are as follows:

Salary, allowances and other benefits Contribution to pension scheme	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 891 971 1,117 190 207 264 1,081 1,178 1,381	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 579 761 92 92 671 853	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 579 761 92 92 671 853
			853

Their emoluments were all within the RMB0-RMB1,000,000 band.

During the Relevant Periods, no emoluments or incentive payments were paid to the directors and the five highest paid individuals as an inducement to join or upon joining the Target Group, or as compensation for loss of office.

8. Income tax expense

Current income tax – PRC enterprise income tax Deferred income tax (note 14) Income tax expense	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 14,901 15,686 68,886 – – (16,880) 14,901 15,686 52,006	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 40,267 61,223 – (7,323) 40,267 53,900	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 40,267 61,223 – (7,323) 40,267 53,900
			53,900

(a) The provision for PRC enterprise income tax (“EIT”) is calculated based on the statutory income tax rate of 25%. The applicable income tax rate in the Relevant Periods is 25% of the assessable income of each of the entities of the Target Group, determined in accordance with the relevant PRC income tax rules and regulations.

– II-19 –

APPENDIX II

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

(b) The income tax expense can be reconciled to the profit before tax per the consolidated statements of comprehensive income as follows:

Profit before tax Notional tax on profit before tax at 25% Tax effect of non-deductible expenses Tax effect of non-taxable income Income tax expense	Year ended 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 30,517 36,466 160,326 7,629 9,116 40,081 7,272 6,570 12,614 – – (689) 14,901 15,686 52,006	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 154,361 210,981 38,590 52,745 1,677 1,155 – – 40,267 53,900	Six-month ended 30 June 2010 2011 RMB’000 RMB’000 (unaudited) 154,361 210,981 38,590 52,745 1,677 1,155 – – 40,267 53,900

			52,745 1,155 –
			53,900

9. Segment information

For the Relevant Periods, the Target Group was principally engaged in mining, processing and selling of coal in the PRC. The results, assets and liabilities of the Target Group during the Relevant Periods were mainly related to the above activities, and the assets and result are located and generated in the PRC.

Since the Target Group is only engaged in one operating segment which is the mining, processing and selling of coal and all of its result and assets are generated and located in the PRC, no segment reporting information such as segment revenue, results, assets and liabilities is presented under HKFRS 8 “Operating Segments”.

– II-20 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

10. Property, plant and equipment

Cost: At 1 January 2008 Additions Transfer from construction in progress At 31 December 2008 Additions Arising from acquisition of assets (Note 22) At 31 December 2009 Additions Arising from acquisition of assets (Note 22) Disposals At 31 December 2010 Additions At 30 June 2011 Accumulated depreciation: At 1 January 2008 Charge for the year At 31 December 2008 Charge for the year At 31 December 2009 Charge for the year Written back on disposals At 31 December 2010 Charge for the period At 30 June 2011 Carrying amount: At 31 December 2008 At 31 December 2009 At 31 December 2010 At 30 June 2011	Buildings and mining structures RMB’000 85,777 1,283 59,719 146,779 7,703 318,830 473,312 7,953 324,415 – 805,680 3,952 809,632 - - - - - - - - - - - - 12,948 12,078 25,026 12,567 37,593 75,669 – 113,262 41,750 155,012 - - - - - - - - - - - - 121,753 435,719 692,418 654,620	Plant and machinery RMB’000 127,471 5,187 – 132,658 11,991 112,279 256,928 61,422 85,233 (23,160) 380,423 132,629 513,052 - - - - - - - - - - - - 38,376 16,546 54,922 18,241 73,163 42,646 (11,068) 104,741 37,185 141,926 - - - - - - - - - - - - 77,736 183,765 275,682 371,126	Furniture and equipment RMB’000 643 95 – 738 1,164 278 2,180 3,490 196 – 5,866 1,714 7,580 - - - - - - - - - - - - 242 124 366 221 587 433 – 1,020 643 1,663 - - - - - - - - - - - - 372 1,593 4,846 5,917	Motor vehicles RMB’000 941 612 – 1,553 1,342 – 2,895 1,801 – – 4,696 1,377 6,073 - - - - - - - - - - - - 347 248 595 328 923 523 – 1,446 380 1,826 - - - - - - - - - - - - 958 1,972 3,250 4,247	Total RMB’000 214,832 7,177 59,719 281,728 22,200 431,387 735,315 74,666 409,844 (23,160) 1,196,665 139,672 1,336,337 - - - - - - - - - - - - 51,913 28,996 80,909 31,357 112,266 119,271 (11,068) 220,469 79,958 300,427 - - - - - - - - - - - - 200,819 623,049 976,196 1,035,910

The buildings are held in the PRC on long lease.

– II-21 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

11. Construction in progress

Cost:
At 1 January 2008
Additions
Transfer to property, plant and equipment
At 31 December 2008 and 2009
Additions
At 31 December 2010
Additions
At 30 June 2011
Mining rights
Carrying amount:
At 1 January 2008
Amortisation charge
At 31 December 2008
Arising from acquisition of assets (Note 22)
Amortisation charge
At 31 December 2009
Additions
Arising from acquisition of assets (Note 22)
Amortisation charge
At 31 December 2010
Amortisation charge
At 30 June 2011

RMB’000
58,293
1,426
(59,719)
–
61,169
61,169
63,186
124,355
RMB’000
9,679
(190)
9,489
15,000
(217)
24,272
15,525
74,750
(2,185)
112,362
(1,484)
110,878

12. Mining rights

Xingtao Coal’s mining rights and Chongsheng Coal’s mining rights totalling RMB96,287,000 are pledged for bank loans (Note 20).

– II-22 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

13. Lease prepayments

Carrying amount:
At 1 January 2008
Amortisation charge
At 31 December 2008
Amortisation charge
At 31 December 2009
Amortisation charge
At 31 December 2010
Amortisation charge
At 30 June 2011
The land use rights are held in the PRC on long lease.
Deferred tax assets
At 1 January and 31 December 2008
Arising on acquisition of assets (Note 22)
At 31 December 2009
Arising on acquisition of assets (Note 22)
Credit to profit or loss for the year (Note 8)
At 31 December 2010
Credit to profit or loss for the period (Note 8)
At 30 June 2011
Goodwill
Carrying amount:
At 1 January and 31 December 2008
Arising on acquisition of assets (Note 22)
At 31 December 2009
Arising on acquisition of assets (Note 22)
At 31 December 2010 and 30 June 2011

RMB’000
187
(22)
165
(22)
143
(22)
121
(12)
109
RMB’000
–
14,635
14,635
38,487
16,880
70,002
7,323
77,325
RMB’000
–
156,978
156,978
79,801
236,779

14. Deferred tax assets

15. Goodwill

For the purposes of impairment testing, the carrying amount of goodwill has been allocated to cash generating units (“CGUs”) included in coal mining. The recoverable amount of these units have been determined based on a value in use calculation which is based on financial budgets approved by management covering a

– II-23 –

APPENDIX II FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

period of 5 years and discount rate of 13%. Cash flows beyond the period of 5 years are extrapolated using a zero growth rate. Another key assumption for the value in use calculation is the budgeted gross margin, which is determined based on the unit’s past performance and management’s expectations for the market development.

During the Relevant Periods, management of the Target Group determined that there is no impairment in these CGUs containing goodwill as the recoverable amount is higher than its carrying amount.

16. Inventories

Consumables Finished goods for sales	As 2008 RMB’000 5,483 3,435 8,918	at 31 December 2009 2010 RMB’000 RMB’000 9,359 13,488 50,876 53,629 60,235 67,117	As at 30 June 2011 RMB’000 21,915 56,089
			78,004

17. Trade and other receivables

Trade receivables Other receivables Amount due from a shareholder Payment in advance	As 2008 RMB’000 62,920 15,218 – 22,471 100,609	at 31 December 2009 2010 RMB’000 RMB’000 46,298 82,912 206,504 24,554 – 38,125 27,898 96,756 280,700 242,347	As at 30 June 2011 RMB’000 262,706 235,724 – 162,540
			660,970

The Target Group generally allows credit periods ranging from 60 days to 120 days to its trade customers, which may be extended to 180 days for selected customers depending on their trade volume and settlement terms. The aged analysis of the trade receivables, net of allowance for doubtful receivables, presented based on the invoiced date at the end of the reporting period, is as follows:

0 – 60 days 60 – 120 days Over 120 days	As 2008 RMB’000 5,830 7,064 50,026 62,920	at 31 December 2009 2010 RMB’000 RMB’000 19,586 70,307 9,916 28 16,796 12,577 46,298 82,912	As at 30 June 2011 RMB’000 256,921 2,800 2,985
			262,706

The credit quality of trade receivables that are neither past due nor impaired has been assessed by reference to historical information about counterparty default rates. The existing counterparties do not have significant defaults in the past.

– II-24 –

APPENDIX II

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

The aged analysis of the trade receivables which are past due but not impaired at the end of each reporting period is as follows:

Less than 240 days Over 240 days past due	As 2008 RMB’000 50,000 26 50,026	at 31 December 2009 2010 RMB’000 RMB’000 16,431 12,212 365 365 16,796 12,577	As at 30 June 2011 RMB’000 2,620 365
			2,985

In determining the recoverability of a receivable, the Target Group considers whether there has been adverse change in the credit standing of the receivables from the date credit was initially granted. There is no concentration of credit risk as the Target Group’s customer base comprises of a quite large number of customers.

The amount due from a shareholder was unsecured, interest free and was fully settled during the six-month period ended 30 June 2011.

Included in the Target Group’s receivables are balances which are denominated in Renminbi.

18. Cash and cash equivalents

Bank balances carry interest at market rates based on daily bank deposit rates. Included in the Target Group’s bank balances are balances which are denominated in Renminbi.

19. Trade and other payables

Trade payables (Note 1 below) Other payables Accruals Receipt in advance Amounts due to shareholders (Note 2 below)	As 2008 RMB’000 58,059 143,264 8,439 68,109 54,988 332,859	at 31 December 2009 2010 RMB’000 RMB’000 78,134 87,140 416,109 353,569 21,935 20,592 38,206 30,220 459,152 55,178 1,013,536 546,699	As at 30 June 2011 RMB’000 110,695 424,763 15,949 10,536 427,604
			989,547

– II-25 –

APPENDIX II

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

Note 1: Trade payables principally comprise amounts outstanding for trade purchases and have an average term of 60 days. Trade and other payables are non-interest bearing. The aged analysis of trade payables based on the invoiced date at the end of each reporting date is as follows:

0 – 60 days 61 – 90 days 91 – 120 days Over 120 days	As 2008 RMB’000 25,693 12,037 2,729 17,600 58,059	at 31 December 2009 2010 RMB’000 RMB’000 38,037 65,269 5,683 4,508 9,676 3,062 24,738 14,301 78,134 87,140	As at 30 June 2011 RMB’000 59,348 10,870 22,453 18,024
			110,695

Note 2: The amounts due to shareholders are unsecured, interest free and have no fixed terms for repayment.

Included in the Target Group’s payables are balances which are denominated in Renminbi.

20. Loans and borrowings, secured

Bank loans: 3-year bank loan of RMB300,000,000 – fully repayable in March 2013 (Note 1 below) 5-year bank loan of RMB300,000,000 – fully repayable in January 2015 (Note 2 below) 5-year bank loan of RMB300,000,000 – fully repayable in July 2015 (Note 3 below) Less: Amounts due within one year shown under current liabilities	As 2008 RMB’000 – – – – – –	at 31 December 2009 2010 RMB’000 RMB’000 – 300,000 – 300,000 – 300,000 – 900,000 – (160,000) – 740,000	As at 30 June 2011 RMB’000 300,000 280,000 300,000
			880,000 (195,000)
			685,000

– II-26 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

The borrowings are repayable as follows:

On demand or within one year More than one year, but not exceeding five years	As 2008 RMB’000 – – –	at 31 December 2009 2010 RMB’000 RMB’000 – 160,000 – 740,000 – 900,000	As at 30 June 2011 RMB’000 195,000 685,000
			880,000

Note 1: The bank loan was guaranteed by a related company. The loan interest was charged at 7.14% per annum.
Note 2: The bank loan was secured by Xingtao Coal’s mining rights. The loan interest was charged at 6.65% per annum.
Note 3: The bank loan was secured by Chongsheng Coal’s mining rights. The loan interest was charged at 6.65% per annum.

21. Capital, reserve and dividends

(a) Share capital

Share capital amounting to RMB30,000,000, RMB1,200,000, RMB4,000,000, RMB170,000,000, and RMB100,000,000 were injected by the shareholders and registered under Capital Verification Report dated 8 May 2005, 10 June 2006, 9 May 2008, 21 May 2009 and 17 May 2010 respectively.

On 28 December 2006, the Target reduced its registered share capital amounting to RMB5,200,000.

(b) Nature and purpose of PRC statutory reserve

In accordance with the relevant PRC laws applicable to local enterprises, the Target’s subsidiaries established in the PRC are required to transfer at least 10% of their annual net profits to the general reserve until the balance of the reserve is equal to 50 % of the entities’ registered capital. The transfer to this fund must be made before distribution of dividends to equity shareholders. This reserve can be used to offset prior years’ losses, if any, and convert into paid-up capital provided that the balance of the general reserve after such conversion is not less than 25% of their registered capital.

(c) Risk management

The Target Group’s objectives when managing capital are to safeguard the Target Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

Consistent with others in the industry, the Target Group monitors capital on the basis of the gearing ratio. This ratio is calculated as total borrowings divided by total capital. Total borrowings include current and non-current borrowings as shown in the consolidated statements of financial position. Total capital is calculated as “equity”, as shown in the consolidated statements of financial position, plus borrowings.

– II-27 –

APPENDIX II

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

The gearing ratios at 31 December 2008, 2009 and 2010 and six-month period ended 30 June 2011 were as follows:

Total borrowings (note 20) Total equity Total capital Gearing ratio	As at 31 December 2008 2009 2010 RMB’000 RMB’000 RMB’000 – – 900,000 (24,481) 155,299 363,619 (24,481) 155,299 1,263,619 N/A N/A 71.22%	As at 30 June 2011 RMB’000 880,000 488,700 1,368,700 64.29%

(d) Dividends

No final dividend was proposed for the year ended 31 December 2010.

Interim dividend amounting to RMB32,000,000 were declared and paid to the existing shareholders for the six-month period ended 30 June 2011.

22. Business combinations

(a) Goodwill

(i) For the year ended 31 December 2009

During the year ended 31 December 2009, the Target Group acquired property, plant and equipment and mining rights of Fengxi Coal at a consideration of RMB618,000,000. The acquisition has been accounted for using the acquisition method.

The aggregate net assets acquired by the Target Group are as follows:

Net assets acquired: Property, plant and equipment Mining rights Deferred tax assets Goodwill (Note 15) Net cash outflows arising on acquisition: Cash consideration paid Payable to third parties	Acquiree’s carrying value before combination RMB’000 489,929 15,000 – 504,929	Fair value adjustments RMB’000 (58,542) – 14,635 (43,907)	Fair value RMB’000 431,387 15,000 14,635
			461,022 156,978
			618,000

			381,000 237,000
			618,000

– II-28 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

(ii) For the year ended 31 December 2010

During the year ended 31 December 2010, the Target Group acquired property, plant and equipment, mining rights and inventories of Chongsheng Coal at a consideration of RMB450,000,000. The acquisition has been accounted for using the acquisition method.

The aggregate net assets acquired by the Target Group are as follows:

Net assets acquired: Property, plant and equipment Mining rights Inventories Deferred tax assets Goodwill (Note 15) Net cash outflows arising on acquisition: Cash consideration paid Payable to third parties	Acquiree’s carrying value before combination RMB’000 443,248 30,000 4,141 – 477,389	Fair value adjustments RMB’000 (142,920) – – 35,730 (107,190)	Fair value RMB’000 300,328 30,000 4,141 35,730
			370,199 79,801
			450,000

			400,000 50,000
			450,000

(b) Gain on a bargain purchase

During the year ended 31 December 2010, the Target Group acquired property, plant and equipment and mining rights of Hong Quan Coal at a consideration of RMB120,000,000. The acquisition has been accounted for using the acquisition method.

– II-29 –

APPENDIX II

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

The aggregate net assets acquired by the Target Group are as follows:

Net assets acquired: Property, plant and equipment Mining rights Deferred tax assets Gain on a bargain purchase (Note 4) Net cash outflows arising on acquisition: Cash consideration paid Payable to third parties	Acquiree’s carrying value before combination RMB’000 120,543 44,750 – 165,293	Fair value adjustments RMB’000 (11,027) – 2,757 (8,270)	Fair value RMB’000 109,516 44,750 2,757
			157,023 (37,023)
			120,000

			110,000 10,000
			120,000

23. Capital commitments

At each year end, the Target Group had the following capital commitments for the acquisition of property, plant and equipment:

Capital expenditure contracted for but not provided in the Financial Information	As 2008 RMB’000 – –	at 31 December 2009 2010 RMB’000 RMB’000 – 54,886 – 54,886	As at 30 June 2011 RMB’000 17,047
			17,047

– II-30 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

24. Financial instruments by category

Financial assets Loans and receivables – Trade and other receivables – Bank balances and cash Financial liabilities At amortised cost – Trade and other payables – Loans and borrowings	As 2008 RMB’000 78,138 1,968 264,750 –	at 31 December 2009 2010 RMB’000 RMB’000 252,802 145,591 26,070 107,458 975,330 516,479 – 900,000	As at 30 June 2011 RMB’000 498,430 103,498

			979,011 880,000

25. Financial risk management and estimation of fair values

a) Financial risk management

The Target Group’s business activities expose it to a variety of financial risks, which include credit risk, liquidity risk and interest rate risk. Details of the policies on how to mitigate these risks are set out below. The Target Group manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

There has been no change to the Target Group’s risk exposure relating to financial instruments or the manner in which it manages and measures the risks.

Credit risk

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Target Group’s maximum exposure to credit risk is represented by the carrying amount of each financial asset as stated in the consolidated statements of financial position. The Target Group does not provide any guarantees which would expose it to credit risk.

The management considers that the Target Group has adequate credit control for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Target Group reviews the recoverable amount of each individual trade debt at each reporting date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the management of the Target Group considers that its credit risk is significantly reduced.

The Target Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer rather than the industry or country in which the customers operate and therefore significant concentrations of credit risk primarily arise when the Target Group has significant exposure to individual customers. The Target Group has no significant concentration of credit risk in respect of trade and other receivables. The Target Group performs ongoing credit evaluation of the debtors’ financial condition and maintains an account for allowance for doubtful debts based upon the expected collectibles of all trade and other receivables.

The credit risk on bank balances is minimal because the counterparties are major banks in the PRC with good credit quality.

– II-31 –

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

APPENDIX II

Liquidity risk

Liquidity risk is the risk that an enterprise will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value.

The Target Group’s objective is to maintain a balance between continuity of funding and the flexibility through the use of bank and other borrowings. The Target Group monitors the current and expected liquidity requirements and maintains a level of bank balances deemed adequate to finance the Target Group’s operations and its compliance with lending covenants regularly to ensure it maintains sufficient working capital and adequate committed lines of funding from reputable financial institutions to meet its liquidity requirement. Accordingly, the Financial Information has been prepared on a going concern basis.

As at both 31 December 2010 and 30 June 2011, the Target Group’s total available banking facilities were RMB600,000,000 and 900,000,000 respectively of which RMB900,000,000 and RMB880,000,000 were utilised respectively.

The following tables detail of the Target Group’s contractual maturity for their non-derivative financial liabilities date. The tables have been drawn based on the undiscounted cash flows of financial liabilities in accordance with the earliest date on which the Target Group can be required to pay.

Trade and other payables Trade and other payables Trade and other payables Borrowings	Within 1 year or on demand RMB’000 264,750 Within 1 year or on demand RMB’000 975,330 Within 1 year or on demand RMB’000 516,479 213,000 729,479	As at More than 1 year but less than 2 years RMB’000 – As at More than 1 year but less than 2 years RMB’000 – As at More than 1 year but less than 2 years RMB’000 – 153,000 153,000	31 December 2008 2 to 5 years Total undiscounted cash flows RMB’000 RMB’000 – 264,750 31 December 2009 2 to 5 years Total undiscounted cash flows RMB’000 RMB’000 – 975,330 31 December 2010 2 to 5 years Total undiscounted cash flows RMB’000 RMB’000 – 516,479 677,000 1,043,000 677,000 1,559,479	Carrying amounts RMB’000 264,750

				Carrying amounts RMB’000 975,330

				Carrying amounts RMB’000 516,479 900,000
				1,416,479

– II-32 –

APPENDIX II

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

Trade and other payables Borrowings	Within 1 year or on demand RMB’000 979,011 246,213 1,225,224	As More than 1 year but less than 2 years RMB’000 – 372,697 372,697	at 30 June 2011 2 to 5 years Total undiscounted cash flows RMB’000 RMB’000 – 979,011 380,824 999,734 380,824 1,978,745	Carrying amounts RMB’000 979,011 880,000
				1,859,011

Interest rate risk

The Target Group is primarily exposed to cash flow interest rate risk in relation to bank balances at prevailing market rates and variable-rate bank loans.

The Target Group 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.

At 30 June 2011 and 31 December 2010, it is estimated that a general increase or decrease of 10 basis points in interest rates, with all other variables held constant, would decrease or increase the Target Group’s profit for the year and retained profits by approximately RMB4,499,000 and RMB3,960,000 respectively. The analysis is prepared assuming the financial instruments outstanding at the balance sheet date were outstanding for the whole year. A 10 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.

No sensitivity analysis is performed on the exposure to interest rate risk for bank balances as at 31 December 2008 and 2009 as the effect on the Target Group’s profit for both years would be insignificant.

(b) Estimation of fair values

The fair values of financial assets and financial liabilities recorded at amortised cost are determined in accordance with generally accepted pricing models based on discounted cash flow analysis.

The management of the Target Group considers that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the Financial Information with a maturity of less than one year are assumed to approximate their fair values.

The fair value of balances with related parties has not been determined as the timing of the expected cash flows of these balances cannot be reasonably determined because of the relationship.

– II-33 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

A. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following unaudited pro forma financial information of the Enlarged Group, comprising the unaudited pro forma statements of comprehensive income and cash flows of the Enlarged Group for the year ended 31 December 2010 and the unaudited pro forma statement of financial position of the Enlarged Group as at 30 June 2011, prepared in accordance with Rule 4.29 of the Listing Rules is for illustrative purposes only, and is set forth here to illustrate the effect on the results of operations, financial position and cash flows of the Group as if (i) the Acquisition, had been taken place on 1 January 2010 in respect of the unaudited pro forma statements of comprehensive income and cash flows of the Enlarged Group; and (ii) the Acquisition, had been taken place on 30 June 2011 in respect of the unaudited pro forma statement of financial position of the Enlarged Group.

The unaudited pro forma financial information has been prepared using accounting policies consistent with that of the Group and based on the audited consolidated statement of comprehensive income and audited consolidated statement of cash flows of the Group for the year ended 31 December 2010 and the unaudited consolidated statement of financial position of the Group as at 30 June 2011 as extracted from the Group’s published financial reports as mentioned in the “Financial Information of the Group” in Appendix I and the audited financial information of Huameiao Energy Group as extracted from the “Financial Information of Huameiao Energy Group” in Appendix II, after making certain pro forma adjustments as described below. A narrative description of the pro forma adjustments of the Acquisition that are (i) directly attributable to the transactions concerned and not relating to future events or decisions; and (ii) factually supportable, is set out in the accompanying notes.

The unaudited pro forma financial information of the Enlarged Group is based on a number of assumptions, estimates, uncertainties and currently available information. As a result of these assumptions, estimates and uncertainties, the accompanying unaudited pro forma financial information of the Enlarged Group does not purport to describe the actual results of operations, financial position and cash flows of the Enlarged Group that would have been attained had the acquisition been completed on any future date. Furthermore, the accompanying unaudited pro forma financial information of the Enlarged Group does not purport to predict the Enlarged Group’s future results of operations, financial position and cash flows.

The unaudited pro forma financial information should be read in conjunction with the “Financial Information of the Group” set forth in Appendix I to this circular, the “Financial Information of Huameiao Energy Group” set forth in Appendix II to this circular, and other financial information included elsewhere of this circular.

– III-1 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Further, for the purpose of this unaudited pro forma financial information of the Enlarged Group, in the opinion of the Directors, the Huameiao Group’s fair value of the assets and liabilities being acquired is subject to changes because the fair value of the Huameiao Energy Group’s assets and liabilities being acquired shall be assessed on the date of completion. Since this unaudited pro forma financial information of the Enlarged Group is prepared solely for illustrative purposes, the Directors had assumed the fair values of the assets and liabilities as at 30 September 2011, as assessed by independent valuers on 8 December 2011, were the fair values of the assets and liabilities as at the completion date.

1. Unaudited Pro Forma Statement of Comprehensive Income of the Enlarged Group For the year ended 31 December 2010

Turnover Cost of sales Gross profit Other income Gain on bargain purchase Gain on fair value of previously acquired equity interest Distribution expenses Administrative expenses Other expenses Results from operating activities Finance income Finance cost Net finance costs Share of loss of associate Profit before taxation Income tax expense Profit for the year	The Group for the year ended 31 December 2010 RMB’000 6,455,805 (5,698,188) 757,617 30,154 15,563 – (119,748) (122,906) (4,808) 555,872 48,722 (100,784) (52,062) (1,922) 501,888 (125,236) 376,652	Traget Group for the year ended 31 December 2010 Consolidation adjustment on associate becoming a subsidiary RMB’000 RMB’000 Note 3 914,474 (638,374) (24,387) 276,100 (24,387) 1,150 37,023 94,230 – 355,420 – (114,165) (30,103) (1,808) 198,300 395,160 (37,974) (37,974) – – – 160,326 395,160 (52,006) 13,622 108,320 408,782	Enlarged Group for the year ended 31 December 2010 RMB’000 7,370,279 (6,360,949) 1,009,330 31,304 146,816 355,420 (119,748) (267,174) (6,616) 1,149,332 48,722 (138,758) (90,036) (1,922) 1,057,374 (163,620) 893,754

– III-2 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Other comprehensive income Foreign currency translation differences for foreign operations Net change in fair value of available-for-sale financial assets Other comprehensive income for the year (after tax and reclassification adjustment) Total comprehensive income for the year Profit attributable to: Equity shareholders of the company Non-controlling interests Profit for the year Total comprehensive income attributable to: Equity shareholders of the Company Non-controlling interests Total comprehensive income for the year	The Group for the year ended 31 December 2010 RMB’000 (24,583) (12,918) (37,501) 339,151 377,222 (570) 376,652 339,721 (570) 339,151	Traget Group for the year ended 31 December 2010 Consolidation adjustment on associate becoming a subsidiary RMB’000 RMB’000 Note 3 – – 108,320 408,782 108,320 395,292 13,490 108,320 408,782 108,320 395,292 13,490 108,320 408,782	Enlarged Group for the year ended 31 December 2010 RMB’000 (24,583) (12,918) (37,501) 856,253 880,834 12,920 893,754 843,333 12,920 856,253

– III-3 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

2. Unaudited Pro Forma Statement of Financial Position of the Enlarged Group

Non-current assets PPE & CIP Intangible assets Lease prepayments Investment in associate Goodwill Deferred tax assets Current assets Inventories Derivatives Trade and other receivables Prepayments and other receivables Pledged deposits Bank and cash balances Current liabilities Loans and borrowings Trade and other payables Derivatives Current taxation payable Total assets less current liabilities Capital and reserves Share capital Reserves Non-controlling interests	The Group as at 30 June 2011 RMB’000 1,726,189 210,659 129,798 1,670,456 6,289 3,743,391 - - - - - - - - - - 439,112 1,697 642,964 1,132,833 412,539 738,782 3,367,927 - - - - - - - - - - (3,211,494) (816,138) (1,377) (228,764) (4,257,773) 2,853,545 (91,479) (1,940,553) (54,611) (2,086,643) - - - - - - - - - -	Target Group as at 30 June 2011 RMB’000 1,160,265 110,878 109 236,779 77,325 1,585,356 - - - - - - - - - - 78,004 – 262,706 398,264 103,498 842,472 - - - - - - - - - - (195,000) (989,547) (69,581) (1,254,128) 1,173,700 (300,000) (188,700) (488,700) - - - - - - - - - -	Pro forma adjustments Reversal of investment in associate Fair value adjustment on Target Group Consolidation adjustment on associate becoming a subsidiary RMB’000 RMB’000 RMB’000 Note 1 Note 2 Note 3 487,735 5,051,122 (1,627,400) (236,779) (77,325) (1,627,400) 5,538,857 (314,104) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 50,833 (211,695) 17,593 (200,000) 1,600,000 (1,900,000) 1,600,000 (143,269) (2,100,000) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 40,200 989,547 69,581 – – 1,099,328 (27,400) 5,395,588 (1,314,776) 300,000 27,400 (4,082,588) 3,794,238 (1,239,262) 27,400 (4,082,588) 2,854,976 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -	Enlarged Group as at 30 June 2011 RMB’000 3,374,189 5,372,659 129,907 43,056 – 6,289
				8,926,100 - - - - - - - - - - 567,949 1,697 693,975 1,348,690 412,539 542,280
				3,567,130 - - - - - - - - - - (3,366,294) (816,138) (1,377) (228,764)
				(4,412,573)
				8,080,657

				(91,479) (2,390,203) (1,293,873)
				(3,775,555) - - - - - - - - - -

– III-4 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Non current liabilities Deferred tax liabilities Other payables Loans and borrowings Net assets	The Group as at 30 June 2011 RMB’000 (48,992) (717,910) (766,902) (2,853,545)	Target Group as at 30 June 2011 RMB’000 (685,000) (685,000) (1,173,700)	Pro forma adjustments Reversal of investment in associate Fair value adjustment on Target Group Consolidation adjustment on associate becoming a subsidiary RMB’000 RMB’000 RMB’000 Note 1 Note 2 Note 3 (1,313,000) (1,232,000) (308,200) – (1,313,000) (1,540,200) 27,400 (5,395,588) 1,314,776	Enlarged Group as at 30 June 2011 RMB’000 (1,361,992) (1,232,000) (1,711,110)
				(4,305,102)
				(8,080,657)

– III-5 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

3. Unaudited pro Forma Statement of Cash Flows of the Enlarged Group For the year ended 31 December 2010

Profit before taxation Adjustments for: Depreciation for property, plant and equipment Amortisation of lease prepayments Amortisation of intangible assets Net finance costs Gain from disposal of available-for-sale financial assets Loss on disposal of property, plant and equipment Provision for environment and development funds Net gain on derivatives Gain on bargain purchase Gain on fair value of previously acquired equity interest Equity-settled share-based payment expenses Share of loss of associate Changes in working capital: Inventories Trade and other receivables Trade and other payables Operating activities Cash generated from/(used in) operations Tax paid: – PRC Income Tax (paid)/refunded Net cash generated from/(used in) operating activities	The Group for the year ended 31 December 2010 RMB’000 501,888 91,139 140 – 52,062 (19,584) (5,423) (15,563) – 2,522 1,922 (169,181) (477,324) 389,726 352,324 (85,568) 266,756	Target Group for the year ended 31 December 2010 Consolidation adjustment on associate becoming a subsidiary RMB’000 RMB’000 Note 3 160,326 395,160 119,271 24,387 22 – 2,185 30,103 37,098 512 266,332 (37,023) (94,230) – (355,420) (2,741) 38,353 (793,169) (208,834) – (22,900) – (231,734) –	Enlarged Group for the year ended 31 December 2010 RMB’000 1,057,374 234,797 162 32,288 89,160 (19,584) 512 266,332 (5,423) (146,816) (355,420) 2,522 1,922 (171,922) (438,971) (403,443) 143,490 (108,468) 35,022

– III-6 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Investing activities Interest received Proceeds from sale of property, plant and equipment Proceeds from sales of derivative financial instruments Cash arising from acquisition of a subsidiary Acquisition of subsidiary Cash paid for acquisition of assets Acquisition of property, plant and equipment Payment for investments in subsidiaries and associates Additional costs paid for mining rights Refund of part payments for aborted acquisition Net cash used in investing activities Financing activities Proceeds from loans and borrowings Capital injection Capital contribution from non-controlling shareholders Repayment of loans and borrowings Change in pledged deposits Interest paid Net cash generated from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Effect of foreign exchange rate changes Cash and cash equivalents at 31 December	The Group for the year ended 31 December 2010 RMB’000 21,452 481 1,409 655 (525,489) (1,387,781) 129,000 (1,760,273) 10,088,978 35,594 (8,714,747) 85,521 (99,028) 1,396,318 (97,199) 376,187 8,173 287,161	Target Group for the year ended 31 December 2010 Consolidation adjustment on associate becoming a subsidiary RMB’000 RMB’000 Note 3 833 11,580 (2,100,000) (510,000) (135,835) – 1,300,000 (15,525) – – (648,947) (800,000) 900,000 100,000 (37,931) – 962,069 – 81,388 (800,000) 26,070 – – 107,458 (800,000)	Enlarged Group for the year ended 31 December 2010 RMB’000 22,285 12,061 1,409 655 (2,100,000) (510,000) (661,324) (87,781) (15,525) 129,000 (3,209,220) 10,988,978 100,000 35,594 (8,714,747) 85,521 (136,959) 2,358,387 (815,811) 402,257 8,173 (405,381)

– III-7 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The adjustment reflects the reversal of investment cost in assets of RMB1,627,000,000, share of profits of RMB32,520,000, a gain on bargain purchase of RMB26,880,000 and dividend in amount of RMB32,000,000 received from the acquisition of 32% of Target Group.
(i) For the purpose of the unaudited pro forma financial information of the Enlarged Group, the directors revalue the valuation of the assets for the Target Group as at 30 June 2011 with reference to a report from an independent firm of professional valuers, being the fair values of these assets as at the completion date.
(ii) The fair value adjustment on the intangible assets acquired (i.e. mining rights) of RMB 5,051,122,000 is determined by the directors of the Company with reference to the valuation report where the basis of valuation adopted is income-based approach.

The directors of the Company have assessed the recoverable amount of the cash-generating unit to which the intangible asset relates to, is greater than the carrying amount of such cash-generating unit, taking into the account the independent valuation report as disclosed in Appendix V to the Circular. Based on their assessment and the valuation report, the directors of the Company consider that there is no indication that the value of the intangible asset of the Enlarged Group is impaired.

The reporting accountants have conducted an impairment test in respect of the intangible assets in accordance with IAS 36 “Impairment of Assets” involves the determination of the recoverable amount of the cash-generating unit to which the intangible assets have been allocated, being the higher of the cash-generating unit’s fair value less costs to sell and its value in use. Based on the assessment by the directors of the Company and the impairment test, there is no indication that the value of the intangible assets of the Enlarged Group is impaired.

The directors of the Company have confirmed that the Company will adopt the accounting policies, principal assumptions and valuation method consistent with those used in the preparation of the unaudited pro forma financial information in assessing impairment of the Enlarged Group’s intangible assets in the future.

(i) The considerations for the proposed acquisition of 32% and 48% interest in the Target Group are RMB1,600,000,000 and RMB2,880,000,000 respectively, totalling of RMB4,480,000,000.

The total consideration is RMB4,480,000,000, in which (i) RMB200,000,000 of prepayment made by the Group for the acquisition, (ii) RMB 500,000,000 to be settled by additional bank borrowings of the Group, (iii) RMB1,232,000,000 to be settled by either self-financing or bank borrowings of the Group, (iv) RMB 648,000,000 to be fully settled by way of taking up the responsibility to repay bank facilities of RMB648,000,000 of Target Group; and the remaining balance of RMB1.9 billion is settled by way of cash payments.

Pursuant to the Acquisition Agreement, the Group will not take up the responsibility to repay all liabilities, except the banking facilities of Target Group in the amount of RMB648,000,000. Thus all liabilities in Target Group were reversed.

(ii) In accordance with IFRS3 and the accounting policies adopted by the Group, business combinations are accounting for using the acquisition method. The Group measures gain on bargain purchase as the excess of the net fair value of the acquiree’s identifiable assets and liabilities to be acquired measured as at the acquisition date over the aggregate of (i)the consideration transferred, (ii) fair value of previously acquired equity interest in Target Group, and (iii)non-controlling interest in Target Group.

– III-8 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Gain on bargain purchase of RMB94,230,000 is calculated as follows:

Fair value of net identifiable assets of Target Group Consideration of acquiring 48% interest in Target Group Fair value of previously acquired equity interest of 32% in Target Group Non-controlling interest of 20% in Target Group Gain on bargain purchase	RMB’000 6,196,312
	2,880,000 1,982,820 1,239,262
	6,102,082
	94,230

Share capital and pre-acquisition retained earnings of Target Group are adjusted. Non-controlling interests of RMB1,239,000,000 incurred from 20% interests of Target Group on fair value of Target Group as per completion held by minority shareholders.

The Group remeasures the fair value of its previously acquired equity interest of 32% in Target Group and gain on fair value of RMB355,420,000 arose.

Since the fair values of the identifiable assets and liabilities of the Target Group as at the date of completion of the transactions may be different from their fair values used in the preparation of this unaudited pro forma statement of financial position of the Enlarged Group, the actual amount of gain on bargain purchase may be different from those as shown above.

(iii) For the purpose of the unaudited pro forma statement of comprehensive income and statement of cash flows of the Enlarged Group, additional amortisation and depreciation expenses in respect of the fair value adjustments recorded in Target Group of RMB30,103,000 and RMB24,387,000 respectively and relevant tax credit of RMB13,622,000 were recorded in profit and loss for the year ended 31 December 2010. These adjustments will have continuing effects on the Enlarged Group.

– III-9 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

B. ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF CHINA QINFA GROUP LIMITED

Mabel Chan & Co. Certified Public Accountants

Suites 2208-11, 22/F., Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong Tel: (852) 2122 9736 Fax: (852) 2180 9163

We report on the unaudited pro forma financial information of China Qinfa Group Limited (the “ Company ”), and its subsidiaries (hereinafter collectively referred to as the “ Enlarged Group ”), which has been prepared by the directors of the Company for illustrative purposes only, to provide information about how the proposed acquisition of additional 48% interest in Shanxi Huameiao Energy Group Company Limited (the “ Target Group ”) might have affected the financial information presented, for inclusion in Appendix III of the circular dated 8 December 2011 issued by the Company (the “ Circular ”). The basis of preparation of the unaudited pro forma financial information is set out on pages III-8 and III-9 of 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.

Basic 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.

– III-10 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

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 Group as at 30 June 2011 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; and
c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Mabel Chan & Co.

Certified Public Accountants Hong Kong, 8 December 2011

– III-11 –

COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

COMPETENT PERSON’S REPORT ON THE Shanxi Huameiao Energy Group Co, Ltd. Coal Mines Pinglu District, Shuozhou, Shanxi, China

PREPARED FOR China Qinfa Group, Ltd.

November 9, 2011

PREPARED BY Edmundo J. Laporte, P.E., ECSI Group

==> picture [184 x 46] intentionally omitted <==

==> picture [217 x 59] intentionally omitted <==

– IV-1 –

COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

SECTION TITLE PAGE NO.	SECTION TITLE PAGE NO.	SECTION TITLE PAGE NO.
1.	INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-7
	1.1	SCOPE OF WORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-7
	1.2	RELEVANT ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-7
	1.3	REVIEW OF METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-8
	1.4	SITE VISITS AND INSPECTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-8
	1.5	KEY SOURCES OF INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-9
	1.6	COMPETENT PERSON AND RESPONSIBILITY . . . . . . . . . . . . . . . . . . . . IV-12
	1.7	LIMITATIONS AND EXCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-17
		1.7.1 Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-17
		1.7.2 Limitations and Limited Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-17
	1.8	CAPABILITY AND INDEPENDENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-18
		1.8.1 Gustavson Associates, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-18
		1.8.2 BMI Technical Consulting Resources, Ltd. . . . . . . . . . . . . . . . . . . . . IV-19
2.	PROJECT OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-20
	2.1	PROJECT LOCATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-21
	2.2	REGIONAL ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-22
	2.3	LICENSES AND APPROVALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-23
	2.4	PROPERTY DESCRIPTION OF XINGTAO PROJECT . . . . . . . . . . . . . . . . IV-23
	2.5	PROPERTY DESCRIPTION OF FENGXI PROJECT . . . . . . . . . . . . . . . . . . IV-25
	2.6	PROPERTY DESCRIPTION OF CHONGSHENG PROJECT . . . . . . . . . . . . IV-26
	2.7	HISTORY OF AREA EXPLORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-27
	2.8	HISTORY OF MINING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-28
		2.8.1 Xingtao Mine History. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-28
		2.8.2 Fengxi Mine History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-29
		2.8.3 Chongsheng Mine History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-30
3.	GEOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-31
	3.1	REGIONAL GEOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-31
	3.2	GEOLOGY OF XINGTAO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-31
		3.2.1 Stratigraphy (Table 3-1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-31
		3.2.1.1 Coal-bearing Strata . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-35
		3.2.2 Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-36
		3.2.3 Coal Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-37
		3.2.3.1 Physical Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-37
		3.2.3.2 Chemical Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-37
	3.3	GEOLOGY OF FENGXI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-38
		3.3.1 Stratigraphy (Table 3-5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-38
		3.3.1.1 Coal-bearing Strata . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-39
		3.3.2 Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-40
		3.3.3 Coal Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-41
		3.3.3.1 Physical Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-41
		3.3.3.2 Chemical Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-42

– IV-2 –

APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

	3.4	GEOLOGY OF CHONGSHENG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-42
		3.4.1 Stratigraphy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-42
		3.4.1.1 Coal-bearing Strata . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-44
		3.4.2 Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-44
		3.4.3 Coal Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-45
		3.4.3.1 Physical Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-45
		3.4.3.2 Chemical Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-45
4.	RESOURCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-46
	4.1	DATA VERIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-46
	4.2	RESOURCE CALCULATION OF METHODOLOGY BY CHINESE . . . . . . IV-46
	4.3	COMPARISON OF RESOURCE STANDARDS TO JORC . . . . . . . . . . . . . . IV-49
	4.4	RESOURCE CALCULATIONS FOR XINGTAO . . . . . . . . . . . . . . . . . . . . . IV-50
	4.5	RESOURCE CALCULATIONS FOR FENGXI . . . . . . . . . . . . . . . . . . . . . . . IV-50
	4.6	RESOURCE CALCULATIONS FOR CHONGSHENG . . . . . . . . . . . . . . . . . IV-51
	4.7	MINERAL RESOURCE STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-51
	4.8	POTENTIAL ADDITIONAL RESOURCES FROM OTHER SEAMS . . . . . . IV-51
5.	ORE	RESERVE ESTIMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-53
	5.1	BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-54
	5.2	DESCRIPTION OF MINING METHOD – XINGTAO . . . . . . . . . . . . . . . . . IV-54
	5.3	DESCRIPTION OF MINING METHOD – FENGXI. . . . . . . . . . . . . . . . . . . IV-55
	5.4	DESCRIPTION OF MINING METHOD – CHONGSHENG . . . . . . . . . . . . . IV-55
	5.5	RESERVE ESTIMATION PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . IV-55
	5.6	RESERVE STATEMENT – XINGTAO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-56
	5.7	RESERVE STATEMENT – FENGXI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-57
	5.8	RESERVE STATEMENT – CHONGSHENG . . . . . . . . . . . . . . . . . . . . . . . . IV-58
	5.9	COMBINED RESERVE STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-59
6.	MINING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-60
	6.1	MINING LICENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-60
	6.2	MINING METHODS AND APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . IV-60
	6.3	MINE DESIGN PRACTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-65
	6.4	RAW COAL PRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-65
	6.5	HYDROLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-66
	6.6	MINE GASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-67
	6.7	SPONTANEOUS COMBUSTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-69
	6.8	EXPLOSIVE DUST POTENTIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-70
	6.9	SUBSIDENCE ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-71
	6.10	COMMENTS ON OVERALL MINE PLAN AND MINING APPROACH . . . IV-72
7.	COAL WASHING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-72
	7.1	RAW COAL QUALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-73
	7.2	DESCRIPTION OF THE XINGTAO PLANT . . . . . . . . . . . . . . . . . . . . . . . . IV-74
	7.3	DESCRIPTION OF THE PLANT AT FENGXI. . . . . . . . . . . . . . . . . . . . . . . IV-77
	7.4	DESCRIPTION OF THE PLANT FOR CHONGSHENG . . . . . . . . . . . . . . . IV-80
	7.5	WASHED COAL QUALITY AND SALEABLE PRODUCTS . . . . . . . . . . . . IV-83
	7.6	WASHED COAL QUALITY AND SALEABLE PRODUCTS . . . . . . . . . . . . IV-84

– IV-3 –

APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

8. PROJECT DEVELOPMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-84	8. PROJECT DEVELOPMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-84
8.1	STATUS OF CONSTRUCTION AND DEVELOPMENT – XINGTAO . . . . . IV-84
8.2	STATUS OF CONSTRUCTION AND DEVELOPMENT – FENGXI. . . . . . . IV-85
8.3	STATUS OF CONSTRUCTION AND DEVELOPMENT – CHONGSHENG . IV-85
8.4	COMBINED SCHEDULE AND PRODUCTION . . . . . . . . . . . . . . . . . . . . . IV-86
9. OPERATING AND CAPITAL COSTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-86
9.1	EXTERNAL CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-87
9.2	CURRENCY EXCHANGE RATE CONSIDERATIONS . . . . . . . . . . . . . . . . IV-87
9.3	PRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-87
9.4	CAPITAL COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-88
9.5	OPERATING COSTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-89
9.6	SUMMARY OF COSTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-92
10. ENVIRONMENT AND SAFETY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-98
10.1	SAFETY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-98
10.2	ENVIRONMENTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-99
	10.2.1 Laws & Rules Basis of Environmental Protection and Water and
	Soil Conservation (As listed in the feasibility studies). . . . . . . . . . IV-99
11. RISKS, OPPORTUNITIES AND CRITICAL ISSUES . . . . . . . . . . . . . . . . . . .IV-101
11.1	RISK SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .IV-101
11.2	OPPORTUNITY SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .IV-102
	LIST OF FIGURES
FIGURE	PAGE
FIGURE	2-1 LOCATION MAP OF HUAMEI’AO XINGTAO COAL INDUSTRY
	CO., LTD., PINGLU DISTRICT, . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-21
FIGURE	2-2 XINGTAO PROPERTY AND NEIGHBORHOOD PROPERTIES MAP. IV-25
FIGURE	2-3 CHONGSHEN PROPERTY AND NEIGHBORING PROPERTIES . . . . IV-27
FIGURE	6-1 SEAM SCHEMATIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-61
FIGURE	6-2 XINGTAO MINE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-62
FIGURE	6-3 FENGXI MINE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-63
FIGURE	6-4 CHONGSHENG MINE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-64
FIGURE	7-1 XINGTAO SURFACE FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-76
FIGURE	7-2 FENGXI SURFACE FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-79
FIGURE	7-3 CHONGSHENG SURFACE FACILITIES. . . . . . . . . . . . . . . . . . . . . . . IV-82
	LIST OF TABLES
TABLE	PAGE
TABLE 2-1 INFLEXION POINT COORDINATE LIST OF
	COAL PROPERTY BOUNDARY . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-24
TABLE 2-2 INFLEXION POINT COORDINATE LIST OF
	THE BOUNDARY OF FENGXI . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-25
TABLE 2-3 INFLECTION OR TURN POINTS FOR CHONGSHENG PROPERTY. IV-26
TABLE 3-1 MINE SITE STRATIGRAPHY – XINGTAO . . . . . . . . . . . . . . . . . . . . IV-35

– IV-4 –

APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

TABLE	3-2	FAULTS AT XINGTAO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-37
TABLE	3-3	RAW COAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-37
TABLE	3-4	WASHED COAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-38
TABLE	3-5	MINE SITE STRATIGRAPHY – FENGXI . . . . . . . . . . . . . . . . . . . . . . IV-39
TABLE	3-6	COAL STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-41
TABLE	3-7	RAW COAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-42
TABLE	3-8	WASHED COAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-42
TABLE	3-9	INDUSTRIAL USAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-42
TABLE	3-10	FAULTS AT CHONGSHENG. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-45
TABLE	3-11	RAW COAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-45
TABLE	3-12	WASHED COAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-46
TABLE	4-1	CHINESE RESOURCE/RESERVE CLASSIFICATION SYSTEM . . . . . IV-49
TABLE	4-2	COMPARISON OF CHINESE RESOURCE/RESERVE
		CLASSIFICATION SYSTEM TO JORC CONCESSION COAL
		RESOURCE ESTIMATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-49
TABLE	4-3	XINGTAO CONCESSION COAL RESOURCE ESTIMATE . . . . . . . . . IV-50
TABLE	4-4	FENGXI CONCESSION COAL RESOURCE ESTIMATE . . . . . . . . . . IV-50
TABLE	4-5	CHONGSHENG COAL RESOURCE ESTIMATE. . . . . . . . . . . . . . . . . IV-51
TABLE	4-6	TOTAL COAL RESOURCE ESTIMATE . . . . . . . . . . . . . . . . . . . . . . . IV-51
TABLE	4-7	XINGTAO SEAMS 8 AND 10 POTENTIAL ADDITIONAL
		RESOURCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-52
TABLE	4-8	CHONGSHENG SEAM NO. 6 POTENTIAL ADDITIONAL
		RESOURCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-52
TABLE	4-9	FENGXI SEAM NO. 8 POTENTIAL ADDITIONAL RESOURCES . . . IV-52
TABLE	4-10	TOTAL POTENTIAL ADDITIONAL RESOURCES . . . . . . . . . . . . . . . IV-53
TABLE	5-1	XINGTAO COAL RESERVE ESTIMATE . . . . . . . . . . . . . . . . . . . . . . IV-56
TABLE	5-2	XINGTAO ROM COAL QUALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-57
TABLE	5-3	FENGXI COAL RESERVE ESTIMATE . . . . . . . . . . . . . . . . . . . . . . . . IV-57
TABLE	5-4	FENGXI ROM COAL QUALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-58
TABLE	5-5	CHONGSHENG COAL RESERVE ESTIMATE . . . . . . . . . . . . . . . . . . IV-58
TABLE	5-6	CHONGSHENG ROM COAL QUALITY. . . . . . . . . . . . . . . . . . . . . . . IV-59
TABLE	5-7	TOTAL COAL RESERVES ESTIMATE . . . . . . . . . . . . . . . . . . . . . . . . IV-59
TABLE	6-1	RAW COAL PRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-66
TABLE	6-2	SPONTANEOUS COMBUSTION ANALYSIS RESULT LIST . . . . . . . IV-69
TABLE	6-3	COAL DUST EXPLOSION IDENTIFICATION REPORT
		– XINGTAO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-70
TABLE	7-1	XINGTAO RAW COAL QUALITY – AVERAGES. . . . . . . . . . . . . . . . IV-73
TABLE	7-2	FENGXI RAW COAL QUALITY – AVERAGES . . . . . . . . . . . . . . . . . IV-74
TABLE	7-3	CHONGSHENG RAW COAL QUALITY – AVERAGES . . . . . . . . . . . IV-74
TABLE	7-4	XINGTAO CLEAN COAL QUALITY – AVERAGES. . . . . . . . . . . . . . IV-83
TABLE	7-5	FENGXI CLEAN COAL QUALITY – AVERAGES . . . . . . . . . . . . . . . IV-83
TABLE	7-6	CHONGSHENG CLEAN COAL QUALITY – AVERAGES . . . . . . . . . IV-83
TABLE	7-7	RAW AND CLEAN COAL PRODUCTION . . . . . . . . . . . . . . . . . . . . . IV-84
TABLE	9-1	MARKET ASSUMPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-87
TABLE	9-2	EXCHANGE RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-87
TABLE	9-3	LOM MINE RAW COAL PRODUCTION SUMMARY . . . . . . . . . . . . IV-88

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COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

TABLE 9-4	LOM CLEAN COAL SUMMARY BASED ON 80% YIELD . . . . . . . . IV-88
TABLE 9-5	LOM CAPITAL COST SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-89
TABLE 9-6	MINE & PLANT CAPITAL COST SUMMARY. . . . . . . . . . . . . . . . . . IV-89
TABLE 9-7	MINE OPERATING SCHEDULE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-90
TABLE 9-8	LOM MINE OPERATING COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-90
TABLE 9-9	LOM MINE OTHER OPERATING COSTS . . . . . . . . . . . . . . . . . . . . . IV-91
TABLE 9-10	PREP PLANT OPERATING SCHEDULE . . . . . . . . . . . . . . . . . . . . . . IV-91
TABLE 9-11	LOM PREPARATION PLANT OPERATING COSTS . . . . . . . . . . . . . . IV-92
TABLE 9-12	LOM PREP PLANT OTHER OPERATING COSTS . . . . . . . . . . . . . . . IV-92
TABLE 9-13	COMBINED PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-93
TABLE 9-14	COMBINED SUMMARY RESULTS . . . . . . . . . . . . . . . . . . . . . . . . . . IV-94
TABLE 9-15	XINGTAO SUMMARY RESULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-95
TABLE 9-16	FENGXI SUMMARY RESULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-96
TABLE 9-17	CHONGSHENG SUMMARY RESULTS . . . . . . . . . . . . . . . . . . . . . . . IV-97
	LIST OF APPENDICES
Appendix A – Certificate of Competent Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . .IV-103
Appendix B – Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .IV-104

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COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

1. INTRODUCTION

Gustavson Associates, LLC (Gustavson) and BMI Technical Consulting (Resources), Ltd. (BMITC) were commissioned by China Qinfa Group, to complete an update of the Competent Person’s Report dated March 31, 2011, to be used as part of the documentation for an additional acquisition on the Hong Kong Stock Exchange (HKSE). This new assignment was initiated by a site visit to China on October 18, 2011.

Gustavson and BMITC worked as independent experts for China Qinfa Group to develop the necessary documentation to support China Qinfa Group’s work to complete a HKSE acquisition.

1.1 Scope of Work

The following assignments were included within the Scope of Work under this study for Gustavson and BMITC:

Complete a site visit with the appropriate personal.
Visit all of the three mine sites.
Collect data and relevant information from the mines and the offices of the owner, related to production, quality, sales contracts, revenues and expenses.
Translate the documents on the three mines.
Review and analysis all of the data provided.
Independent update of the Resource and Reserve base, taking into account the depletion associated with the production reported by the active operations.
Write and present an updated Competent Person’s Draft Report to China Qinfa Group for review and comment.
Finalize the Competent Person’s Report for incorporation into the HKSE Circular document corresponding to the new acquisition.

1.2 Relevant Assets

The assets that are of interest to the China Qinfa Group comprise the complete holdings and coal concessions of the following three companies, wholly owned by Shanxi Huameiao Energy Group Company Limited (referred to as “Huameiao”).

Shanxi Shuozhou Pinglu District Huameiao Xingtao Coal Industry Co., Ltd.
Shanxi Shuozhou Pinglu District Huameiao Fengxi Coal Industry Co., Ltd.
Shanxi Shuozhou Pinglu District Huameiao Chongsheng Coal Industry Co., Ltd.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

The control and overall management of the three companies is provided from a corporate office in Beijing. Overhead costs for these services will be included in the operating costs as corporate headquarters costs.

1.3 Review of Methodology

Gustavson and BMITC’s methodology for this study included the following:

Initial meetings with the senior management of China Qinfa Group and Huameiao.
A site visit to all three mines.
Obtaining production and quality figures, sales contracts and operational and capital expenses, as well as other relevant reports and documents from the owner.
Translation of the documents into English and the review of the material for use in this report.
Independent update of the Resource and Reserve base, taking into account the depletion associated with the production reported by the active operations.
Preparing a draft of this report and submitting it to China Qinfa Group for review and comments.

1.4 Site Visits and Inspections

On October 15, 2011, Mr. Edmundo J. Laporte, P.E., the Competent Person of record for the original acquisition’s Technical Report, traveled to Hong Kong to meet with Mr. Marco Sze of BMITC. Mr. Sze organized the visit agenda and obtained a Chinese visa for Mr. Laporte.

On October 18, 2011, Mr. Laporte of Gustavson, and Mr. Sze of BMITC traveled to Beijing as the first step for their site visits. They were met by China Qinfa Group, Ltd. (Qinfa) representatives Mr. Ying and Mr. Li, who provided transportation to the hotel in Beijing.

On October 19, 2011, Gustavson and BMITC departed for Beijing along with Messrs. Ying and Li, in a 6-hour road trip to Shuozhou, Shanxi Province. In Shuozhou, BMITC and Gustavson met with Qinfa’s Deputy President, Mr. Ma, had lunch at a local hotel in town and discussed the proposed schedule for the site visits. That same afternoon, the group traveled by car to the Xingtao Mine. The remainder of the afternoon and evening was spent with the management and technical staff of Xingtao in collecting data and answering questions about the operation, including a short visit to the coal preparation plant.

On October 20 Mr. Laporte and Mr. Sze visited the Fengxi Mine site to meet the management and technical staff. The team traveled to Shuozhou and had lunch with Qinfa representatives, and visited the Chongsheng site in the afternoon. During both visits, BMITC and Gustavson interviewed mine staff and collected data on the operations. The Fengxi mine

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

is operational and producing raw coal but its preparation plant is still under construction. The Chongsheng complex surface facilities are still under construction while the underground mine works have been completed.

No underground visits were made at the active mines since both Xingtao and Fengxi were reporting productions well within the expected levels. Furthermore, the production and ventilation plans were discussed in detail with the mine managers, and appeared to be technically sound and reasonable. Chongsheng was not producing coal since its surface facilities, including the coal preparation plant, are still under construction. Gustavson was also advised that obtaining permission from local regulators to proceed with the underground visits was unlikely due to recent restrictions motivated by a fatal accident that occurred at another mine in the region. In the evening the group returned to Shuozhou.

On October 21 the BMITC and Gustavson representatives traveled to Beijing accompanied by Messrs. Ying and Li, and later returned to Hong Kong.

Subsequent to the site visits there have been several requests for additional data and translation of significant documents and maps. These activities continued during the week of October 24, 2011.

1.5 Key Sources of Information

The following reports were the prime sources of data for the compilation of the original technical review. Within the main reports listed here there are numerous references to other reports and standards that these reports used as their sources and design criteria. The lists of documentation in each of the Chinese reports are extensive and demonstrate that the reports utilized by Gustavson are based on the format that is set forth by the governing rules and regulations within China.

Approval Document for Resource Integration in Shanxi Shuozhou Pinglu Huameiao Xingtao Coal Co., Ltd and Coal Preparation Plant, Name of Mine Participating Merge, Acquisition and Integration and Their affiliated Relation. (Feasibility and property merger document).
Geological Report of Merge & Acquisition and Integration Mine in Shanxi Shuozhou Pinglu Huameiao Coal Co., Ltd compiled by Shanxi Geophysical and Geochemical Prospecting Institute in March 2010.
The mining license granted by Ministry of Land and Resources of Shanxi Province on October 14, 2009 to Shanxi Shuozhou Pinglu Huameiao Xingtao Coal Co., Ltd, No. C1400002009101220038680.
Preliminary Design for Mine Mechanization Upgrading and Renovation of Shanxi Shuozhou Fengxi Coal Industry Co., Ltd (feasibility study for Fengxi)
Mining license (Fengxi) (with the number of 1400002009101220038812.) issued by the Department of Land and Resources of Shanxi Province on October 14, 2009.

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COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

Shanxi Shuozhou Fengxi Coal Company Limited Mine Geological Report of Upgrading Mechanized Coal Mining (Geologic Report).
Approval document on acquisition, reorganization and consolidation project of Shanxi Shuozhou Pinglu Huameiao Chongsheng Coal Industry Co., Ltd. (feasibility study).
On October 14, 2009, Department of Land and Resource of Shanxi Province changed Shanxi Shuozhou Pinglu Huameiao Chongsheng Coal Industry Co., Ltd’s Mining License (No. C1400002009101220038704).
Geological Report for Acquisition, Reorganization and Consolidation of Shanxi Shuozhou Pinglu Huameiao Chongsheng Coal Industry Co., Ltd’s mine.
Mine plans and Mine Maps for the current plans at Xingtao, Fengxi and Chongsheng.
Chapter 18 of the Rules and Regulations for the Hong Kong Stock Exchange.
Chapter Twenty, Evaluation Conclusions, Summary of Construction Project, Shanxi Coal Administrative College, Document GHPZYZ No. 1309 Document (Chongsheng).
Reply for Geological Report of Merger, Restructuring and Integration of Huamei’ao Chongsheng Coal Industry Co., Ltd, Pinglu District, Shuozhou City, Shanxi Province, Document of Coal Industry Bureau, Shanxi Provincial, No.764 JMG(2010).
Reply for Geological Report of Merger, Restructuring and Integration of Huamei’ao Xingtao Coal Industry Co., Ltd, Pinglu District, Shuozhou City, Shanxi Province Document of Coal Industry Bureau, Shanxi Provincial, No. 720 JMG(2010).
Reply for Program (Partial) of Merger, Restructuring and Integration of Coal Industry Enterprises, Pinglu District, Shuozhou City, JMCZB (2009) No.36.

All of the references above required translation from Chinese to English to allow Gustavson to review the documentation. There is the possibility of some misunderstanding in translated documents, but the documents were translated in total, which helps to improve the overall comprehension of the reports and data. Unfortunately due to the translation workload the appendices and some of the figures were not included within the translated reports.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

In addition to the above, and with the specific purpose of updating the original technical report to reflect the current situation at the three subject mines, Gustavson relied on the following documents supplied by Qinfa through BMITC:

1. Xingtao:

a. Financial Statement January-September 2011 (Profit & Losses Statement and Balance Sheet)
b. Raw Coal Production Statement January-September 2011
c. Clean Coal Production Statement January-September 2011
d. Quality test results dated April 8, 2011
e. Spot Sales Invoices January-September 2011 (Once invoice per month)
f. Mine Plan AutoCAD drawing (Seam 4[1] )
g. Mine Plan AutoCAD drawing (Seams 4[2] and 9[2] )
h. Human Resources Statistics (Direct and Indirect Manpower)

2. Fengxi

a. Financial Statement January-September 2011 (Profit & Losses Statement and Balance Sheet)
b. Spot Sales Invoices March-September 2011 (Once invoice per month)
c. Coal Sales Contract Dated October 2, 2011
d. Human Resources Statistics (Direct and Indirect Manpower)

3. Chongsheng

a. Financial Statement January-September 2011 (Profit & Losses Statement and Balance Sheet)
b. Supplementary Report on Hydro-geological Investigation Dated November 2010
c. Spot Sales Invoices January-September 2011 (Once invoice per month)
d. Mine Plan AutoCAD drawing (Seam 4)
e. Human Resources Statistics (Direct and Indirect Manpower)

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

1.6 Competent Person and Responsibility

This report has been prepared to JORC Standards and in compliance with HKSE’s Chapter 18 that governs this type of listing and is the rules for the listing and acceptance of mineral type projects. Gustavson Associates in conjunction with BMI, and associated groups and individuals completed this report.

William J. Crowl R.G., Vice President of Mining Gustavson Associates, LLC

Mr. Crowl’s qualifications include:

Greater than five years experience relevant to this type of deposit and project.
Previously accepted as a Competent Person under Chapter 18 guidelines for a mining project in China.
Holds a Bachelor of Arts Degree in Geosciences in University of Southern California (1968) and a Masters Degree in Economic Geology (1979) in University of Arizona.
Is a Member of the AusIMM and a Registered Geologist (R.G.) in the State of Oregon (G573).
Does not have any economic or beneficial interest, present or contingent, in any of the report assets.
Has not received a fee dependent on the findings outlined in the Competent Person’s Report.
Is not an officer, employee or proposed officer for the issuer or any group, holding or associate company of the issuer.
Is a member of the Gustavson team.

Karl D. Gurr, Associate Principal Mining Engineer

Mr. Gurr’s qualifications include:

Greater than five years experience relevant to this type of deposit and project.
Holds a Bachelor Degree in Science (Geology) in University of Utah (1974) and a second Bachelor Degree in Engineering (Mining) in University of Utah (1975).
Is a Member of the Society of Mining Engineers.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

Does not have any economic or beneficial interest, present or contingent, in any of the report assets.
Has not received a fee dependent on the findings outlined in the Competent Person’s Report.
Is not an officer, employee or proposed officer for the issuer or any group, holding or associate company of the issuer.
Is a member of the Gustavson team.

Edmundo J. Laporte P.E., ECSI Group

Mr. Laporte is a Professional Engineer (P.E.) and is an employee of ECSI, LLC of Lexington, Kentucky, USA (ECSI Group). Mr. Laporte is working for Gustavson on this project through a consulting agreement between ECSI Group and Gustavson.

Mr. Laporte 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 qualifications include:

Greater than five years experience relevant to this type of deposit and project.
Holds a Bachelor Degree in Engineering in University of Rafael (1981).
Is a Professional Engineer in 14 States in the United States
Is a Professional Engineer in the Province of Alberta, Canada
Is a Chartered Professional Engineer in Australia.
Is a Registered Professional Engineer in Queensland.
Is a Member of the Association of Professional Engineers, Geologists, and Geophysicists of Alberta (APEGGA).
Is a Registered Member of the Society for Mining, Metallurgy & Exploration Inc. (SME).
Does not have any economic or beneficial interest, present or contingent, in any of the report assets.
Has not received a fee dependent on the findings outlined in the Competent Person’s Report.
Is not an officer, employee or proposed officer for the issuer or any group, holding or associate company of the issuer.

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COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

I assume overall responsibility for this Competent Person’s Report.
Is a member of the Gustavson team

J. Michael Elder P.E., JMECO Group

Mr. Elder is a Professional Engineer (P.E.) and is the owner of JMECO Group. Mr. Elder is working for Gustavson on this project through a consulting agreement between JMECO Group and Gustavson These qualifications include:

Greater than five years experience relevant to this type of deposit and project.
Is a Professional Engineer.
Holds a Bachelor Degree in Engineering (Mining) in Colorado School of Mines (1974).
Does not have any economic or beneficial interest, present or contingent, in any of the report assets.
Has not received a fee dependent on the findings outlined in the Competent Person’s Report.
Is not an officer, employee or proposed officer for the issuer or any group, holding or associate company of the issuer.
Is a member of the Gustavson team.

Dr. Tony Cheng, CEO, BMITC

Dr. Cheng is the CEO of BMITC who is responsible for the management and business development of BMITC.

Chairman of Institute of Mechanical Engineers, China.
Vice-chairman of the Institute of Mining, Metallurgy and Petroleum.
A member of Environment and Sustainability Committee of the Hong Kong General Chamber of Commerce.
Member, the Hong Kong Institute of Surveyors.
Holds a Bachelor Degree in Building.
Holds a Master Degree in Urban Design.
Holds a Master Degree in Engineering.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

Holds a Doctoral Degree in Economics.
Has not received a fee dependent on the findings outlined in the Competent Person’s Report.
Is not an officer, employee or proposed officer for the issuer or any group, holding or associate company of the issuer.

Derek Chan, Managing Director, BMITC

Mr. Derek Chan is the Managing Director of BMITC who is responsible for the management, technical advising and business development of BMITC. He has over five years of experience in various deposit types, especially experienced in coal and gold projects.

Holds a Bachelor Degree in Earth Sciences
Secretary and Founding Member of the Hong Kong Mining Investment Professionals Association.
Has not received a fee dependent on the findings outlined in the Competent Person’s Report.
Is not an officer, employee or proposed officer for the issuer or any group, holding or associate company of the issuer.

Jacky Chan, Principal Geologist, BMITC

Mr. Jacky Chan is the principal geologist of BMITC. He has over 7 years experience in the mining industry.

Mr. Chan’s qualifications include:

Is a member of Australasian Institute of Mining and Metallurgy (AUSIMM), Australian Institute of Geoscientists (AIG), Canadian Institute of Mining (CIM), Society of Economic Geology (SEG).
Holds a Bachelor & Master Degree in Geology.
Vice-chairman of the Hong Kong Mining Investment Professional Association.
Holds a Master Degree in Civil Engineering.
Has not received a fee dependent on the findings outlined in the Competent Person’s Report.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

Is not an officer, employee or proposed officer for the issuer or any group, holding or associate company of the issuer.

Marco Sze, Director, BMITC

Mr. Sze is the Director of BMITC. He has extensive experience in conducting in mining valuation.

Has 5 years experience in Civil Engineering and Environmental Engineering in Hong Kong.
Holder of Bachelor Degree in Environmental Engineering.
Holder of Chartered Financial Analyst (CFA).
Certified Public Accountant (AICPA) in the United States.
Has not received a fee dependent on the findings outlined in the Competent Person’s Report.
Is not an officer, employee or proposed officer for the issuer or any group, holding or associate company of the issuer.

Paul Lau, Director, BMITC

Mr. Lau is a Director of the Company. He has extensive experience in performing economical and financial analysis for mining and oil & gas assets.

Is a Chartered Structural Engineer (MIStructE).
Holder of Chartered Financial Analyst (CFA).
Holds a Master Degree in Engineering and Finance.
Holds a Master Degree in Civil Engineering.
Has not received a fee dependent on the findings outlined in the Competent Person’s Report.
Is not an officer, employee or proposed officer for the issuer or any group, holding or associate company of the issuer.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

1.7 Limitations and Exclusions

1.7.1 Forward-Looking Statements

Estimates of coal resources and reserve, as well as projections of coal mine output, are inherently forward-looking statements. Actual performance may differ from projections of future performance due to various reasons beyond the control of Gustavson and BMITC, including, but not limited to, inherent uncertainties in geologic data interpretation; occurrence of unforeseen geological conditions; change or lack of development in key domestic and international markets; material changes in market prices; variances in the execution of construction and mine plans; and significant changes in projected materials, supplies, parts and equipment, operating costs, and expenditures. Imposition of different central, regional, and/or local government policies could affect future coal production. For example, increased environmental compliance and changes in regulatory oversight for health and safety could result in reduced output and increased costs. Possible variations of future performance from projections presented in this report are addressed in more detail in specific sections of this report. Comments on the risks inherent in the various operations are discussed in the appropriate sections.

1.7.2 Limitations and Limited Liability

This report is mainly based on information provided by the project owners, either directly from the mine sites and other offices, or from reports by other organizations whose work is the property of the Company. As much as possible, Gustavson and BMITC have verified the reasonableness and accuracy of the data provided. The Company has not advised Gustavson and BMITC of any material change, or event likely to cause material change, to the designs or forecasts since the date of asset inspections.

The work undertaken by Gustavson and BMITC for this report is that required for a Competent Person’s Report, coupled with such inspections as Gustavson and BMITC considered appropriate to prepare the report. It specifically excludes all aspects of legal issues, commercial and financing matters, land titles and agreements.

Gustavson and BMITC accept 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.

This report has been produced by Gustavson and BMITC using information that is available to Gustavson and BMITC as at the date stated on the cover page. This report cannot be relied upon in any way if the information provided to Gustavson and BMITC changes. Gustavson and BMITC are under no obligation to update the information contained in the report at any time.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

1.8 Capability and Independence

1.8.1 Gustavson Associates, LLC

Gustavson Associates, LLC has more than 30 years of experience in the mining business, specializing in minerals and hydrocarbon exploration, production, and evaluation. The Company’s business is global. In the minerals sector, our experience and capabilities focus on evaluation of exploration opportunities, computerized mineral resources and reserves estimation, project financing, due diligence, feasibility studies, appraisals and valuations, and Qualified/Competent Person reports.

Gustavson’s mining division is located in Lakewood, Colorado; as such our firm has ready access to research facilities at the Colorado School of Mines in Golden and the USGS facilities in Lakewood. Gustavson and ECSI are part of the corporate family Ecology and Environment, Inc. (AMEX: EEI).

Combining Gustavson’s and ECSI’s track record with that of Walsh and their parent company yields a firm capable of handling projects of diverse size and scope, anywhere in the world. The combined offices are located globally, extending our local knowledge and resources. Our professional staff of more than 20 degreed geologists, engineers, economists, and appraisers has worked on hundreds of mining projects in commodities ranging from coal, coal-bed methane, uranium, base and precious metals, to specialty metals and rare earths.

Our specialties include work on:

Generative exploration;
Exploration Program Management;
Preliminary assessments;
Preliminary feasibility studies;
Feasibility studies;
Technical documents for IPO’s;
Technical due diligence audits;
Independent engineer reviews;
NI 43-101 technical reports;
Certified mineral appraisals.

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COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

With specific skills in: Geologic modeling, Resource/reserve estimation, Mine design, Mine planning/scheduling/costing, Process design, Infrastructure studies, Capital & operating cost estimation, Environmental investigation/permitting, and Economic/financial analysis. Our investment services include: Valuation and Investment analysis, Contract drafting & negotiations, and Project cash flow analysis.

Our experience extends globally. Gustavson has conducted projects with numerous private and public companies, national governments, and other international agencies. Some of our most recent corporate and government clients include: Midway Gold, IC Potash, Canyon Resources, Royal Gold, Auramet Trading, Rexwell Mining, Government of Afghanistan, and B2 Gold. These assignments often combine field visits and assessments of technical, political, and economic merits of proposed and operating mining projects. Our international agency and financial institution projects have included assignments for the U.S. Trade and Development Agency, The World Bank, The Asian Development Bank, and other institutions worldwide.

Gustavson’s jealously guarded independence is assured by the company having no investments in mining properties or companies and the fact that the project team members have no ownership interest in the projects on which they work. Further, no work done by Gustavson is or has been conditioned by our client’s on results.

1.8.2 BMI Technical Consulting Resources, Ltd.

BMI Technical Consulting (Resources) Limited has been established to cater for the demand for technical consulting services and it aims at providing professional and extensive technical consulting services to our clients worldwide. We provide technical consulting services tailor-made to support clients in aspects of coal, aggregates, industrial minerals, metals, crude oil, natural gas, diamond and gems bringing the vision and the experience required to implement comprehensive solutions which meet our clients’ needs and provide a solid platform for future growth.

Our services include:

Evaluation, GIS
Due diligence
Economic and financial analysis
Environmental assessments
Geotechnical assessments
Independent technical review
Initial Public Offering (IPO)
Mergers and acquisition

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Litigation support – expert
Resource and reserve estimation
Advice on resource/reserve classification systems
Conditional simulation for risk analysis, product variability and grade control
Scoping and conceptual studies through to bankable documents
Due diligence assessments
Audits of existing operations
Mine financing options
Legal opinions and arbitration
Mining risk assessments

2. PROJECT OVERVIEW

The local and national governmental agencies in China has an overall objective to consolidate small, unsafe coal mines into larger properties that can utilize modern mining method and employ them in a safe manner. This approach was specifically applied in the Pinglu Coal Field where numerous small mines and companies were consolidated into 10 much larger units that are Logical Mining Units (LMU). Three of the consolidated mines, Xingtao, Fengxi and Chongsheng are controlled and owned by the Shanxi Huameiao Energy Group Co, Ltd.(SHEG).

SHEG has moved aggressively to develop large mines that can employ the most productive and modern mining methods available in China today. At Xingtao the complete mining facility has been constructed and approximately 11 million tonnes have been mined utilizing longwall units and employing a wash plant to upgrade the coal to saleable products. The plan at Xingtao is to continue mining the various coal seams and extract as high of an overall recovery as possible.

The longwall mining operation at Fengxi has been completed and has been in production since early 2011. Even though the wash plant and other ancillary surface facilities are being completed, the mine has produced 810,000 tonnes of raw coal between January and September of 2011.

Construction of the underground facilities has been completed at Chongsheng and it is expected that the wash plant and surface facilities will be completed before the end of 2011. Both Fengxi and Chongsheng are basically designed to follow the lead of Xingtao and mine the various coal seams using longwall mining methods.

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2.1 Project Location

Xingtao Coal Industry Co., Ltd. is located in the eastern part of Luping District, 18km northeast of Shuozhou City, 95km southwest of Datong City and 425km via the Xuanda Expressway west of Beijing. Inside the Pinglu District, there is a 1km soil and stone road connected to the county public cement road, 8km away from Lujiayao Coal Collection Station, 20km away from Shentou No. 1 and 2 Power Plants. The connection to this area has good access to China through the existing public roads and railway system.

Fengxi is about 2km from Xingtao and the Fengxi Mine is approximately 5km from Chongsheng.

==> picture [415 x 266] intentionally omitted <==

Figure 2-1 Location Map of Huamei’ao Xingtao Coal Industry Co., Ltd., Pinglu District, Shuozhou, Shanxi

2.2 Regional Environment

The coal field is situated at the eastern foot of Guancen Mountain. The earth surface is covered with loess, which has been cut and scoured by erosion and over the many years the landscape is now hills with steep gullies. The general area of the coal field terrain is higher in northwest and lower in southeast. The highest peak is situated on a ridge in the northwest of the coal field with an elevation of 1,395.4m. The lowest point in the coal field is situated near a southeast trench with an elevation of 1,210.0m giving an overall relative relief of 185.4m. The zone is covered with loess material, gullies filled with loess material, and ridge type landforms. Intense erosion has caused the formation of many gullies where the upstream areas are “V” shape and the downstream areas are “U” shape.

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There is no large river that crosses the coal field, but the big and small gullies in the field are basically dry and only collect water in a rainy season. The discharge is along the main gullies into Making River to the east. The Maying River discharges into Sanggan River in the east of Xiaopingyi Town. The Sanggan River is a tributary of Yongding River system within the Haihe River basin.

Maying River originates from Madaotou of Zuoyun County, flowing through the eastern part of this area near Yujing Village of Sanyin County with an overall length of over 100km, the river is generally in a dry state for most of the year, but carries a large quantity of water in the flood season.

This Pinglu Coal District is located in an arctic-alpine belt in the north of Shanxi, it is cold and dry in the winter, cool in the summer, windy and sandy in the spring and belongs to a typical continental climate. Annual mean temperature throughout the year is 4.5°C degrees, it is the coldest in January, where the temperature is within minus 11°C to minus 15°C degrees, the extreme minimum temperature has been minus 30°C degrees; it is hottest in July with a temperature of 19°C-20°C degrees and the extreme maximum temperature of 35°C degrees. The precipitation period is mostly concentrated in June, July and August, which accounts for 67-75% of the annual precipitation. The mean annual precipitation is 462mm and the maximum daily precipitation of 72mm. The annual evaporation capacity ranged from 2,080mm to 2,516mm with the average around 2,351mm and occurs mostly from May to July. The monthly evaporation capacity can reach 470mm and the maximum daily evaporation capacity can reach to more than 30mm. The frost period is from the last ten day of October to April of the next year with the thickness of the frozen soil being around 1.23m to a maximum depth of 1.5m. Maximum thickness of snow accumulation is 26cm and an above grade 8 gale wind storm will occur on average of every 8 years (wind speed more than 17.2m/s) that usually lasts about 25 days. There are 290 sandy and windy days per year, mostly concentrated in winter and spring. Wind direction is mainly from the northwest where the maximum wind speed can reach 21m/s.

According to the standard of the People’s Republic of China GB50011-2001 Code for Seismic Design of Buildings, earthquake intensity of the region where the coal field belongs is degree 7. There have been many periods of earthquake activity recorded in the history of the area. Shoo County Annals and Shanxi General Annals recorded 14 earthquakes in succession from 144 A.D. to around 1688AD with three times when the earthquakes were very intense in 512 A.D., 849 A.D. and 1291AD. Records show that in the intense earthquakes that houses collapsed and several thousand people and some livestock died. On June 9, 1407 and September 5, 1958, grade 5.5 earthquakes occurred in Pinglu District. Guo County earthquake in 1952, Tangshan earthquake in 1978 and Yanggao Datong earthquake in 1989 all affected this area, but they did not cause damages or loss of life.

The Pinglu District has abundant underground resources, including coal, limestone, kaolin, iron, manganese, mica and etc. The area industry is mainly based on coal mining with other parts including machinery, electric power, chemical fertilizer, printing, ceramics, building materials, agricultural and sideline product manufacturing and, etc. Main crops include millet, corn, oat, sorghum, potato, oil crops and etc. The economy of the region is well developed.

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2.3 Licenses and Approvals

The following licenses and approvals were provided by Huameiao in Chinese and the translations were done by BMITC. All of the copies of the licenses appear to be valid and properly approved.

Safety Production Permit, Xingtao Coal Company, Ltd., Valid until December 31, 2011.
Coal Production Permit, Xingtao Coal Company Ltd., N0. 201406030108, Valid from January 28, 2009 to January 31, 2018.
Mining License, Xingtao Coal Company Ltd., No. C1400002009101220038680, Valid from October 14, 2009 to October 14, 2011 and is currently in the process of being renewed.
Mining License, Fengxi Company Ltd., No. C1400002009101220038812, Valid from October 14, 2009 to October 14, 2011, and is being renewed.
Mining License, Chongsheng Coal Ltd., No. 1400002009101220038704, Valid from October 14, 2009 to October 14, 2011. This permit is currently being renewed.

The mining licenses specify which coal seams can be mined, what production capacity the mine is allowed, the area of the mine, the boundaries and the elevation horizon is allowed for the operations. Copies of the translated licenses and permits are provided in Appendix A.

Gustavson and BMITC believe that the term on the safety and mining licenses is a renewable term that is set as a specific time limit. The mining company is required to resubmit for new or renewed licenses as is the regulation and practices in China. Gustavson and BMITC also believe the licenses will be renewed throughout the mine’s life if the companies follow the procedures as set forth by the licensing agencies.

2.4 Property Description of Xingtao Project

The documents approving Shanxi Shuozhou Huameiao Xingtao Coal Co. Ltd to explore No. 4[-1] , 4[-2] , 9 and 11 coal seams was issued by Shanxi Land and Resource Ministry on October 14, 2009, the company is granted to mine 1.5Mtpy by mining license No. C1400002009101220038680. The term of this license is from October 14, 2009 to October 14, 2011. Gustavson and BMITC were informed that as of the date of this report, this license is being renewed.

The boundaries of the Mining Concession are delineated by 13 survey inflexion or turn points as shown in Table 2-1.

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Table 2-1 Inflexion Point Coordinate List of Coal Property Boundary

(6°Zone in Xi’An Coordinate System in 1980)

Inflexion	Latitude(X)	Longitude (Y)
1	4372752.97	19626729.26
2	4372752.95	19629479.29
3	4373652.96	19629479.30
4	4343552.96	19629964.30
5	4372977.95	19629964.30
6	4372652.95	19630654.31
7	4372337.94	19630469.30
8	4371852.94	19630479.30
9	4371852.94	19629479.29
10	4371752.94	19629479.29
11	4371752.95	19627429.27
12	4371452.95	19627054.26
13	4371752.95	19626729.26

The Xingtao property is 3.93km long from east to west, 1.90km wide from north to south and has a total area of 4.25km[2] .

As of the date of Gustavson’s visit to the site on October 19, 2011, no new areas have been added to this mining concession.

The combined coal properties in Shanxi Shuozhou Pinglu District Huameiao Xingtao Coal Co., Ltd have no operating small mines within the boundaries. Operating mines surrounding Xingtao are Shanxi Pinglu Sheng Houyuan Coal Co., Ltd in the north; the Former Daxing Mine of Shanxi Jinneng Bailu Coal Co., Ltd (Former Bailu Mine) in the northwest; the Former Bailu Mine of Shanxi Shuozhou Lu Jiayao Coal Co., Ltd (Former State-Owned Lu Jiayao Mine) in the southwest; the Shanxi Shuozhou Daheng Coal Co. Ltd (Former Xie Maguan Mine) in the south; and to the east, is open land with no mines.

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Figure 2-2 Xingtao Property and Neighborhood Properties Map

2.5 Property Description of Fengxi Project

The Mine is located 2.6km west of Xiamiangao village. Its geographical coordinates are: longitude 112°27’58”– 112°29’05”, North latitude 39°29’23”– 39°30’28”.The documents approving Shanxi Shuozhou Huameiao Fengxi Coal Co., Ltd to explore No. 4, No. 9 and No. 11 coal seams was issued by Shanxi Land and Resource Ministry on October 14, 2009, the company is granted to mine 0.9 Mtpy by mining license No. 1400002009101220038812. The term of this license is from October 14, 2009 to October 14, 2011 and, as of the date of this report, it is being renewed. The mining concession is defined by the following survey coordinate points (8):

Table 2-2 Inflexion Point Coordinate List of the Boundary of Fengxi (In 6 Zone Beijing Coordinate System in 1954)

	Inflection Point No. Latitude = X Longitude = Y 1 4376000.00 19626100.00 2 4376000.00 19627720.00 3 4375100.00 19627720.00 4 4375100.00 19627550.00 5 4374000.00 19627550.00 6 4374000.00 19626600.00 7 4375000.00 19626600.00 8 4375000.00 19626350.00

The area of the Fengxi Mine is about 2.43km[2] and coal seams No. 4, No. 9 and No. 11 are approved for mining at a production capacity of 0.90 Mt/a.

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As of the date of Gustavson’s visit to the site on October 20, 2011, no new areas have been added to this mining concession.

2.6 Property Description of Chongsheng Project

The documents approving Shanxi Shuozhou Huameiao Chongsheng Coal Co., Ltd to explore No. 4, No. 9 and No. 11 coal seams was issued by Shanxi Land and Resource Ministry on October 14, 2009, the company is granted to mine 0.9Mtpa by mining license No. C1400002009101220038704. The term of this license is from October 14, 2009 to October 14, 2011. This license is currently being renewed. The coordinates of surveyed inflection or turn points for the mine concession are shown in Table 2-3.

Table 2-3 Inflection or Turn Points for Chongsheng Property

			Xi’an 80 Coordinate	Xi’an 80 Coordinate	Xi’an 80 Coordinate	Beijing 54 Coordinate	Beijing 54 Coordinate
			System		(6°)	System (6°)
No.	of	Point		X	Y	X	Y
1			4375953.00		19627649.29	4376000	19627720
2			4375952.99		19627929.29	4376000	19628000
3			4376453.00		19627929.29	4376500	19628000
4			4376453.00		19628585.30	4376500	19628656
5			4376379.00		19628585.30	4376426	19628656
6			4376379.00		19628709.30	4376426	19628780
7			4376453.00		19628709.30	4376500	19628780
8			4376452.99		19629729.31	4376500	19629800
9			4375352.98		19629929.31	4374000	19630000
10			4375252.98		19629729.31	4375300	19629800
11			4375052.98		19629429.30	4375100	19639500
12			4375052.98		19628809.30	4375100	19628880
13			4374952.98		19628809.30	4375000	19628880
14			4374952.98		19628529.29	4375000	19628600
15			4375052.98		19628529.29	4375100	19628600
16			4375052.99		19627649.28	4375100	19627720

The mine concession is an irregular polygon, the length west to east is about 2.30km, and the width north to south is about 1.50km with the total area of 2.88km[2] . The shape of the Chongsheng property is shown in Figure 2-6-1 and in Chinese language are the neighboring properties. As of the date of Gustavson’s visit to the site on October 19, 2011, no new areas have been added to this mining concession.

Figure 2-6-1 also illustrates the two properties that were combined to form the current Chongsheng concession.

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==> picture [370 x 284] intentionally omitted <==

Figure 2-3 Chongsheng Property and Neighboring Properties

2.7 History of Area Exploration

Phase I – From 1965 to 1966, Team 115 of Shanxi Bureau of Coal Field Geology conducted geological prospecting in this coal field and submitted the “Geological Report of East Maguan River General Survey Exploration Area, Pinglu Shuo County Mine Zone, and Daning Coal Field” (accepted in August 1969). The area of general exploration area is 136km[2] , totaling 29 drill holes with drilling length around 6,868 meters. The team also submitted a terrain and geological map at 1:25,000 scale. Line spacing of drill holes is around 1,000-1,500m. The No. 31 and 34 Drill Holes are at north edge of the Chongsheng property and No. 51, 52 and 53 Drill Holes are in the south of Chongsheng with a total core length of 843.9lm.This drilling was done at very early stage and the columnar and coal quality data of No. 31, 52 and 53 Drill Holes could not be collected. The coal seam data collected is reliable and all the drill holes were determined to be qualified and were used for the Chongsheng geologic reports.

Phase II – From October 1980 to November 1981, No. 115 Coal Field Geology Exploration Team of Shanxi Province carried out detailed exploration in the west of Maguan River, Pingshuo mine zone. This field is located about 5km north of the Chongsheng area, and the team submitted the “Geological Report of West Maguan River Open Air Detailed Survey Exploration of Pinglu Mine Zone”, and part of hydrological data and other data were used for the Chongsheng geologic report.

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Phase III – Team 185 of Shannxi Bureau of Coal Field Geology was entrusted by then Beijing Luneng Coal Industry Co., Ltd. to implement exploration from May 2009 to August 25, 2009 for previously mined areas of Si’ergou Coal Mine. The main purpose was to understand coal seams within the old mining area. A total of 4 drill holes were completed this time within the Chongsheng area i.e., K1, K2, K3 and K4.

In these 4 drill holes they drilled 418.93m, logged 203.00m and collect 9 coal core samples. According to Standard for Coal Geological Exploration Drill Hole Quality (MT/ T1042-2007), implement quality rating for the 4 drill holes and their comprehensive quality reached Grade B standard (Chinese Standard Scale).

A total of 9 drill holes were completed in the past in and near Chongsheng, including 7 holes in the field and 2 near the field. All the data was used for Chongsheng geologic reports.

Similar geologic exploration work was completed in the Xingtao and Fengxi coal properties, generally by the same geologic teams.

As of the date of Gustavson’s visit to the site on October 19 and 20, 2011, no new exploration holes have been drilled in the subject mining concession.

2.8 History of Mining

In 2007/2008 the authorities initiated a program to consolidate and merge the mining areas into larger blocks and to allow the owners of the larger properties to expand the mining production. This approach was initiated to bring in mining groups that could employ stat-of-the-art mining methods and machinery and increase the productivity and Resource recovery for the coal field.

The three mines addressed within this report, Xingtao, Fengxi and Chongsheng were all part of the mine consolidations and expansion approval.

2.8.1 Xingtao Mine History

In 1973 the No. 1 Mine was established in the former Hong Quangou Mine Group that had an area of 0.261km[2] and an approved production permit of 0.09Mtpa. The No. 9 coal seam was explored and developed under an approval from the proper authorities. A new mine was established in 1980 in the former Hong Quangou Mine Group and had an area of 1.135km[2] and an approved production permit of 0.21Mtpa. The No. 4 and 9 coal seams were explored and developed under approval from the proper authorities. In 2007, the No. 1 Mine and the new mine were integrated together to form a single resources block.

The Xingtao Mine was established on December 31 in 2004 by the documentation that was approved upon receipt of “No. 741 Reply on Acceptance of Xingtao Mine with Production Capacity of 600,000 tonnes/a in Pinglu District, Shuozhou City ” issued by Shanxi Coal Infrastructure Office in Shanxi Coal Industry Ministry to be accepted and

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transferred on May 25, 2007. Its concession has an area of 2.855km[2] , production permit of 0.60Mtpa and the No. 4, 9 and 11 coal seams are explored all under this approval. The industrial site of this mine is located to the west of the lower Han Zuogou village.

According to reply of the “Proposal (Partial) on Merge, Reorganization and Integration of Coal Enterprises in Pinglu District, Shuozhou City”, No. 36 official document issued by Coal Enterprise Merge, Reorganization and Integration Leading Team Office in Shanxi Province, Shanxi Province Coal Reorganization Office (2009) and upholding the guidelines of “Resources integration, Close Small Mines, Joint transformation, Eliminate outmoded products and optimize structure”, Shanxi Shuozhou Pinglu District Huameiao Xingtao Coal Co., Ltd was established by integrating the former Xingtao Mine in Shanxi Shuozhou Pinglu District Huameiao Co., Ltd and the former Hong Quangou Mine in Pinglu District, Shuozhou City, Shanxi Province as a principal role. After integration, the mine is renamed Shanxi Shuozhou Pinglu District Huameiao Xingtao Coal Co., Ltd, affiliated to Shanxi Huameiao Energy Group and administratively governed by Taocun Village, Pinglu district, Shuozhou city, Shanxi province.

This concession expands from 2.885km[2] to 4.252km[2] , when the 1.396 km[2] of the Hong Quangoa is added. Shanxi Shuozhou Pinglu District Huameiao Xingtao Coal Co., Ltd was granted with mining license by Ministry of Land and Resources of Shanxi Province on October 14th, 2009, license No. C1400002009101220038680, approved to explore and develop No. 4[-1] , 4[-2] , 9 and 11 coal seams and are approved for mining depth of between 1250m and 1030m.

As of the date of the end of September 2011, Xingtao had produced approximately 3.05 million tonnes of raw coal, which after processing yielded approximately 1.86 million tonnes of clean coal.

2.8.2 Fengxi Mine History

Shanxi Shuozhou Fengxi Coal Industry Limited Corporation is located 2.6km from the west of Gaoxiang at Pinglu District, Shuozhou City, of which, the administrative division is subordinated to Gaoxiang at Pinglu District.

Shanxi Shuozhou Fengxi Coal Industry Limited Corporation (originally Shuozhou Pinglu District Fengxi Coal Mine) is the mine reserved separated during the resource integration in 2006. The mine was initially established in 1986, and formally put into production in 1987. No. 4, 9 and 11 coal seams were approved for mining on November 20, 2006 by Department of Land and Resources of Shanxi Province with the mining license number of 1400000622894. The mine concession area is 2.428km[2] ; it then obtained the safety production permit (with the number of (J) MK AXZZ (2007) 1501B1) on January 15, 2007 issued by Shanxi Bureau of Coal Mine Work Safety; obtained the coal production permit (with the number of X040602036Y3G1) issued by Bureau of Coal Industry of Shanxi Province on December 27, 2004, with an approved production capacity of 0.21Mtpa.

Shanxi Shuozhou Fengxi Coal Industry Limited Corporation was granted for mine mechanization upgrades in accordance with the “Notice on Mechanization Upgrades of Shanxi Zhongqiang Weiye Co., Ltd. and other 10 mines” issued in JMGF (2008) No.56 by

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Bureau of Coal Industry of Shanxi Province, and the approved mine capacity after upgrades is 0.9Mtpa. Shanxi Coal Geological Co., Ltd. prepared the “Geological Memoir of Mechanization Upgrades of Shanxi Shuozhou Fengxi Coal Industry Limited Corporation” in March 2008, and which was approved in JMGF (2008) No.802 by Bureau of Coal Industry of Shanxi Province; in September 2008, the “Feasibility Study Report of Mechanization Upgrades of Shanxi Shuozhou Fengxi Coal Industry Limited Corporation”, which was approved in JMGF (2009) No.70 by Bureau of Coal Industry of Shanxi Province on January 23, 2009, and we were now entrusted to prepare the “Preliminary Design of Mechanization Upgrades of Shanxi Shuozhou Fengxi Coal Industry Limited Corporation”.

As of the end of September 2011, Fengxi has reportedly produced 810,000 tonnes of raw coal.

2.8.3 Chongsheng Mine History

The following is taken directly from the Chongsheng Geologic Report and describes the past consolidation and mining activities at Chongsheng.

“Huameiao Chongsheng Coal Industry Co., Ltd., Pinglu District, Shuozhou, Shanxi was established through resource integration of Chongsheng Coal Industry Co., Ltd., Shuozhou, Shanxi (original Si’ergou Coal Mine, Pinglu District, Shuozhou City) and Fengjialing Yilong Coal Industry Co., Ltd., Pinglu District, Shuozhou City, Shanxi (closed). Chongsheng Coal Industry Co., Ltd., Shuozhou, Shanxi is approved integration main shaft, shaft production capacity after resource integration is still 900,000tpa. Production status of Coal Mine of Chongsheng Coal Industry Co., Ltd., Shuozhou, Shanxi (original Si’ergou Coal Mine, Pinglu District, Shuozhou City) and Fengjialing Yilong Coal Industry Co., Ltd., Pinglu District, Shuozhou City, Shanxi (closed) is described as below:

Chongsheng Coal Industry Co., Ltd., Shuozhou, Shanxi (original Si’ergou Coal Mine, Pinglu District, Shuozhou City) was originally established in 1980, put into operation in 1984, approved to mine Taiyuan Formation No. 4, 9 and 1l Coal Beds, now mining No. 4 Coal Bed, production capacity 150,000tpa. According to JMX [2008] No. 56 Document of Coal Industrial Bureau of Shanxi Province in January 2008, this mine was approved to implement mechanized upgrading and reformation, this mine was approved to reach construction scale 900,000tpa after mechanized upgrading and reformation.

Chongsheng Coal Industry Co., Ltd., Shuozhou, Shanxi (original Si’ergou Coal Mine, Pinglu District, Shuozhou City) established shafts in 1980, jointly operated by county and village, until 1985 jointly operated by Beijing Military Region Logistics Department and Headquarters, until October 1993, belonged to government of Pinglu District, becoming local state-operated coal mine, approved to mine No. 4, 9 and 11 Coal Beds.

Si’ergou Coal Mine, Pinglu District, Shuozhou City was comprehensively taken over and operated by Shanxi Huamei’ao Energy Group in 2008, the name was changed as Chongsheng Coal Industry Co., Ltd., Shuozhou, Shanxi. According to JMX [2008] No. 56 Document Notice issued by Coal Industrial Bureau of Shanxi Province in January 2008, this mine was agreed to carry out mechanized upgrading and reformation and have construction scale 900,000tpa after mechanized upgrading and reformation.”

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3. GEOLOGY

The Chongsheng, Fengxi, and Xing Tao mines are located in the Shanxi Province, near the villages of Xiamiangaoxiang, Beiyandun, and Gengjialing. The mines are roughly 32km north of Shuozhou City. The area is semi-arid, which is typical of the continental climate. The average yearly temperature is 4.5ºC, with cold winters and hot summers. Precipitation is concentrated in June, July, and August with an average annual rainfall of 462mm. The prevailing wind direction is from the northwest and may reach 21m/s.

The topography is shaped by low mountains and hills belonging to the Shuoping terrace in the Shanxi Loess Plateau. The area has been heavily eroded and forms a topographical landscape called the Liangyuan loess hills. There is little vegetation. River valleys are “V” shaped and cut to a depth of 40-70m.

3.1 Regional Geology

The mine area is located in the northern part of the Ningwu coalfield of the Shanxi Province. The five coal-forming periods are Late Carboniferous (Taiyuan Formation), Early Permian (Shanxi Formation), Middle Jurassic (Datong Formation), Tertiary (Taxigou Formation) and Quaternary (peat). The general structure of the area is based on broad folding with some faulting.

3.2 Geology of Xingtao

3.2.1 Stratigraphy (Table 3-1)

Located in the northeast of Ningwu coalfield, from this coal field bears stratums in Ordovician system, Carboniferous Benxi formation and Taiyuan formation, Permian Shanxi formation, lower Shihezi formation, upper Shihezi formation, Jingle formation in tertiary of Jurassic system, middle and upper Pleistocene in quaternary of Jurassic system as well as Holocene series, described separately as below

� Upper Ma Jiagou Formation in Ordovician System (O2s)

It is a fundamental rock system in the coal-bearing stratum. No. XI hole in this area reveals a thickness of 265.56m. Outside this area, a small amount of coal is exposed in the east of Maying River, with stratum thickness between 210 and 400m and average thickness 250m. It is mainly composed of grey-dark grey limestone, dolomite, dolomitic limestone mixed with low-coal yellow-green peat. Limestone contains mud and presents earthy yellow clots after ablation, thus nicknamed as leopard limestone. It is often mixed with autobreccia in stratums. Fossils produced include: Actinoceras, Armenoceras and Callograptus.

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� Carboniferous System (C)

1) Benxi Formation (C2b)

Its rocks are composed of grey, dark grey, grey black sandstone, sandy mudstone and mudstone, including 1 to 3 layers of dark grey limestone, only one stable layer of limestone in middle lower part (Symbolic layer K1) and 1 to 2 unstable layers of low-coal mixed on the top, thickness below 0.5m. On the bottom, Shanxi type iron ore is not nurtured, sometimes only mixed with variegated allophone mudstone. Stratum thickness is between 20.58 and 49.55m and average thickness is 35.71m. It contacts non-conformingly in parallel with underlying Ordovician system. Fossils produced include:

Sphenophyllum oblongifolium
Pecopteris arborescens
Calamites cistii
Limestone produces Idiongnathodus and delicates.
2) Taiyuan Formation (C3t)

It is mainly composed of grey white sandstone, grey, grey black sandy mudstone, mudstone and coal seams, mixed with thin muddy sandstone, thus is a major coal-bearing stratum. This formation is divided into three coal seams: Upper coal seams are No. 4 and 5 coal seams and grey white fine sandstone, siltstone, siltstone as well as grey black mudstone located between such coal seams. Middle coal seam is composed of grey, grey white mudstone, grey black sandy mudstone, mudstone and No. 6 and 7 unstable coal seams. T4 ore mass generally nurtured on No. 6 coal seam distinguishes it from upper coal formation. Lower coal seam is composed of grey white mudstone, grey black sandy mudstone, mudstone and No. 8, 9, 10, 11 and 12 coal seams. Middle lower coal seam is divided by T3 ore mass. A layer of stable muddy limestone being not very thick exists between No. 9 and no. 11 coal seam.

Stratums in this formation are thick between 79.11 to 112.32m, and average thickness is 91.90m. Average thickness in coal seams is 37.90m. On the bottom, it nurtures grey white medium and fine-particle quartzy sandstone (K2), contacts with declined stratums conformingly with thickness between 0.40 to 8.40m and average thickness is 3.22m.

Fossils in the top floor of No. 11 coal seam include:
Aviculopecten alternatoplicatus
Dictyoclosdus taiyanfuensis

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

     - Lingulella sp, crinoid stem, gasteropod and bryozoan fossils

  - Fossils in the bottom floor of No. 4 coal seam and between No. 4 and No. 6 coal seams include:

     - Sphenophyllum Spciosun

     - S.oblongifolium

     - S.verticillalum

     - Calamites sp

     - Peeopteris arborescens

     - Lepidodendron Posthumii

     - Neuropteris ovata

     - Stigmaria ficoides

Permian System (P)
1) Lower Shanxi Formation (P1s)

It is mainly composed of grey, grey white sandstone, grey black and grey sandy mudstone. Sandy mudstone contains spathic iron ore nodule and 2 to 3 unstable layers of low-coal seams. K3 sandstone on the bottom presents light grey and grey white medium and coarse particle sandstones, which constitutes direct top floor of declined No. 4 coal seam, thick between 0.40 to 9.95m and average thickness is 4.00m.

Stratums in this formation are thick between 9.55 to 77.48m, average thickness 55.20m. It contacts declined stratums conformingly. Fossils produced include:

Lepidodendron incertum
Pecopteris wongii
Taeniopteris multinervis
Cordaites sp
Alethopteris huiana

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

2) Lower Shihezi Formation (P1x)

It is mainly composed of yellow green, grey yellow, pink siltstone, fine sandstone and middle-particle sandstone, grey, yellow green mudstone and mudstone. On the bottom, sandy mudstone sometimes contains 1 to 2 layers of coal streaks. A layer of red-grey purple oolitic alum clay mudstone (Taohua mudstone) is often seen on the top of this formation and acts as subordinate symbolic layer for K6 sandstone. The bottom K4 is pebbled coarse particle sandstone, thickest 11.63m and averaged thickness is 3.63m, in stable level. Stratum in this formation is thick between 0 to 115.15m and average thickness is 46.66m. It contacts declined stratum conformingly. Plant fossils include:

Sphenophyllum thonii Pecopteris sp
3) Upper Shihezi Formation (P2s)

A majority of stratums in this formation are denudated. It contacts declined stratums conformingly.

� Tertiary (R)

1) Pliocen Jingle formation (N2j)

Rocks are brown red clay and loam, containing iron and manganese spots. On the middle and lower part, it often contains 3 to 5 layers of calcic concretion. It is nurtured widely. The formation is thick between 0 to 77.02m, averaged thick is 15.36m. It contacts declined stratums in non-conforming angle.

�

Quaternary (Q)

1) Middle and Upper Pleistocene Series (Q2+3)

Upper Pleistocene series is composed of earth yellow silt and sub-silt clay, loam Malan yellow soil. Middle Pleistocene series is composed of red yellow loam and ancient soil, containing calcic concretion and pebbles on the bottom. Stratum is thick between 3.10 to 47.40m and average thickness is 24.28m. It is one of major components in loess landform. It contacts declined stratums in non-conforming way.

2) Holocene series (Q4)

It is mainly distributed in river valleys and terrace on sides, composed of limestone pebble, cobble, silt soil, sandstone, medium and coarse sandstone debris and sediments. It is thick between 0 to 40m and average thickness is 10.00m.

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COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

Table 3-1 Mine Site Stratigraphy – Xingtao

	Stratum Unit	Stratum Unit
Group		System		Rock Property and Sediment Characteristics Thickness
Cenozoic	Quaternary			Stratums develop completely. Rocks			are 0-50m
Group				composed of pebble, clay and sand.
	Permian		Lower	It is	composed of grey and purple spot-like 60-120m
	system		Shihezi	mudstone,		siltstone mixed with sandstone and
			formation	sandy mudstone.
			Lower	It is	composed of grey sandstone, sandy 40-86m
			Shanxi	mudstone and clay mudstone. It has			1 to 3
			formation	layers of coal on the bottom.
	Carboniferous		Taiyuan	Develop middle and upper series. Lower series 88-164m
	system		formation	are lacked.		Rocks are composed of sandstone,
			Benxi formation	sandy mudstone, mudstone, and coal and alum clay mudstone. Minable coal seams are stored in Taiyuan formation.
	Ordovician	system		Develop middle and lower series. Upper series
				are lacked.		Rocks are composed of limestone,
				dolomite mixed with low-coal mudstone.

3.2.1.1 Coal-bearing Strata

Taiyuan Formation (C3t)

It is a major coal-bearing stratum. Except for the total exposure in No. X1 hole (thick 74.95m), no exposure exists in other holes. A maximal thickness is exposed to be 107m. Rocks are composed of grey white sandstone, grey and grey black sandy mudstone, mudstone and coal seams. Muddy limestone is developed on top of south No. 11 coal seam. Stratums tend to be thinner from the east to the west.

According to regional exploration data, the thickness in this formation is between 74.95 and 112.32m, generally thick 90m. The development sequence in the other stratums is seen below:

On the bottom, it has grey white medium and coarse particle sandstone with thickness between 1.00 and 5.42m, general thickness is 3.00m. Siltstone and sandy mudstone are deposited between No. K2 and 11 coal seams, mixed with unstable No. 12 coal seam.

No. 11 coal seam has thicknesses between 0.00 and 2.10m, mean thickness of 0.78m. Muddy limestone is deposited on top of it in the south. Siltstone exists between No. 11 and 9[-2] coal seam, with the interburden between 5.43 and 36.34m, mean 17.33m. The mining area has a larger gap in the west and more coarse rocks(medium sandstone).

No. 9[-2] coal seam has a thickness between 4.10 and 6.20m and averaged thickness of 4.92m, becoming No. 9[-1] +9[-2] coal seam by combining with No. 9[-1] coal seam in west of the property. No. 9[-1] coal seam has a thickness between 6.90 and 13.50m and

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COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

averaged thickness of 8.51m. It is thicker in the northwest and thinner in the southeast. Siltstone and sandy mudstone exist between No. 9[-1] and No. 8 coal seam, with an interburden of 1.10m and a mean of 2.39m.

No. 8 coal seam has a thickness between 1.10 and 1.30m and averaged thickness of 1.23m; Medium and fine particle sandstone exist between No. 4[-2] and No. 8 coal seam, mixed with sandy mudstone, with the interburden between 8.4 and 14.72m, and mean thickness of 10.61m. The coal seam becomes thinner in the middle.

No. 4[-2] coal seam has a thickness between 4.67 and 5.90m and mean thickness of 5.34m. Grey siltstone exists between No. 4[-1] and 4[-2] coal seam, mixed with charcoal mudstone, with an interburden of between 2.90 and 5.95m and a mean thickness of 4.47m. There are small changes in the interburden. The north rock seam in No. 4[-1] coal seam becomes thicker, allowing stratums to be thinner. Stratum thickness is between 8.30 and 10.87m and averaged thickness of 9.42m. On top of No. 4[-1] coal seam, it is composed of dark grey siltstone, grey black sandy mudstone, mixed with Charcoal mudstone and fine and medium sandstones.

� Permian System

Shanxi Formation (P1s)

It is mainly composed of grey, grey white sandstone, grey black and grey sandy mudstone and mudstone. Sandy mudstone contains spathic iron ore nodule and 1 to 2 unstable layers of low-coal seams. On the bottom, light grey and grey white coarse particle sandstones containing pebbles (K3) are presented. Thickness is between 3.00 and 9.41m. The formation is thickness is between 40.63 and 66.50m, the general thickness is 50.00m.

3.2.2 Structure

The well field is located in east edge of the North Ningwu syncline, in the east edge of Ma Guanhe syncline and east of Pingshuo mining area. In holistic, the coal field presents a monoclinal structure with high to the east and low to the west. The topography is flat in the southeast with inclination between 1° and 2°, steep in the northwest with inclination between 3°and 5°, the maximum is 7°. In the west of this coal field, it nurtures a wide flat syncline in a north-east direction. Seven faults are developed in this coal field (F1-F7) with throws of between 0.3 and 20m (Details are seen Fault List inside coal field Table 3-2). No magmatite intrudes into this coal field. From what has been discussed above, this coal field has a simple structure.

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COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

Table 3-2 Faults at Xingtao

Fault No.
Location
Tendency
(°)
Direction
Inclination
(°)
Drop
Difference
(m)
Extending
Length within
Property (m)
F1 Normal fault
West
NE15
NW
70-80
1.5-7.5
1220
F2 Normal fault
East Middle
NE28
NW
75
15
750
F3 Normal fault
East
NW62
NE
75
17
668
F4 Normal fault
West
NE43
SE
75
20
725
F5 Normal fault
North
NE88
SE
40-88
8-10
2450
F6 Normal fault
Middle
NE60
NW
60-66
5-11
940
F7 Normal fault
Middle
NW9
SW
40-60
0.3-8.0
630

3.2.3 Coal Characteristics

3.2.3.1 Physical Properties

Each coal seam mainly presents weak vitreous luster, followed by pitchy luster, with strip and block structure, in hard quality; It has splintery or angular fracture, with endogenic crack developing in medium degree, exogene cracks are well developed in the No. 4 coal seeing lime carbonate. Sulphide concretion or membrane is seen in No. 8, 9 and 11 coal seams with density mostly beyond 1.70t/m[3] .

In the mine area the No. 4[-1] Seam has an approximate thickness of 8.8m and an apparent density of 1.46t/m[3] ; the 4[-1] Seam is approximately 5.1m thick with an apparent density of 1.43 t/m[3] ; the No. 8 Seam is approximately 1.2m thick with an apparent density of 1.43t/m[3] ; the No. 9[-1] Seam is approximately 1.46m thick with an apparent density of 1.46t/m[3] ; the 9[-2] Seam is approximately 4.7m with an apparent density of 1.46t/m[3] ; and the No. 11 Seam is about 1.4m thick with an apparent density of 1.5t/m[3] .

3.2.3.2 Chemical Characteristics

Table 3-3 Raw Coal

Raw
Seam No.
Recovery
(%)
Yield
(%)
Moist
(%)
Ash
(%)
Vol (%)
Sul
(%)
Energy
Content
(MJ/kg)
4-1
28.47
22.33
3.58
27.52
41.11
0.66
19.60
4-2
43.81
36.96
3.54
20.78
40.83
0.96
22.81
8
38.32
30.99
3.36
25.17
42.18
2.42
22.28
9-1
33.31
26.33
3.07
26.95
42.07
1.96
20.74
9-2
44.30
37.30
2.65
22.10
42.24
1.82
23.31
11
32.66
24.37
2.73
30.99
40.92
1.90
19.61

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COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

Table 3-4 Washed Coal

	Washed Seam No. Moist (%) Ash (%) Vol (%) Sul (%) 4-1 3.18 7.58 40.69 0.78 4-2 3.54 6.10 40.24 0.81 8 2.78 7.46 41.86 1.25 9-1 2.82 7.58 41.48 1.39 9-2 3.01 7.47 42.32 0.94 11 3.31 7.51 40.31 1.14

3.3 Geology of Fengxi

3.3.1 Stratigraphy (Table 3-5)

Coal Seam Nos. 4, 9[-1] , 9[-2] , and 11 are approved for mining. The mine area is covered by loess. Based on the actual mining production, exploration drilling, and visual observations in the active mine, the strata in this mine are listed in ascending order as follows:

� Ordovician – Middle Series of the Majiagou Formation

The Majiagou does not outcrop in this coal field. The thickness of this formation is around 180m. It is composed mainly of limestones, dolomite and dolomitic limestones.

� Carboniferous – Middle Series of the Benxi Formation

The thickness of the Benxi Formation is 28.95 to 42.77m. It is mainly composed of sandstone, sandy mudstone, and mudstone. There are always two layers of limestone in the center, of which the lower layer is more stable, and is marked as the K1 seam. There are always Shanxi-style iron ores in a chicken-coop shape at the bottom of K1. A high grade of bauxite is developed on top of this layer.

� Carboniferous – Upper Series of the Taiyuan Formation

The thickness of the formation is 87.23 to 109.44m. It is generally composed of sandstone, siltstone, mudstone, and coal. There are one to two layers of marlstone and calcareous mudstone folded in between the middle and the bottom. The thickest seams are located in the top and bottom of the formation. The lower portion is mainly composed of coal, sandstone, siltstone with marlstone. The three main recoverable seams are the Nos. 8, 9 (9[-1] and 9[-2] ), and 11 Seams. The middle part of the formation is a thick layer of sandstone. The upper part contains seam Nos. 4 and 5 Seams. The No. 4 Seam is a wholly recoverable, stable seam. The No. 5 is non-recoverable. The bottom of the formation is used as a marker bed.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

� Permian – Lower Series of the Shanxi Formation

The thickness of the formation is 48.64 to 78.79m. It is primarily composed of sandstone and sandy mudstone. There is one or two layers of limestone in the middle-lower part of the formation, both are non-recoverable. The lower sandstone (K3) is coarse-grained and grades into a pebbly sandstone.

� Permian – Lower Series of the Shihezi Formation

The exposed thickness is 58.22 to 103.42m. It is largely composed of coarse sandstone, siltstone and sandy mudstone. Some of the mudstones contain plant fossils. The base of the formation is a marker bed of coarse sandstone.

� Quaternary – Upper-Middle Series of the Pleistocene

This formation is composed mainly of clay and loess. The clay is primarily exposed in the valley. The loess is the Malan Loess, which covers the whole region. It formed as part of the Loess Plateau landscape. The thickness of the formation is 3.88 to 43.70m.

Table 3-5 Mine Site Stratigraphy – Fengxi

	Unit
Group		System		Characteristics		Thickness
Cenozoic	Quaternary			Loess, pebbles, clay, and sand.		0-50m
Paleozoic	Permian		Lower	Grey and purple speckled mudstone, siltstone mixed		60-120m
	system		Shihezi	with sandstone and sandy mudstone.
			Formation
			Lower	Grey sandstone, sandy mudstone,	and clay mudstone.	40-86m
			Shanxi	It has 1 to 3 layers of coal on the bottom.
			Formation
	Carboniferous		Taiyuan	Developed middle and upper series. (The lower series		88-164m
	system		formation	is missing.) Sandstone, sandy mudstone, mudstone,
			Benxi Formation	coal and alum clay mudstone. Minable coal seams are within the Taiyuan formation.
	Ordovician	system		Developed middle and lower series. (The upper series
				are missing.) Limestone, dolomite mixed with
				low-coal mudstone.

3.3.1.1 Coal-bearing Strata

The coal-bearingunits in the coal field are the Taiyuan and Shanxi Formations. The main coal-bearing formation is the Taiyuan. The Taiyuan contains the Nos. 4, 8, 9[-1] , 9[-2] and 11 coal seams.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

The lowest seams are the Nos. 9 and 11. There are marlstones and/or mudstones at the top of No. 11 Seam. The position of the coal seam is stable. The Seam 11 coal developed in peat swamps associated with tidal flats and sand bars. The No. 11 is mostly semi-dark and has a high sulfur content.

The No. 9 Seam is the product of brackish water in delta front and delta coal-forming environments. There are lenticular pyrite and siderite nodules. The No. 9 is divided into the 9[-1] and 9[-2] Seams.

The middle portion of the formation contains the Nos. 5 and 8 Seams. The sediments were deposited in delta distributary channels. The No. 8 is very stable and the No. 5 is very unstable.

The top portion of the formation includes the No. 4 Seam. The No. 4 has kaolinite partings and is a high-ash, low sulfur coal. It developed in freshwater peat swamps on a delta plain.

The Shanxi formation contains two coal seams. Both seams are thin, unstable, and non-recoverable.

3.3.2 Structure

The structure of the coal field is defined by an anticline. Its axis is in the center of the coal field. The axis faces in a nearly north-south direction and plunges to the south, the flanks dip at a similar angle to each other. The slope of the strata in the coal field is steeper in the southern part andgentler in the north. The dip is between 2° and 5°. There are two faults and two collapse columns present. These features are described as:

� F1 – Normal Fault

F1 is located on the western boundary of the coal field, trending in a north-south direction. No water has been found. F1 is exposed in the underground mine; there is no outcrop at the surface.

� F2 – Normal Fault

F2 is located in the northern part of the coal field. It is east of F1 and runs in a north north-west direction. The fault is exposed in the underground mine; there is no outcrop at the surface.

� Collapse Columns

There are two collapse columns (X1, X2) found underground in the coal field. They are located at the boundaries of the central and eastern portions of the field. The columns are oval in shape, but small in size. X1 is approximately 115x400m in diameter (bottom of No. 4 Seam). X2 is about 170x220m in diameter (bottom of No. 4 Seam).

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

3.3.3 Coal Characteristics

3.3.3.1 Physical Properties

According to visual identification, the physical properties of the coal seams – No.4, No.9[-1] , No.9[-2] , and No.11 are very similar. According to the survey report, the structural characteristics of the coals are listed in Table 3-6.

Table 3-6 Coal Structure

	Seam No.	Organic content % Minerals (Inorganic content) % Vitrinite Semi- vitrinite Fusinite Exinite Total 46.60 5.50 40.60 7.30 100.00 18.70 53.30 4.40 35.40 6.90 100.00 14.20 80.30 2.60 13.60 3.50 100.00 9.80 26.80 12.9 22.30 7.00 100.00 27.70
	4
	9-1
	9-2
	11

From the elementary analysis, the coal is composed of 80.68% carbon (Cdaf), 5.77% hydrogen (Hdaf), 1.33% nitrogen (Ndaf), and 10.75% oxygen + sulfur (Odaf + Sdaf).

According to the “Quality Classification of Coal” GB/T15224-2004: Standard Steam Coal Grading, these coals are extra medium to high ash, middle to high sulfur, extra low to low calorific value bituminous coal.

In the mine area the No. 4 Seam has an approximate thickness of 12.3m and an apparent density of 1.42t/m[3] ; the No. 9[-1] Seam is approximately 6m thick with an apparent density of 1.35t/m[3] ; the 9[-2] Seam is approximately 5.1m with an apparent density of 1.4t/m[3] and the No. 11 Seam is about 2.7m thick with an apparent density of 1.45t/m[3] .

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

3.3.3.2 Chemical Characteristics

Table 3-7 Raw Coal

	Raw Seam No. Recovery (%) Yield (%) Moist (%) Ash (%) Vol (%) Sul (%) Energy Content (MJ/kg) 4 29.4 23.69 3.42 25.38 40.79 0.54 30.83 9-1 27.89 22.16 3.46 27.73 38.34 0.86 31.52 9-2 31.39 25.79 2.66 25.65 42.22 1.89 32.21 11 12.88 9.11 2.18 37.12 39.84 1.85 30.14

Table 3-8 Washed Coal

	Washed Seam No. Moist (%) Ash (%) Vol (%) Sul (%) 4 3.3 7.41 40.29 0.63 9-1 3.15 9.03 39 0.56 9-2 2.63 9.49 42.96 1.33 11 2.63 11.11 44.12 1.52

Table 3-9 Industrial Usage

	Seam No.	Ash Component Analysis(%) Fusibility of Coal Ash (oC) Slagging Index Pollution Index SiO2 Al2O3 FeO3 CaO MgO K2O Na2O SO2 TiO2 P2O5 Total 40.08 45.32 2.05 4.36 0.78 0.24 0.14 2.55 2.08 0.34 97.94 1450 0.17 0.51 28.72 25.48 15.4 15.48 0.32 0.09 0.05 13.06 1.4 0.04 99.79 1315 0.21 1.68 40.75 34.5 10.32 5.1 0.73 0.29 0.08 5.37 1.32 0.04 99.5 1450 0.49 1.16
	4
	9-1
	9-2

3.4 Geology of Chongsheng

3.4.1 Stratigraphy

Coal seam Nos. 4, 9[-1] , 9[-2] , and 11 are approved for mining. The mine area is covered by loess. Based on the actual mining production, exploration drilling, and visual observations in the active mine, the strata in this mine are listed in ascending order as follows:

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APPENDIX IV

� Ordovician – Middle Series of the Majiagou Formation

This formation is not completely exposed in the mine field. According to data from a neighboring zone, the thickness of this formation is about 180m. It mainly consists of limestone, dolomite, dolomitic limestone and laminated mudstone. Limestones contain mud and appear khaki colored after weathering, so they are commonly referred to as leopard skin limestone.

� Carboniferous – Middle Series of the Benxi Formation

The thickness of this formation is 45.0-50.0m. It mainly consists of sandstone, sandy mudstone, mudstone and bauxite mudstone. It contains 1-3 layers of laminated limestone; the bottom layer is very stable. The maximum thickness is 3m, and often contains brachiopods. The bottom is often seen in Shanxi iron mines, appearing in chicken-coop shape deposit. A layer of high grade bauxite is above iron strata. Thin (0.2-0.5m) coal beds can be seen in middle and upper parts of the formation.

� Carboniferous – Upper Series of the Taiyuan Formation

Thickness of this formation is 68.57-94.17m, average 73.62m, consisting of sandstone, siltstone, mudstone and coal beds. The middle and lower parts contain 1-2 layers of muddy limestone and calcareous mudstone. The bottom is often a layer of muddy limestone. The main coal seams in the zone are the No. 4, 9, and 11 coal seams.

� Permian – Lower Series of the Shanxi Formation

The thickness of this formation is 53.96-77.82m, mainly consisting of sandstone, mudstone, and sandy mudstone. The middle and lower parts or the formation contain 1-3 layers of thin coal beds that are not minable. Sandstone (K3) at the bottom is coarse grained sandstone that locally grades into a pebbly sandstone.

� Permian – Lower Series of the Shihezi Formation

This formation appears variegated, and is 85.0-97.77m thick. It is composed mainly of sandstone, siltstone and mudstone.

� Quaternary – Upper-Middle Series of the Pleistocene

This series is mainly red soil and loess. The loess is Malan Loess that covers the area and formed as part of the Loess Plateau landscape. It is 1.84-48.54m thick.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

3.4.1.1 Coal-bearing Strata

The coal-bearing units in the coal field are the Taiyuan and Shanxi Formations. The main coal-bearing formation is the Taiyuan. The Taiyuan contains the Nos. 4, 6, 8, 9[-1] , 9[-2] and 11 coal seams. During the Taiyuan period the widely distributed peat marsh environment was suitable for prolonged periods of plant growth, thus providing thick, stable accumulations of coal.

The lowest seams are the Nos. 9 and 11. A muddy limestone lies above the No. 11 Seam. The position of the coal seam is stable. The Seam No. 11 coal developed in peat swamps associated with tidal flats and sand bars. The No. 11 is mostly semi-dark and has a high sulfur content.

The No. 9 Seam is very thick and formed in delta front and delta coal-forming environments. It contains lenticular pyrite and siderite nodules. The No. 9 Seam is divided into the 9[-1] and 9[-2] seams. It is semi-bright and has a very high sulfur content.

The middle portion of the formation is a thick layer of sandstone formed by a delta distributary channel that contains the Nos. 6 and 8 Seams.

The top portion of the formation includes the No. 4 Seam. The No. 4 is very thick and contains multiple partings of kaolinite and rock. It is a high-ash, low sulfur coal. It developed in freshwater peat swamps on a delta plain. Repeated flooding of the swamps caused the development of the partings and high ash content.

The Shanxi formation contains three coal seams. These seams are thin, unstable, and non-recoverable.

3.4.2 Structure

The mine area is situated on the east flank of the Maguan River syncline. The flank trends in an east-west direction and dips to the south. The dip angle for much of the area is less than 3°. The dip increases in the west to about 3°-8°. It increases to 14° within very small area west of fault F2.

There are 5 normal faults in the mine area. Two of the faults located at the edge of the mine have large displacements, thus have little impact on the mining. The faults are described in Table 3-10.

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APPENDIX IV

COMPETENT PERSON’S REPORT ON THE MINES

Table 3-10 Faults at Chongsheng

				Dip				Length in
				Angle	Displacement		Mine Field
Fault No.	Location	Trend	Inclination	(°)		(m)		(m)	Control
F1 normal fault	South	NWW	NNE	75		10-15		1270	Underground
(Xiamiangao fault)									Excavation
F2 normal fault	West	NNE	NWW	75		30-40		520	Regional
(Fengjialing fault)									Fault
F3 normal fault	Middle	NE	NW	75		1-2		150	Underground
									Excavation
F4 normal fault	West	NNW	NEE	75		5-7		125	Underground
									Excavation
F5 normal fault	East of F4	NNW	SWW	75		5-7		130	Underground
									Excavation

During underground excavation of the No. 4 coal, one oval collapse column was found in the west. The long axis measures about 50m and the short about 22m.

3.4.3 Coal Characteristics

3.4.3.1 Physical Properties

In the mine area the No. 4 Seam has an approximate thickness of 14.4m and an apparent density of 1.42t/m[3] ; the No. 9[-1] Seam is approximately 7.66m thick with an apparent density of 1.35t/m[3] ; the 9[-2] Seam is approximately 4.3m with an apparent density of 1.4t/m[3] and the No. 11 Seam is about 1.9m thick with an apparent density of 1.45t/m[3] .

3.4.3.2 Chemical Characteristics

Table 3-11 Raw Coal

	Raw Seam No. Recovery (%) Yield (%) Moist (%) Ash (%) Vol (%) Sul (%) Energy Content (MJ/kg) 4 67.46 58.15 2.95 21.33 40.65 0.45 24.86 9-1 47.14 39.86 2.2 21.38 39.65 1.86 25.07 9-2 46.20 39.01 1.9 23.58 42.89 2.29 23.83 11 46.05 35.78 2.38 29.15 37.97 2.58 23.37

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COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

Table 3-12 Washed Coal

	Washed Seam No. Moist (%) Ash (%) Vol (%) Sul (%) 4 1.85 8.73 41.09 0.470 9-1 1.80 7.02 40.26 0.912 9-2 1.60 9.50 43.68 1.590 11 2.56 8.81 39.51 1.910

4. RESOURCES

Coal Resources are to be estimated and classified as measured, indicated, and inferred following guidelines accepted by JORC. Following the Australian Guidelines for Estimating and Reporting of Inventory Coal, Coal Resources and Coal Reserves: measured resources are considered to be those lying within 500m of a valid point of measurement, indicated resources are those lying between 500 and 1,000m from such an observation point, and inferred coal resources are situated greater than 1,000m from a valid observation point. These classifications connote the degree of resource estimation reliability based on distance from known points of measurements.

4.1 Data Verification

After processing the maps and information supplied by the Chinese operators and reconciled with mine site records, Gustavson and BMITC prepared an independent estimate of the subject measured, indicated and inferred resources using methodology outlined in the JORC Code. The resource estimates have been prepared using industry-standard methodology to provide reasonable assurance that the resources can be extracted based upon core hole data, and actual mining in the concession areas. The resource assessment provided herein addresses geologic parameters related to coal thickness, faults, collapsed zones, recoverability, product yield, and other practical mining limitations. The mineral concession areas were reviewed, and a mining area defined after deducting areas where only inferred mineral exists, where significant geologic factors impact the reasonable classification of the coal resource, or where a multitude of geologic factors would prevent application of reasonable coal extraction methods. For the identified mining areas, total seam thickness grid were created using Carlson Mining (formerly SurvCADD®) software® for all the analyzed seams based on the available core hole and other data from existing observation points. An estimate of the resources was calculated based on the property boundary and mine plans of the Xingtao, Fengxi and Chongsheng Mines. Inferred coal resource and resources deemed inaccessible due to faulting are excluded from the resource estimate.

4.2 Resource Calculation of Methodology by Chinese

The resources presented by the Chinese operators were reported using the new Chinese Resource/Reserve Classification System, which was established by the Ministry of Land and Resources (“MLR”) in 1999.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

This system attempts to recognize economic parameters as well as parameters related to geological levels of confidence, and is based on the complex three-dimensional United Nations Framework Classification System. It is based on a three-dimensional matrix or three-number code in the form of “123”:

The first digit represents economics:
1 – Economic;
2M – Marginal Economic;
2S – Sub-Marginal Economic;
3 – Intrinsic Economic.
The second digit represents the level of technical study:
1 – Feasibility Study;
2 – Pre-Feasibility Study;
3 – Scoping Study or no Study
The third digit represents level of geological confidence:
1 – Measured;
2 – Indicated;
3 – Inferred;
4 – Reconnaissance.

The United Nations Framework Classification (UNFC) for Energy and Mineral Resources is a universally applicable scheme for classifying/evaluating energy and mineral reserves/resources. Most importantly, it allows a common and necessary international understanding of these classifications/evaluations. The Classification is designed to allow the incorporation of currently existing terms and definitions into this framework and thus to make them comparable and compatible. This approach has been simplified through the use of a three-digit code clearly indicating the essential characteristics of extractable energy and mineral commodities in market economies, notably (i) degree of economic/commercial viability; (ii) field project status and feasibility; and (iii) level of geological knowledge.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

The UNFC is a flexible system that is capable of meeting the requirements for application at national, industrial and institutional level, as well as to be successfully used for international communication and global assessments. It meets the basic needs for an international standard required to support rational use of resources, improve efficiency in management, and enhance the security of both energy supplies and of the associated financial resources. Furthermore, the new classification will assist countries with transition economies in reassessing their energy and mineral resources according to the criteria used in market economies.

The following classes of recoverable coal quantities are defined:

Mineral Reserves including:
Proved Mineral Reserves: code 111
Probable Mineral Reserves: codes 121 + 122
Mineral Resources (Additional or Remaining Resources) including:
Feasibility Mineral Resources: code 211
Pre-Feasibility Mineral Resources: codes 221+222
Measured Mineral Resources: code 331
Indicated Mineral Resources: code 332
Inferred Mineral Resources: code 333
Reconnaissance Mineral Resources: code 334

Class 111 is of prime interest to an investor since it refers to quantities that are: economically and commercially recoverable (number 1 as the first digit); have been justified by means of a feasibility study or actual production to be technically recoverable (number 1 as the second digit); and are based on reasonably assured geology (detailed exploration for solids) (number 1 as the third digit).

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

Table 4-1 summarizes the Chinese Resource/Reserve Classification System:

Table 4-1 Chinese Resource/Reserve Classification System

				Undiscovered
		Identified Mineral Resource		Mineral Resource
Economic Status	Measured	Indicated	Inferred	Reconnaissance
Economic	Proven Reserve (111)
	Reserve Base (111b)
	Probable Reserve (121)	Probable Reserve (122)
	Reserve Base (121b)	Reserve Base (122b)
Marginal	Reserve Base (2M11)
Economic	Reserve Base (2M21)	Reserve Base (2M22)
Sub-Marginal	Resource (2S11)
Economic	Resource (2S21)	Resource (2S22)
Intrinsic	Resource (331)	Resource (332)	Resource (333)	Resource (334)
Economic

4.3 Comparison of Resource Standards to JORC

The current system has been shown to have created some operational difficulties for both local companies and foreign companies operating in China.

Even though the current Chinese Resource/Reserve Classification System is not readily comparable with the JORC Code, a rule of thumb comparison can be used to establish a reasonable comparison of the resource estimate. Table 4-2 summarizes the rule of thumb, which requires detailed analysis by the Competent Person to verify its applicability.

Table 4-2 Comparison of Chinese Resource/Reserve Classification System to JORC Concession Coal Resource Estimate

	Category	1999 Chinese Resource/ Reserve Classification System 2004 JORC 111, 121 Proved Reserve 122 Probable Reserve 111b, 121b, 2M11, 2M21, 2S11, 2S21, 331 Measured Resource 122b, 2M22, 2S22, 332 Indicated Resource 333 Inferred Resource 334 N/A
	Reserve
	Resource

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

4.4 Resource Calculations for Xingtao

In total, the Xingtao concession contains 120.77 million tonnes of coal resources, out of which 86.14 million tonnes represent Measured Resources, 17.41 million tonnes are Indicated Resources and 17.22 million tonnes are Inferred Resources. Table 4-3 summarizes the calculated resource at the various mineable seams within this concession. The figures in this table represent the updated resources, taken into consideration the depletion of resources due to reported production between January and September 2011, and the reclassification of certain tonnes from measured to indicated, because of the additional measurement points obtained from the advance of the mining activities during that period.

Table 4-3 Xingtao Concession Coal Resource Estimate (As of September 30, 2011)

Category
Seam
No. 4-1
(tonnes)
Seam
No. 4-2
(tonnes)
Seam
No. 9-1
(tonnes)
Seam
No. 9-2
(tonnes)
Seam
No. 11
(tonnes)
Total In
Situ Coal
(tonnes)
% of
Total
Resource
J.O.R.C.
Measured
24,485,000
16,944,000
29,800,000
14,910,000
0
86,139,000
71%
Indicated
450,000
1,560,000
11,800,000
3,600,000
0
17,410,000
15%
Inferred
0
0
7,960,000
4,660,000
4,600,000
17,220,000
14%
Total
24,935,000
18,504,000
49,560,000
23,170,000
4,600,000
120,769,000
100%

4.5 Resource Calculations for Fengxi

The Fengxi concession contains 78.31 million tonnes of coal resources, out of which 31.68 million tonnes represent Measured Resources, 36.34 million tonnes are Indicated Resources and 10.29 million tonnes are Inferred Resources. Table 4-4 summarizes the calculated resource at the various mineable seams within this concession.

Table 4-4 Fengxi Concession Coal Resource Estimate

Category
Seam No.
4 (tonnes)
Seam
No. 9-1
(tonnes)
Seam
No. 9-2
(tonnes)
Seam No.
11 (tonnes)
Total In
Situ Coal
(tonnes)
% of Total
Resource
J.O.R.C.
Measured
31,680,000
0
0
0
31,680,000
41%
Indicated
450,000
14,950,000
13,230,000
7,710,000
36,340,000
46%
Inferred
680,000
3,780,000
3,570,000
2,260,000
10,290,000
13%
Total
32,810,000
18,730,000
16,800,000
9,970,000
78,310,000
100%

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

4.6 Resource Calculations for Chongsheng

The Chongsheng concession contains 80.79 million tonnes of coal resources, out of which 43.76 million tonnes represent Measured Resources, 24.15 million tonnes are Indicated Resources and 12.88 million tonnes are Inferred resources. Table 4-5 summarizes the calculated resource at the various mineable seams within this concession.

Table 4-5 Chongsheng Coal Resource Estimate

Category
Seam No.
4 (tonnes)
Seam
No. 9-1
(tonnes)
Seam
No. 9-2
(tonnes)
Seam No.
11 (tonnes)
Total In
Situ Coal
(tonnes)
% of Total
Resource
J.O.R.C.
Measured
23,805,000
12,160,000
7,796,000
0
43,761,000
34%
Indicated
0
13,541,000
8,416,000
2,190,000
24,147,000
34%
Inferred
5,178,000
2,771,000
1,788,000
3,143,000
12,880,000
32%
Total
28,983,000
28,472,000
18,000,000
5,333,000
80,788,000
100%

4.7 Mineral Resource Statement

The total Resources contained in the three studied concessions amount to 279.87 million tonnes. 161.58 million tonnes represent Measured Resources, 77.90 million tonnes are Indicated Resources and 40.39 million tonnes are Inferred Resources. Table 4-6 summarizes the calculated resource at the studied concessions.

Table 4-6 Total Coal Resource Estimate

	Category Xingtao (tonnes) Fengxi (tonnes) Chongsheng (tonnes) Total In Situ Coal (tonnes) J.O.R.C. Measured 86,139,000 31,680,000 43,761,000 161,580,000 Indicated 17,410,000 36,340,000 24,147,000 77,897,000 Inferred 17,220,000 10,290,000 12,880,000 40,390,000 Total 120,769,000 78,310,000 80,788,000 279,867,000

4.8 Potential Additional Resources From Other Seams

Table 4-7 illustrates the potential to add Resources to Xingtao by including Seams 8 and 10. These Resources were not added to the Resource statement nor can they be converted to Reserves because Xingtao does not have the mining licenses for these seams. It is safe to assume that the mining licenses will be granted to Xingtao because the 8 and 10 Seams are within their mine property. Another reason that these Resources cannot be converted to Reserves is that there is no mine plans for either of these seams.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

Table 4-7 Xingtao Seams 8 and 10 POTENTIAL Additional Resources

	Category Seam No. 8 (tonnes) Seam No. 10 (tonnes) Total In Situ Coal (tonnes) % of Total Resource J.O.R.C. Measured 3,610,000 0 3,610,000 33% Indicated 830,000 0 830,000 8% Inferred 1,440,000 4,940,000 6,380,000 59% Total 5,880,000 4,940,000 10,820,000 100%

Table 4-8 illustrates the potential to add Resources to Chongsheng by including Seam 6 and these Resources cannot be included within the total or converted to Reserves for the identical reasons as given for the 8 and 10 Seams at Xingtao.

Table 4-8 Chongsheng Seam No. 6 POTENTIAL Additional Resources

	Category Seam No. 6 (tonnes) % of Total Resource J.O.R.C. Measured 15,700,000 36% Indicated 14,200,000 32% Inferred 14,100,000 32% Total 44,000,000 100%

Table 4-9 Fengxi Seam No. 8 POTENTIAL Additional Resources

	Category Seam No. 8 (tonnes) % of Total Resource J.O.R.C. Measured Indicated Inferred 4,400,000 100% Total 4,400,000 100%

Table 4-9 represents the potential Resources for Fengxi, but the minimum thickness is 1.28m and the average is 1.4m. These are too thin to mine with the current longwall equipment, have no mining licenses and are not convertible to Reserves.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

Table 4-10 Total POTENTIAL Additional Resources

	Category Xingtao (tonnes) Fengxi (tonnes) Chongsheng (tonnes) Total In Situ Coal (tonnes) % of Total Resource J.O.R.C. Measured 3,610,000 15,700,000 19,310,000 33% Indicated 830,000 14,200,000 15,030,000 25% Inferred 6,380,000 4,400,000 14,100,000 24,880,000 42% Total 10,820,000 4,400,000 44,000,000 59,220,000 100%

Overall addition of these seams would potentially add 59.2 million tonnes of Resources to the combined mines total if the owners receive the mining licenses (Table 4-10).

All Resources shown in this report and specifically Section 4 are as of September 30, 2011.

5. ORE RESERVE ESTIMATION

This section of the report describes the process and steps used in defining the mineable coal reserves within the coal resources estimated in the previous section. The order is consistent with “Table 1 – Check List of Assessment and Reporting Criteria” in the JORC Code.

The JORC Code sets out the minimum standards, recommendations and guidelines for Public Reporting of exploration results, mineral resources and ore reserves. In the case of coal, it is permissible to substitute “coal” for “ore”. The JORC Code main principles are competency, transparency, and materiality.

Transparency requires that the reader of a Public Report is provided with sufficient information, the presentation of which is clear and unambiguous, to understand the report and is not mislead.

Materiality requires that a Public Report contains all the relevant information which investors and their professional advisers would reasonably require, and reasonably expect to find in the report, for the purpose of making a reasoned and balanced judgment regarding the Exploration Results, Mineral Resources or Ore Reserves being reported.

Competency requires that the Public Report be based on work that is the responsibility of suitably qualified and experienced persons who are subject to an enforceable professional code of ethics.

Coal Reserves are classified as proved or probable from the coal resources considering “modifying factors” including mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors.

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APPENDIX IV

COMPETENT PERSON’S REPORT ON THE MINES

“Proved Coal Reserves” are the economically mineable part of a measured coal resource, adjusted for diluting materials and allowances for losses when the material is mined. It is based on appropriate assessment and studies in consideration of and adjusted for reasonably assumed modifying factors. These assessments demonstrate that extraction could be reasonably justified at the time of reporting.

“Probable Coal Reserves” are the economically mineable part of an indicated coal resource, and in some circumstances a measured coal resource, adjusted for diluting materials and allowances for losses when the material is mined. It is based on appropriate assessment and studies in consideration of and adjusted for reasonably assumed modifying factors. These assessments demonstrate that extraction could be reasonably justified at the time of reporting.

5.1 Background

Consistent with the JORC Code, only “Indicated Resources” are classified as “Probable Reserves”, and only “Measured Resources” are classified as “Proved Reserves.” There are “Inferred Resources” that were identified and excluded from the Reserve estimate. The operators have completed detailed mine planning and procedures are in place for continued updating as conditions warrant.

Moreover, Gustavson and BMITC demonstrated the economic viability of the reserve by interrelating actual and current performance at the mines, when applicable, with coal thickness; coal quality; costs of mining, processing, and transportation; expected selling price, and other modifying factors.

5.2 Description of Mining Method – Xingtao

The technical information reviewed by Gustavson and BMITC indicates that the preferred mining method to that was implemented at Xingtao is the Longwall Top Coal Caving (LTCC).

LTCC was introduced and has been improved over the last 20 years. More than 90 such longwalls currently operate in China.

Yanzhou Coal Mining operates six underground coal mines in the Shandong Province of China and each of these underground mines is operating LTCC longwalls. Combined, they produce approximately 40 million tonnes per year (mt/y). Yanzhou’s Jining No. 3 mine, at an operating depth of more than 600m, produced more than 10 mt in 2005, using solely LTCC production techniques.

Due to the inherent operational problems and high costs associated with the multi-slicing longwall method, and the legislative requirement from the Chinese central government of a 83% (minimum) recovery rate, LTCC was introduced to the Chinese coal industry in 1982 (based on the ‘Soutirage’ longwall caving method originally developed in the French coal mining industry). The soutirage methods allowed for extraction of up to approximately 9m thickness with only one set of panel development roadways and

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

infrastructure. From these initial methods the Chinese industry has gone on to develop the LTCC into a distinctly different method with improved efficiency, safety and production rates.

LTCC is a conventional retreat longwall face with a second armored face conveyor (AFC) towed behind the shields to recover coal that would otherwise fall into the goaf gob and be lost. The roof supports are of a modified design incorporating a system of hydraulically operated tail-canopies at the rear of the support which can be moved up and down to allow the broken coal in the gob area to spill onto a second AFC. This process is allowed to continue until all of the coal is recovered and waste rock appears. At this time, the tail canopies can be lowered and “gates” shut, pulling the AFC forward to stop recovery of product from the gob. The rear AFC pan line is connected to the shields via a chain and hydraulic ram. The chain gives flexibility while the ram drags the pans in behind the shields.

The Chinese industry has reported averages of 15,000 to 20,000 tpd for an LTCC face.

5.3 Description of Mining Method – Fengxi

Given the relatively simple geological structure and hydrogeological conditions of this deposit, the operator has chosen the LTCC method as the preferred mining method for this property, especially for seam No. 4. This method was described in the section related to the Xingtao operation.

5.4 Description of Mining Method – Chongsheng

The Chongsheng feasibility study indicates that the LTCC method was selected as the most suitable for the prevailing geologic conditions and forecast production levels. This method was described in the section related to the Xingtao operation.

5.5 Reserve Estimation Parameters

The coal reserve estimate was prepared using the proposed mine development model where coal extraction would be conducted primarily by longwall mining methodologies (more specifically Longwall Top Coal Caving or LTCC). Entries facilitating the movement of coal, workers, materials and supplies, and ventilation air would be established by a combination of continuous mining and road header equipment. The mine plan was reviewed for the isolation and avoidance of significant geologic factors impacting the thickness and integrity of the coal seam, and the safety of the workers. Where necessary, extraction plans were changed to effect maximum extraction of the coal resources in consideration of the modifying factors. Adjustments to the mine plans were made for previous mining, mine encroachment areas, faults, and other geologic factors, as well as areas not likely to be mined due to the overall geometry of the reserves, and mineral boundary protection. Mining recovery for the coal reserve estimate follows the geometry of the mine plans projections, including entry widths, pillar sizes and proposed longwall panel dimensions. The coal reserve estimate includes a preparation plant yield adjustment for material not likely to be sold.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

As defined by JORC, a Coal Reserve is the economically mineable part of a Measured or Indicated Coal Resource.

Coal Reserve estimates include diluting materials and are adjusted for losses that may occur when the coal is mined. Appropriate assessments, which may include feasibility studies, have been carried out. These assessments should include proper consideration of all relevant ‘modifying factors’ such as: mining methods, beneficiation, and economic, marketing, legal, environmental, social and governmental factors. These assessments should demonstrate that at the time of reporting, economic extraction could reasonably be justified. Coal Reserves are subdivided in order of increasing confidence into Probable Coal Reserves and Proved Coal Reserves.

5.6 Reserve Statement – Xingtao

The technical documents provided by the operator indicate that an overall recovery rate of coal recovery, after applying all the relevant modifying factors, is 79.6%.

It has been determined that the Xingtao concession contains approximately 82.43 million tonnes of Total Reserves, out of which 13.86 million tonnes correspond to Probable Reserves and 68.57 million tonnes are Proved Reserves.

The results of the analysis of the identified resources contained in the various mineable seams, and the application of the corresponding losses, is summarized in Table 5-1 (Note: all resources in Seam 11 are inferred and are not convertible to Reserves):

Table 5-1 Xingtao Coal Reserve Estimate

	Seam Name	Resource (tonnes) Mining Recovery % Probable Reserves (tonnes) Proven Reserves (tonnes) Total Reserves (tonnes) Indicated Measured Total 450,000 24,485,000 24,935,000 79.6 358,200 19,490,060 19,848,260 1,560,000 16,944,000 18,504,000 79.6 1,241,760 13,487,424 14,729,184 11,800,000 29,800,000 41,600,000 79.6 9,392,800 23,720,800 33,113,600 3,600,000 14,910,000 18,510,000 79.6 2,865,600 11,868,360 14,733,960 17,410,000 86,139,000 103,549,000 13,858,360 68,566,644 82,425,004
	4-1
	4-2
	9-1
	9-2
	Total

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

The quality values associated with the proximate analyses performed on coal from the Xingtao concession are summarized in Table 5-2:

Table 5-2 Xingtao ROM Coal Quality

	Seam No. Moisture (%) Ash (%) Volatile Matter (%) Sulfur (%) Energy Content (MJ/kg) 4-1 3.58 27.52 41.11 0.66 19.60 4-2 3.54 20.78 40.83 0.96 22.81 8 3.36 25.17 42.18 2.42 22.28 9-1 3.07 26.95 42.07 1.96 20.74 9-2 2.65 22.10 42.24 1.82 23.31 11 2.73 30.99 40.92 1.90 19.61

5.7 Reserve Statement – Fengxi

The feasibility study provided by the operator indicates that an overall recovery rate of coal recovery, after applying all the relevant modifying factors, is 75.0%.

It has been determined that the Fengxi concession contains approximately 51.02 million tonnes of Total Reserves, out of which 23.76 million tonnes correspond to Proved Reserves and 27.26 million tonnes are Probable Reserves.

The results of the analysis of the identified resources contained in the various mineable seams, and the application of the corresponding losses, is summarized in Table 5-3:

Table 5-3 Fengxi Coal Reserve Estimate

	Seam Name	Resource (tonnes) Mining Recovery % Probable Reserves (tonnes) Proven Reserves (tonnes) Total Reserves (tonnes) Indicated Measured Total 450,000 31,680,000 32,130,000 75 337,500 23,760,000 24,097,500 14,950,000 – 14,950,000 75 11,212,500 – 11,212,500 13,230,000 – 13,230,000 75 9,922,500 – 9,922,500 7,710,000 – 7,710,000 75 5,782,500 – 5,782,500 36,340,000 31,680,000 68,020,000 27,255,000 23,760,000 51,015,000
	4
	9-1
	9-2
	11
	Total

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

The quality values associated with the proximate analyses performed on coal from the Fengxi concession are summarized in Table 5-4:

Table 5-4 Fengxi ROM Coal Quality

	Seam No. Moisture (%) Ash (%) Volatile Matter (%) Sulfur (%) Energy Content (MJ/kg) 4 3.42 25.38 40.79 0.54 30.83 9-1 3.46 27.73 38.34 0.86 31.52 9-2 2.66 25.65 42.22 1.89 32.21 11 2.18 37.12 39.84 1.85 30.14

5.8 Reserve Statement – Chongsheng

The feasibility study provided by the operator indicates that an overall recovery rate of coal recovery, after applying all the relevant modifying factors, is 75.0% for Seams 4, 9[-1] , and 9[-2] , and 80% for Seam 11.

It has been determined that the Chongsheng concession contains approximately 51.04 million tonnes of Total Reserves, out of which 18.22 million tonnes correspond to Proved Reserves and 32.82 million tonnes are Probable Reserves.

The results of the analysis of the identified resources contained in the various mineable seams, and the application of the corresponding losses, is summarized in Table 5-5:

Table 5-5 Chongsheng Coal Reserve Estimate

	Seam Name	Resource (tonnes) Mining Recovery % Probable Reserves (tonnes) Proven Reserves (tonnes) Total Reserves (tonnes) Indicated Measured Total – 23,805,000 23,805,000 75 – 17,853,750 17,853,750 13,541,000 12,160,000 25,701,000 75 10,155,750 9,120,000 19,275,750 8,416,000 7,796,000 16,212,000 75 6,312,000 5,847,000 12,159,000 2,190,000 – 2,190,000 80 1,752,000 – 1,752,000 24,147,000 43,761,000 67,908,000 18,219,750 32,820,750 51,040,500
	4
	9-1
	9-2
	11
	Total

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

The quality values associated with the proximate analyses performed on coal from the Chongsheng concession are summarized in Table 5-6:

Table 5-6 Chongsheng ROM Coal Quality

	Seam No. Moisture (%) Ash (%) Volatile Matter (%) Sulfur (%) Energy Content (MJ/kg) 4 2.95 21.33 40.65 0.45 24.86 9-1 2.2 21.38 39.65 1.86 25.07 9-2 1.9 23.58 42.89 2.29 23.83 11 2.38 29.15 37.97 2.58 23.37

5.9 Combined Reserve Statement

The Coal Resource estimates used as a basis for the Coal Reserve estimate were audited and updated by the Competent Persons from prior estimates by the operators and as indicated in the supplied geologic and feasibility studies. The results of all studies are fairly consistent in the quantity of resources available to support the mine plan production levels.

The Total Reserves of the subject concessions amounts to approximately 184.48million tonnes, out of which 59.33 million tonnes correspond to Proved Reserves and 125.15 million tonnes are Probable Reserves and are shown in Table 5-7.

Table 5-7 Total Coal Reserves Estimate

	Category Xingtao (tonnes) Fengxi (tonnes) Chongsheng (tonnes) Total Reserves (tonnes) J.O.R.C. Probable 13,858,360 27,255,000 18,219,750 59,333,110 Proved 68,566,644 23,760,000 32,820,750 125,147,394 Total 82,425,004 51,015,000 51,040,500 184,480,504

All Reserves shown in this report and specifically Section 5 are as of September 30, 2011.

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COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

6. MINING

The actual mining at the three mines will be similar in method and structure. All three mines have been or are being developed to utilize rubber tired access and transport and will employ the longwall mining method. In the thicker seams the longwall method will include either multiple slice or longwall caving methods to improve the overall recovery. Both of the proposed methods have been successfully used in China in other projects.

One area where the design appears to be inadequate at this point is in the rock mechanics and subsidence studies that are needed to fully understand the mechanics of mining so many seams in close proximity to each other.

6.1 Mining Licenses

The mining licenses are discussed and listed in Section 1 and Section 2 and are valid until October 14, 2011 and are being renewed as of the date of this report. Copies of the actual mining licenses with English translations are included as Appendix A. Gustavson and BMITC believe that the expiration in 2011 is part of a renewal process and that the mining licenses will be either extended or reissued on a continuing basis throughout the mine life of each project.

6.2 Mining Methods and Application

The mining method utilized is basically the same for all three mining projects. In general, the mines are accessed by three different slopes/shafts where one is a high angle slope that is for the conveyor system for the coal production, a transportation access that has a gradient to allow the use of rubber tired, mobile equipment and a ventilation shaft. In Fengxi the transportation access was originally planned to use a hoisting or winch system, but in the actual construction the access was lengthened and the gradient lowered to allow the use of the much more flexible rubber tired equipment.

The main entries for access to the production faces generally are three parallel entries driven by continuous mining equipment. The access for these three entries is usually in coal and provides access, coal transport and ventilation to the production face.

The production is done by the development of a single entry on each side of a longwall face and the longwall faces of different widths mined in a retreating type method. In several of the mineable seams it is planned to utilize longwall units that are adaptable to longwall caving type production where a normal longwall face cuts the bottom 2.5-3.0 meters and allows the remainder of the seam to break, cave and be delivered to a conveyor system at the rear of the shield support (Figure 6-1). This method has been successfully implemented in the first seam mined at Xingtao where the 4-1 Seam is 10 meters thick.

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The longwall caving method is explained in detail in Section 5. The mine maps are shown in Figure 6-2 Xingtao, Figure 6-3 Fengxi and Figure 6-4 for Chongsheng.

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Figure 6-2 Xingtao Mine Plan

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Figure 6-3 Fengxi Mine Plan

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Figure 6-4 Chongsheng Mine Plan

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6.3 Mine Design Practices

The following is a quote from the feasibility studies that states the approach to design is as follows:

1. “In the light of seriously implementing the principle and policy on national energy development as well as the procedure and practice in coal industry, the design sticks to the principle of seeking truth from the fact and exploring for creativity, it is in close combination with the mine characteristics to make sufficient use of existing facility, equipment and make efforts to reduce the project working load on improvement and expansion.

2. Based on the starting point of reasonable concentration for production of One Mine – One Shaft – One Face, it emphasizes on the production system both on the ground and underground as well as the safety facility so as to implement the mine technology reformation.

3. Actively apply the new technology, new process, new equipment, and keep each link of production system to be simple, advanced, reliable, reasonable and practical. Relying on the science and technology progress, carefully optimize on each link.

4. For the arrangement underground, it makes efforts to construct more coal tunnel, less rock tunnel to reduce the working load. During the design it makes efforts to simplify the production system, reduce the administrative and welfare facility to achieve the target of less input, more output, quick efficient and good benefits. It plans to improve and expand the coal mine into a socialist new mine with the feature of safe in character, quality with benefits, scientific with creativity, resource saving and harmonious development.”

The design approach and basis is well defined in each of the feasibility studies. The practices and standards of design are also listed to sufficient detail for Gustavson and BMITC review, and all of the design criteria is acceptable.

6.4 Raw Coal Production

The past production at Xingtao and Fengxi are shown in Table 6-1. Also shown in Table 6-1 is the planned production build up for all three mines and their volume of coal when full production is reached. The 860,000 tonnes from Fengxi is all development coal from driving the access entries and the sale of this development coal has been used to offset construction costs. This same situation will be utilized at Chongsheng, where the access development and longwall panel development coal can be sold to help offset construction costs.

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Table 6-1 Raw coal production

	2008 2009 2010 2011 2012 2013 2014 2015 Production Volume Raw coal production volume (’000 tonnes) Xingtao 1,800 2,837 4,000 4,000 4,000 4,000 4,000 Fengxi 0 1,750 3,500 3,500 3,500 3,500 Chongsheng 0 875 2,800 3,500 3,500 3,500 Total 1,800 2,837 6,625 10,300 11,000 11,000 11,000

Table 6-1 was originally revived from the owner and contained their projection of total raw coal produced at each mine. Gustavson updated it during its recent visit to China in October 2011. In all cases, the mines are planned to produce at a higher level than allowed by the mining license. This same situation has be observer in documentation within other project circulars reviewed by Gustavson and BMITC and it is believed by Gustavson and BMITC that the owners and management of the mines will obtain permission to mine at the levels as projected. Huameiao has indicated to Gustavson and BMITC that it plans to increase the mining volume limit on the licenses, which, as of the date of Gustavson’s visit, were in the process of being renewed.

Gustavson and BMITC believe that the way the mines are constructed or are being constructed, and with the operating experience from the longwall operations at Xingtao and Fengxi, that all three mines will be able to produce at the levels or higher as shown in Table 6-1. Gustavson and BMITC are concerned that in later years when the longwall mining moves to lower seams and the equipment is older, sustaining the levels in Table 6-1 may be hard. Good maintenance and rock mechanics applications will need to be continuously applied to maintain high production levels.

6.5 Hydrology

In the feasibility study for all three mines it was stated that the area water table was below the 11 Seam and in each of the three mines the 11 Seam is the lowest level of mining. Documentation for these statements was from the results of regional hydrological drilling and the water level for the wells in the immediate area. This result suggests that in-mine water will be only from inflow from the surface and not from being below the water table. In some areas there may exist perched water tables or pockets of water that are trapped, but this should be minor amounts of water that will have minimal affect on the mining operations. Designs have been developed for the expected water inflow from the surface rainfall and from the perched system.

A potential for hydrological or water problems does exist from the surface and/or run-off water that has found its way into the old workings that exist in all three mining areas. The K-Series of drill holes that was completed at Xingtao was done specifically to determine the amount of water in the old workings. This is specifically addressed in the feasibility studies and as an example is the following statement from the Xingtao Feasibility Study:

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“This well-field (coal deposit) and surrounding small kiln (mines) have longer exploration. No.4 and 9 coal seams have mined-out areas. Water accumulated in mined-out area will pose a threat to safe production of the mine in future. Before exploration (mining), water accumulated in mined-out area must be prospected and drained. Only production is organized when all prospecting and drainage works are done. Control and prevention work must abide by the principle of “Predict, Prospect before tunneling, prospect first and tunneling later, control first and explore later” and adopt comprehensive treatment measures including prevention, blockage, clear, drainage and interception.”

The warning from the potential risk from water inflow required that the existing old mining areas be studied and assessed prior to mining. The following statement is also from the Xingtao FS and defines the problems in the old workings:

“There is no other old kiln (mine) inside well-field except existing mined-out areas support in such two mines. Because former Hong Quangou Coal Co., Ltd explores(mined) No. 4-1, 4-2, 4-1 and 4-2 coal seams beyond approved limits, water accumulated area occurs in each coal seam. One fire area occurs in mined-out area of No. 4-2 coal seam. Two water accumulation areas and 1 fire area occur in mined-out area of No. 9-1 coal seam. It is predicted in geological report that total water accumulation amount in four areas is 207100m[3] and fire area is 0.253km[2] . Water accumulated and fire ignition in mined-out area brings many potential risks to underwell mining works.”

This recognized potential threat to mining from the water accumulated in the old workings was also addressed in a similar manner at Fengxi and Chongsheng. The feasibility studies for both mines include an assessment of the potential threat, volume of water and steps to insure that the water is removed prior to mining below the water filled areas. Gustavson reviewed a recent Hydrogeologic report prepared for the newest operation, at Chongsheng, and found that its findings and recommendations are similar to those contained in the feasibility study. Good surface drainage practices will be key to prevent surface water to affect the underground activities at the seams above the water table, while the recommended practices for the seams below water table will also need to be implemented at Chongsheng when the progress of the operations reach those seams.

Gustavson and BMITC believe that the approached to define and mitigate the water filled old workings is a correct approach. Gustavson and BMITC also understand that the development work includes drilling in the entry in advance to determine if there are any unknown mine workings.

6.6 Mine Gases

Xingtao

A reply has not been made from the Shanxi Security and Production Supervision Bureau because statistical work in gas outflow in Pinglu district, Shuozhou city in 2010 is still being studied. According to Geological Report of Merge&Acquisition and Integration Mine in Shanxi Shuozhou Pinglu Huameiao Xingtao Coal Co., Ltd

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compiled by Shanxi Provincial Geophysical and Geochemical Prospecting Institute and No. 89 “Reply on Gas Grade and CO2 Outflow Identification Results for Mines with Production Capacity Above 300,000 t/a in Shouzhou City in 2008” issued by Shouzhou Coal Industry Department, both obtain consistent results. Absolute gas outflow in No. 4[-1] Seam is 3.13m[3] /min and relative outflow is 2.73m[3] /t. Absolute CO2 outflow is 3.27m[3] /min and relative outflow is 2.85m[3] /t. Xingtao is identified to be a low-gas mine.

Fengxi

According to the “Approval of Mine Gas Gradation Appraisal of Shuozhou Shuocheng District Yangjian Coal Mine and Other 62 Mines in 2006” in JAJMZ (2007) No.31 document issued by Shanxi Administration for Safe Production Supervision, the absolute and relative gas emission rate and the absolute and absolute emission rate of carbon dioxide of Shanxi Shuozhou Fengxi Coal Industry Limited Corporation (originally Shuozhou Pinglu District Fengxi Coal Mine) are 0.38m[3] /min, 0.80m[3] /t, 1.02m[3] /min and 2.16m[3] /t, respectively (Seams 4[-1] , 9[-1] , 9[-2] and 11), which define a low-gas mine.

Chongsheng

According to the Reply to Evaluation Result on Coal Gas Grading for 41 Local Mines of those below 300k tonnes/year of the City in 2008 , Shuo Mei Fa (2008) No. 303 of Shuozhou Coal Industrial Bureau, the absolute coal gas emission amount in No. 9 Seam is 0.44 m[3] /min, relative emission amount is 2.54 m[3] /t, the absolute emission amount of coal gas and CO2 is 0.77 m[3] /min and the relative emission amount is 4.45 m[3] /t. Shanxi Shuozhou Chongsheng Coal Industry Co., Ltd. (former Shiergou Coal Mine) is a low coal gas mine.

According to Reply to Evaluation Result for Coal Gas Grading and Emission Amount of CO2 in 2006 of those 76 Coal Mines such as Shuocheng Nuanshuiquan Coal Mine, etc. , Shuo An Jian Zi (2006) No. 137 of Shuozhou Safety Production Supervision Administrative Bureau, the absolute coal gas emission amount in No. 4 Seam of Pinglu Fengjialing is 0.45 m[3] /min, relative emission amount is 1.93 m[3] /t, the absolute emission amount of coal gas and CO2 is 0.73 m[3] /min and the relative emission amount is 3.13 m[3] /t. Fengjialing Coal Industrial Industry Co., Ltd. (previous mine name during tests) is a low coal gas mine.

The mine gas potential has been properly assessed for the three mines. Gustavson and BMITC believe that the potential for mine gas problems has been properly studied and the mines have all been declared low gas type mines. The ventilation in the Xingtao Mine during the site visit was adequate for the activities within the mine. Gustavson and BMITC feel that in all of the mines as production progresses into the lower seams that there is a potential to cave into the gob areas from the mined out seams above. Under this situation, management will need to monitor their gas control and ventilation plans to insure that gas accumulations in the old areas are not a problem for the active mining areas.

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6.7 Spontaneous Combustion

Xingtao

Spontaneous combustion tendency tests in No. 4[-1] , 4[-2] , 9[-1] (9[-1] +9[-2] ) and 9[-2] Seams were made by Inner Mongolia Institute of Coal Field Geology on March 1, 2010, showing they belong to Classification II spontaneous combustion. Analysis results are seen in Table 6-2.

Table 6-2 Spontaneous Combustion Analysis Result List

	Coal Seam No. Test No. Absorbed Oxygen in Coal cm3/g Spontaneous Combustion Grade 4-1 0001 0.62 II (Spontaneous Combustion) 4-2 0002 0.60 II (Spontaneous Combustion) 9-1(9-1+9-2) 0003 0.60 II (Spontaneous Combustion) 9-2 0004 0.67 II (Spontaneous Combustion)

Fengxi

According to the investigation report presented by the Comprehensive Test Center, Bureau of Coal Industry of Shanxi Province on August 2, 2008, the No.4 Seam of the mine has a seam oxygen absorption of 0.62cm[3] /g, spontaneous ignition tendency class of II, which is a spontaneous combustion coal seam.

The No.9 Seam in the Siergou Mine, adjacent to Pinglu District, Shuozhou City, has a seam oxygen absorption of 0.7073cm[3] /g with a spontaneous ignition tendency class of II, which is a spontaneous combustion coal seam in accordance with the investigation report presented by the Comprehensive Test Center, Bureau of Coal Industry of Shanxi Province on May 25, 2005.

Chongsheng

A coal sample of No. 4 Seam was taken by Shuozhou Pinglu Shiergou Coal Mine on May 25, 2005 and tested by Comprehensive Testing Center of Shanxi Coal Industry Bureau. The oxygen absorption of No. 4 Seam is 0.8586cm[3] /g. It has the self-ignition tendency of Grade I, belonging to self-ignition coal bed. Its spontaneous combustion period is 5-10 months. According to the current standard, it is Grade I self-ignition, belonging to the easy self-ignition coal.

A coal sample of No. 9 Seam was taken by Shuozhou Pinglu Shiergou Coal Mine on May 25, 2005 and tested by Comprehensive Testing Center of Shanxi Coal Industry Bureau. The oxygen absorption of No. 9[-1] Seam is 0.8773cm[3] /g. It has the self-ignition tendency of Grade I, belonging to the self-ignition type coal seam. Its spontaneous combustion period is 5-10 months. According to the current standard, it is Grade I self-ignition, belonging to the easy self-ignition coal.

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The mine organization did not implement any evaluation on the self-ignition for No. 9[-2] and 11 Seams. It is necessary to invite the qualified unit to do this additional work.

Gustavson and BMITC believe that the evidence from the above data and that in some cases the seams are Category I and in others, they are Category II plus evidence in the local area of spontaneous combustion type mine fires, that all three mines must be designed and operated to control spontaneous combustion. It was observed during the site visit to Xingtao that the operations management is aware of the SC potential and the mine design took into consideration this potential problem.

6.8 Explosive Dust Potential

Xingtao

The coal dust explosion hazard in No. 4[-1] , 4[-2] , 9[-1] (9[-1] +9[-2] ) and 9[-2] Seams was tested by Inner Mongolia Institute of Coal Field Geology on March 1, 2010. Through sampling tests, each coal seam is explosive, with flame length between 80~400 mm. Minimal rock dust that prohibits coal dust is within 25-65% range (Details are seen in appendix of Xingtao FS). The results were given in Appendix 6-11-1 in the Xingtao FS and show that No. 4[-1] , 4[-2] , 9[-1] (9-[1] +9[-2] ) and 9[-2] Seams all have explosive coal dust tendencies (Table 6-3).

Table 6-3 Coal Dust Explosion Identification Report – Xingtao

	Coal Seam No. Test No. Flame Length (mm) Minimal Rock Dust Prohibiting Coal Dust Explosion % Explosion Conclusion 4-1 1 >400 65 Explosive 4-2 2 80 25 Explosive 9-1(9-1+9-2) 3 80 25 Explosive 9-2 4 >400 65 Explosive

Fengxi

The flame length of No. 4 Seam is 400mm, the minimize rock dust usage for preventing explosion by the coal dust is 75%, and the coal dust is explosive in accordance with the investigation report presented by the Comprehensive Test Center, Bureau of Coal Industry of Shanxi Province on August 2, 2008.

Also, according to the investigation report presented by the Comprehensive Test Center, Bureau of Coal Industry of Shanxi Province on May 25, 2005, the No. 9 Seam in the Siergou Mine, adjacent to Pinglu District, Shuozhou City, has a flame length of 400mm, the usage of rock dust for preventing explosion by the coal dust is suggested as 65%.

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Chongsheng

According to the Test Report of Coal Mine Dust Explosion and Coal Self-ignition Tendency in No. 4 and 9[-1] Coal Bed (Seams), Shiergou, Pinglu, Shuozhou issued in May 2005 by Comprehensive Test Center of Shanxi Coal Industrial Bureau, the rock dust addition in No. 4 Seam by Shanxi Shuozhou Chongsheng Coal Industry Co., Ltd. (former Shiergrou Coal Mine) is suggested as 65% due to a tested flame length of >400 mm. The coal dust is explosive. The rock dust addition in No. 9[-1] Seam is suggested as 65% due to a tested flame length >400 mm. The coal dust is explosive.

The mine has not implement the evaluation on No. 9[-2] and 11 Seams for the coal dust explosive issues. It is necessary to invite the qualified unit to do this additional work.

Gustavson and BMITC feel that the data presented for each mine is sufficient to show a real need for continuous and substantial application of rock dust to control or minimize the explosion potential from the coal dust. During the underground visit to the Xingtao Mine it was observed that the rock dust procedures and coverage were inadequate and it is felt by Gustavson and BMITC that rock dusting must be increased and improved. This recommendation will apply to Fengxi and Chongsheng when they are mining coal.

6.9 Subsidence Issues

Gustavson and BMITC have some concerns in the feasibility studies approach to subsidence. The calculations that are shown for determining the barrier or protection pillars for various surface features uses only the thickness of the first seam, 4[-1] in all cases, to calculate the width of the pillars. In the mining operation at each mine, the plan is to progressively mine the lower seams, and the sequence is from top seam to lowest seam. While this is the correct sequence, the calculation of pillars to protect surface facilities must utilize the total extraction, and not just the uppermost seam. An example is that at Chongsheng the calculation uses 60% of the seam thickness of the uppermost seam or 4 Seam, which shows a potential subsidence of 60% of 15.13 meters or 9.08m. In an actual calculation of the overall effect of the subsidence, all seams must be considered so the calculation would need to be 60% X (thickness of 4 + thickness of 9[-1] + thickness of 9[-2] + thickness of 11) or 60% X (15.13m + 8.4m + 5.5m + 2.0m) or a total potential subsidence of 18.62m or double what was used in the calculations. There is a reducing effect to the overall subsidence as mining moves deeper, but in the case of Chongsheng (and the other two mines) the first mineable seam is at about 110m deep and the final mineable seam (11) is 190m deep. In this shallow, overall depth, the subsidence will be effected by all the seams that are to be mined.

Within each feasibility study report there are listed measures for the minimizing of the effects or the repairs required for the damage caused by subsidence. The listed measures are good and will be required, but Gustavson and BMITC believe that the overall effect caused by subsidence is underestimated and will therefore be a higher cost item that anticipated.

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6.10 Comments on Overall Mine Plan and Mining Approach

The Approach to the mining of the coal deposits by the owners is correct and utilizes methods that are proven to work in China and other countries. The application of the thick seam longwall method will maximize the recovery of the coal Resources and provide a safer working environment. Mining in the upper seams is complicated by the existence of old mine workings that require panel designs that are unusual in shape and in some cases requires the panel to change direction. This complicated mine layout is working to mine the remaining areas of the upper seams, but it leaves an unusual pattern that will not be necessary to repeat in the lower seams where there is no previous mining.

Gustavson and BMITC agree with the mining approach and have accepted that the lower seams will have mine plans that will allow the recovery of the Resources in the lower seams. The concern that Gustavson and BMITC have is that the detailed mine plans have not been developed for the lower seams and the actual plans will need to incorporate detailed rock mechanic studies to maximize the safety and Resource recovery in the lower seams. This planning based on ongoing rock mechanic studies is necessary and needs to be completed as soon as possible. The potential interferences from the mining in the upper seams may require that the mining in the lower seams be changed and these changes could result in a lower recovery of the coal Resources and has the potential to increase operating costs.

During their recent visits to the three subject operations in October 2011, Gustavson and BMITC discussed the current mine plans with the general managers of those mines and were satisfied to verify that sound engineering and state of the art techniques are being applied for the preparation of those plans. The active operations appear to closely follow the indications of their mine plans and, overall, these appear to be effectively implemented, with a clear understanding of the prevailing conditions at each of the mine, current production goals and safe mining practices.

7. COAL WASHING

Each of the three mining properties will produce raw coal from multiple coal seams that will essentially provide a high ash, run-of-mine product. Within the feasibility studies for each mine they have documented the need for a coal washing plant at each mine and the type of washing plant they either built or intend to build. In the feasibility studies the production for Xingtao is 1.5Mtpa and both Fengxi and Chongsheng are planned for 0.9Mtpa. As mentioned in other sections within this report, the intention is to mine more that the authorized tonnage and therefore the actual feed to the plant will be higher.

It is assumed by Gustavson and BMITC that the design of the plants will be as stated in the feasibility studies, but the wash plant equipment will be purchased or was purchased that will process the actual volumes that are sent to the plant. This was the case at Xingtao where the design says 1.5Mtpa and the wash plant is processing at least double the stated volume. Under this limitation we have taken excerpts from the feasibility studies that show that they determined they needed a washing plant and the general type of equipment and

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cleaning methods used within the plants. Gustavson and BMITC were not given detailed equipment lists for any of the plants, but the Xingtao plant was processing all the coal that was sent to the plant, which in 2011 is estimated at 4.0Mtpa.

The plant at Fengxi appeared to be substantially complete, even though, as of September 30, 2011 it had not been commissioned for commercial production. Gustavson and BMITC were informed that the plant would become operational during the last quarter of 2011, which appears likely, given the fact that it is substantially complete.

The plant at Chongsheng is still under construction and, in Gustavson’s opinion, will not be ready for production until early-to-mid-2012.

7.1 Raw Coal Quality

The raw coal quality for each mine is complex and depends on the seam that is being mined. All of the mines extract coal from the No.’s 4, 9 and 11 Seams in some combination where in some cases there are multiple No. 4 and No. 9 beds with in the Seam. The following tables are for each mine and the stated raw coal quality as shown in the feasibility studies. Table 7-1 is for Xingtao, Table 7-2 is for Fengxi and Table 7-3 is for Chongsheng. The heating values for the Fengxi raw coal are from the geologic and feasibility reports, but the values are much higher than the corresponding seams in the other two mines. Gustavson and BMITC believed that the heating values for Fengxi appear to be incorrect and will require rechecking in the future.

Actual qualities reported by both Xingtao and Fengxi indicate that the average calorific power of coal from those operations is 4,500kcal/kg (approximately 8,096BTU/lb) and 4,200kcal/kg (approximately 7,600BTU/lb), respectively. The production at Xingtao came from seams 4-1 and 4-2, and production at Fengxi came from seam 4. These variations between qualities reported at the exploration phase, and those obtained during actual operations are not out of the ordinary or a cause of concern. Furthermore, they will not affect the financial aspects of the operations, since the sales prices used in the model are based on qualities within the range of the actual calorific power values reported by the two active operations.

Table 7-1 Xingtao Raw Coal Quality – Averages

	Coal Horizon Moisture % Ash % Volatile % Sulfur % Heating Value Mj/kg Heating Value kcal/kg Heating Value BTU/lb 4-1 3.58 27.52 41.11 0.66 19.60 4,684 8,428 4-2 3.54 20.78 40.83 0.96 22.81 5,301 9,808 9-1(9-1+9-2) 3.07 26.95 42.07 1.96 20.74 4,957 8,918 9-2 2.65 22.10 42.24 1.82 23.31 5,571 10,023 11 2.72 30.99 40.92 1.90 19.61 4,686 8,432

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Table 7-2 Fengxi Raw Coal Quality – Averages

	Coal Horizon Moisture % Ash % Volatile % Sulfur % Heating Value Mj/kg Heating Value kcal/kg Heating Value BTU/lb 4 3.42 25.38 40.79 0.54 30.83 7,368 13,257 9-1 3.46 27.73 38.34 0.86 31.52 7,533 13,554 9-2 2.66 25.65 42.22 1.89 32.21 7,698 13,850 11 2.18 37.12 39.84 1.85 30.14 7,204 12,960

Table 7-3 Chongsheng Raw Coal Quality – Averages

	Coal Horizon Moisture % Ash % Volatile % Sulfur % Heating Value Mj/kg Heating Value kcal/kg Heating Value BTU/lb 4 2.95 21.33 40.65 0.45 24.86 5,942 10,690 9-1 2.20 21.38 39.65 1.86 25.07 5,992 10,780 9-2 1.90 23.58 42.89 2.29 23.83 5,695 10,247 11 2.38 29.15 37.97 2.58 23.37 5,585 10,049

7.2 Description of the Xingtao Plant

The Xingtao coal washing plant has been constructed and has been in operation for at least 3 years. The following is from the Xingtao Feasibility Study, not from recent operating results. This presentation of the expansion and circuit is approximately how the wash plant was built, but the wash plant is processing more than the stated 1.5Mtpa shown in the study. They have either installed larger equipment than was required for a 1.5Mtpa, are operating the plant more hours per year that planned or both. During the site visit the Mine General Manager stated that they are mining around 4.0Mtpa and they have over 3.0Mtpa of clean coal to sell.

Most of the following is from the Xingtao feasibility with some editing for clarity

A coal washing plant with a production capacity of 0.45Mtpa was built in August, 2004 to process the production from Xingtao Coal Mine. The production capacity was increased to 1.50Mtpa after upgrading and reconstruction to match the project needs after acquisition, reconstruction & recombination of the properties.

The process of coal washing plant can be classified into 6 parts as follows: Raw coal sizing/desliming system, a heavy medium circuit of shallow channel, a heavy medium cyclone circuit of two fine coal products, a slime cyclone circuit and a slurry processing system.

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Raw coal can be transported to a crushing station by a conveyor in the coal yard. The coal is crushed to at most 200mm by through crusher in the transfer station. It also can be transported to main plant by another belt to meet production demand so there is no need to build a separate screening& crushing facility.

Raw coal of 200mm to 0mm will be processed and deslimed in the main part of the wash plant. The screen mesh is 13mm and has two sections. The 1[st] section is a dry screen and the 2[nd] section is a wet desliming screen. Raw lump coal of 200mm to 13mm is processed by heavy-media after sizing and desliming. Fine raw coal of 13mm to 0mm is mixed by a turning plate for the 1[st] section so that fine coal can be mixed or bypass. Residual coal is transported to the fine coal process after the desliming. Slurry of 1.5mm to 0mm in the desliming screen shall enter into a slurry bucket and slurry of 1.5mm to 0.15mm shall be selected by a spiral separator after degradation. Fines of less than 0.15mm shall be transported to slurry system as centrifuge spillover.

Light products, namely, clean lump coal of 200mm to 50mm can be crushed to less than 50mm then mixed with fine clean coal after the heavy media process and sizing. Fine clean coal of 50mm to 2mm shall be added to mixed coal after secondary dehydration by a centrifuge.

Fine coal of 13mm to 1.5mm shall be conveyed to a heavy-media cyclone mixing tank. Fine coal and heavy products can be separated by pumping to the heavy media cyclone. Fine coal canal so be added into the mixed coal after medium drainage and secondary dehydration in the centrifuge.

Fine coal and tailings can be produced by coal slime of 1.5mm to 0.15mm after spiral selection. Fine coal can be fed to fine coal centrifuge and heavy media fine coal after dehydration of filter. Tailings also can be drained to tailings yard with heavy media process tailings after process and high-frequency sieving hydration. Fine coal slime of less than 0.15mm shall be conveyed to a condensation tank with spillover of sizing swirler. Materials in thickener include backwater of high-frequency sieve and arc sieve besides spillover of sizing swirler. Spillover water can be used as clarification water for system re-usage after condensation. It can be pumped to pressurized filter for dehydration & recovery. Coal slime can be added to mixed coal or placed individually after dehydration. Filter liquid also can return to condensation tank.

Wash mixed coal and tailings are products of coal wash plant.

Some production facilities of coal wash plant shall be reconstructed to meet mine production.

The surface facilities and wash plant for Xingtao are shown in Figure 7-1.

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Figure 7-1 Xingtao Surface Facilities

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Subsequent information shows that the Xingtao Wash Plant produced 2.2 million tonnes of clean coal in 2010 from 2.8 million tonnes of raw coal feed. Similarly, production records corresponding to the period January-September 2011 show that the plant produced 1.86 million tonnes of clean coal from 3.05 million tonnes of raw coal feed. The plan going forward at Xingtao is to mine and send 4.0Mtpa of raw coal to the plant and to produce 3.2Mtpa of clean coal for sales. This level of production and sales was used by Gustavson and BMITC in the economic model and not the amounts as shown on the Xingtao mine license. Xingtao is currently producing above the mine license volume and Gustavson and BMITC believe Xingtao will obtain the permission to produce at the 4.0Mtpa rate.

7.3 Description of the Plant at Fengxi

Most of the following is from the Fengxi feasibility with some editing for clarity

The raw coal produced by the mine is mainly for power generation and the product scheme is determined based on the market demand and the suggestions of the mine owner. The planned wash plant for Fengxi is similar in design to the Xingtao wash plant, where the raw coal mine screening system is established by the coal owner, which classifies the raw coal as three grades, +50mm, 50-25mm and -25mm. The +50mm run-mine coal is screened and the obvious dirt is extracted, then the +50mm raw coal is stored, transported separately and can be sold as raw coal if the owner has a raw coal market.

The raw coal product scheme and processing method is consistent with the national requirements for a 0.9Mt/a mine design, but the actual plant will be built to process 4.0Mt/a.When the ash content of raw coal is relatively low and the percentage of shale content is significantly decreased by coal washing methods then this can improve the economic benefits of coal mine and allow the coal to meet the different requirements of residential and industrial coals, possibly reduce the transportation costs and show high social and economic benefits.

According to the coal quality of No.4, 9[-1] , 9[-2] and 11 coal seams, and considering the market demands to the thermal coal, a supporting 0.9Mtpa coal washing plant is planned for Fengxi to provide coal cleaning for the mine. The coal with ash content less than 16% and calorific power of above 5,600Kcal/kg can meet the market demand and specifications. At a 16% ash coal product, the raw coal of Fengxi increases the efficient to wash. Initially the raw coal is crushed and screened prior to undergoing the full preparation stages. The process flow system of a jig washing plant is designed, as the jigging method is characterized by low investment, simple technology and low production costs and is well suited for the medium-sized coal washing plant plus it provides good product control. The centrifugal dehydrator is used to maintain a water content below 16%.The recovered coarse coal slime and the fine coal particles are dehydration with the concentrated pressure filter and then mixed into the cleaned coal product. The entire coal cleaning plant mainly produces two kinds of products, namely the waste rock and cleaned coal. Since the ash percentage cannot be guaranteed, the quantity of the middlings is minimized.

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The underground waste rock is brought to the surface in the auxiliary slope and transported to the rock dumping yard for disposal. The handpicked waste rock is placed in the refuse bin and hauled to the waste rock dumping yard.

The waste rock dumping yard is located northwest of the plant in an existing gully, which is 250m long with the average width of 60m, it covers an area of about 1.5ha and the average depth is about 50m. There is currently no waste rocks stored at this site and the yearly output of waste rock and hand-picked waste rock is estimated to be about 110kt. This will provide about a service life of 8 years. The waste rock dumping yard prior to being utilized as the storage of waste rock is designed with water diversion culverts and a cut-off dike is constructed in the gully upstream of rock dumping yard. The downstream has a dam to control the water within the waste rock facility. The rock dumping yard shall be filled in layers and covered with loess (soil). A bulldozer will be used for compaction and then the area will undergo water and soil conservation treatment in accordance with the environmental requirements.

The planned and existing surface facilities for Fengxi are shown on Figure 7-2.

The above description of the type of plant for Fengxi is based on good design and will function similar to the Xingtao wash plant. Subsequent information shows that the Fengxi Wash Plant will be constructed to process tonnage in excess of the mine license of 0.9Mtpa. The plan going forward at Fengxi is to mine and send 3.5Mtpa of raw coal to the plant and to produce 2.8Mtpa of clean coal for sales. This level of production and sales was used by Gustavson and BMITC in the economic model and not the amounts as shown on the Fengxi mine license. Fengxi will produce volumes above the mine license volume and Gustavson and BMITC believe Fengxi will obtain the permission to produce at the 3.5Mtpa rate.

As indicated above, the wash plant at Fengxi had not been commissioned for commercial production as of September 30, 2011. Gustavson and BMITC observed that the plant appeared to be substantially complete, and they were informed that it would start operating during the last quarter of 2011. This appears to be reasonable, and Fengxi should start producing clean coal some time before the end of the year 2011.

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==> picture [383 x 585] intentionally omitted <==

Figure 7-2 Fengxi Surface Facilities

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7.4 Description of the Plant for Chongsheng

Most of the following is from the Chongsheng feasibility with some editing for clarity

Shanxi Shuozhou Luping Huameiao Chongsheng Coal Industrial Industry Co., Ltd. is the result of acquisition, reorganization and consolidation between Shanxi Shuozhou Chongsheng Coal Industry Co., Ltd. and Shanxi Shuozhou Pinglu Fengjialing Yirong Coal Industry Co., Ltd. This Group is in the process of constructing a mine with the production capacity of 0.9Mtpa (feasibility study rate, but the actual will be built to process 4.0Mtpa). In order to reduce the ash in raw coal, improve the calorific value and increase the economic benefit for the mine, the owner plans to construct a coal preparation plant at the southern side of main shaft. The planned operating schedule for the coal preparation plant is 330 d/a, 16 h/d.

Processing Capacity of Coal Preparation Plant:

Annual Processing Volume: 0.9 Mt;
Daily Processing Volume: 2727.27 tonnes;
Hourly Processing Volume: 170.45 tonnes;
Operating Schedule: 330 d/a, 16 h/d.

Process for Coal Preparation

According to the requirements from the owner in combination with the knowledge of coal quality in Shuozhou area, as well as the designing experience (Xingtao), this suggests a design for the coal preparation plant as:

All the raw coal is fully washed after it is crushed to �200mm:
200-13mm – this fraction is separated by screens and then a dense medium circuit;
13-1.5mm – this fraction is separated by screens and then a dense medium hydrocyclone;
1.5-0.15mm – the coarse slime is recovered by a centrifuge system for hydration;
0.15-0mm – the recovery is a combination from through the screen-bowl sedimentation centrifuge, and plate and frame filter presses;
13-0mm – the raw coal fines can be fully by-passed, partially washed or fully washed.
The coal slime is recovered through the press filter for hydration.

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The main product of this coal preparation plant is for steam coal. It is necessary to adjust the production and be flexible according to the market situation and quality of the raw coal.

The waste rock from the auxiliary shaft is about 10ktpa and the waste from the coal preparation plant is at about 270ktpa. The waste storage site is located in the valley and is in a southeast direction from the industrial site. The width of the storage valley bottom is about 54m, valley depth is about 53m, the width of valley opening at the top is about 110m, and length of valley is over 100m giving a capacity of this site at about 870k m[3] . The waste is moved to the waste site by dump trucks. The capacity of waste site can satisfy the produced waste from the mine and the coal preparation plant as well as the boiler debris for approximately 5 years. In the future, for more storage area, the waste site can be increased in size. A debris retaining dam will be installed at the valley of waste site with a constructed ditch to provide flood drainage. The system to be utilized for the waste storage is to stack 3m as one layer, compact and cover with the loess soil to a thickness of 0.5m. After the waste valley is no longer needed it will be reclaimed by covering it with the loess soil of 1.0m in thickness, compaction of the soil for rehabilitation and planting herbs or fruit trees. It can also be used as a pasture for the development of grass to be used in the animal husbandry industry.

The planned surface facilities and wash plant for Chongsheng are shown on Figure 7-3.

The above description of the type of plant for Chongsheng is based on good design and will function similar to the Xingtao wash plant. Subsequent information shows that the Chongsheng Wash Plant will be constructed to process tonnage in excess of the mine license of 0.9Mtpa. The plan going forward at Chongsheng is to mine and send 3.5Mtpa of raw coal to the plant and to produce 2.8Mtpa of clean coal for sales. This level of production and sales was used by Gustavson and BMITC in the economic model and not the amounts as shown on the Chongsheng mine license. Chongsheng will produce volumes above the mine license volume and Gustavson and BMITC believe Chongsheng will obtain the permission to produce at the 3.5Mtpa rate.

Gustavson and BMITC visited the facility in October 2011 and observed that, even though most of the structures are substantially complete and key equipment and controls are still in place, it is unlikely, in Gustavson’s opinion, that Chongsheng start producing clean coal through this plant before early to mid 2012. Chongsheng has made plans to start producing raw coal from their mine within the last quarter of 2011, which Gustavson deems reasonable, given the fact that all the development work has been carried out and the mine itself is ready to start producing.

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==> picture [370 x 577] intentionally omitted <==

Figure 7-3 Chongsheng Surface Facilities

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7.5 Washed Coal Quality and Saleable Products

The raw coal values shown in Section 7-1 are from the geological reports and laboratory testing results. The same results given in the tables for the geologic reports provided the washed coal results that are presented in Tables 7-4, 7-5-and 7-6. During the site visit to Xingtao Gustavson and BMITC inspected the coal washing plant. The plant was idle and the management was not available to provide operational information for the plant, coal volume processed or the specific results of the saleable products. Gustavson and BMITC were later told that the plant at Xingtao was on a planned maintenance shutdown and the information that was required for this report was supplied at a later date.

Therefore, the data listed here for all three mining operations is from the feasibility studies and the geologic reports. If the Xingtao operation is now performing as predicted and the Fengxi and Chongsheng operations also meet their estimated results as shown in the Tables, then the products are as presented as high grade power generation coals.

Table 7-4 Xingtao Clean Coal Quality – Averages

	Coal Horizon Moisture % Ash % Volatile % Sulfur % 4-1 3.18 7.58 40.69 0.78 4-2 3.54 6.10 40.24 0.81 9-1(9-1+9-2) 2.82 7.58 40.83 1.39 9-2 3.01 7.47 41.48 0.94 11 3.31 7.51 40.31 1.14

Table 7-5 Fengxi Clean Coal Quality – Averages

	Coal Horizon Moisture % Ash % Volatile % Sulfur % 4 3.30 7.41 40.29 0.63 9-1 3.15 9.03 39.00 0.56 9-2 2.63 9.49 42.96 1.33 11 2.63 11.11 44.12 1.52

Table 7-6 Chongsheng Clean Coal Quality – Averages

	Coal Horizon Moisture % Ash % Volatile % Sulfur % 4 1.85 8.73 41.09 0.47 9-1 1.80 7.02 40.26 0.91 9-2 1.60 9.50 43.68 1.59 11 2.56 8.81 39.51 1.91

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7.6 Washed Coal Quality and Saleable Products

The raw coal and clean coal production for 2009, 2010 and 2011 for Xingtao, the raw coal production and planned clean coal production for Fengxi, and the planned raw coal production for Chongsheng are provided in Table 7-7. Also shown is the planned production for all three mines as they move to full production. Comments from the owner state that all of the mined raw coal will be sent to the respective wash plant and the sales product is clean coal. No additional data was provided on the quality of the clean coal and it is assumed by Gustavson and BMITC that the clean coal quality will be similar to that shown in Tables 7-4, 7-5 and 7-6 in Section 7-5.

Table 7-7 Raw and Clean Coal Production

		2009	2010	2011	2012	2013	2014	2015
Tonnes	of Raw coals for Processing to clean coal (’000 tonnes)
Xingtao		1,800	2,837	4,000	4,000	4,000	4,000	4,000
Fengxi			0	1,750	2,800	3,500	3,500	3,500
Chongsheng			0	875	2,800	3,500	3,500	3,500
Tonnes	of Clean coal
(’000 tonnes)
Xingtao		1,440	2,270	2,474	2,600	2,600	2,600	2,600
Fengxi			0	320	1,820	2,275	2,275	2,275
Chongsheng		0	0	0	1,820	2,275	2,275	2,275
		1,440	2,270	2,794	6,240	7,150	7,150	7,150

8. PROJECT DEVELOPMENT

Project development for Xingtao is essentially complete. Xingtao is at full production and transferred out of the development phase.

Fengxi has also been transferred to operations since mid-2011. The remaining major task to complete is the commissioning of the wash plant, which should take place in the last quarter of 2011.

Chongsheng is at the end of its development phase and should start production of raw coal in the last quarter of 2011, with its wash plant operating in early to mid 2012, with full production in 2013.

8.1 Status of Construction and Development – Xingtao

Xingtao Mine is fully developed and in full production. All facilities have been constructed and the mine is fully operational. The coal wash plant is fully expanded and is processing all of the coal sent to it from the mine (volumes of raw and clean coal from 2009 and 2010 are shown in Table 7-7).

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More than three quarters of the Reserves within the 4[-1] Seam have already been mined. A new longwall top caving unit was installed in December 2010, and at the time of the site visit it was fully operational.

The Xingtao Mine is in full production and all construction is complete. Mining will continue in the 4[-1] Seam until it is mined out and development will continue in the 4[-2] Seam to allow the longwall unit to continue on without stopping. The long range plan is to continue to develop and mine the lower seams until the 11 Seam is mined out.

There is the potential to add adjacent properties and other coal seams to expand the Resources and mine life as the project expands.

8.2 Status of Construction and Development – Fengxi

The Fengxi Mine Project has been producing raw coal since the second quarter of 2011. Construction of the coal storage silos was in an advanced stage of development as of the time of Gustavson’s visit in October 2011 and both the yard and the wash plant should be fully operational before the end of 2011. At the time of the site visit in October 2011 the status and timing was observed or stated to be:

The mine buildings were completed.
The longwall equipment was fully operational since the first quarter of 2011.
The wash plant appears to be substantially complete and should be operational within the last quarter of 2011.
The mine was shipping raw coal from the development work using temporary facilities.
Fengxi should be fully operational by December 2011 as originally planned.

Fengxi has been shipping development coal using the temporary coal handling facilities.

8.3 Status of Construction and Development – Chongsheng

Chongsheng was purchased by the current owners in 2009. The mine has been on a fast pace of development since the new owners gained control of the project. It is the objective of the owners to construct and put Chongsheng into production during 2011 with full production in 2013.At the time of the site visit in October 2011 the status and timing was observed or stated to be:

The decline for the conveyor completed.
Total underground development planned for 2011 of 944 meters was substantially complete, in addition to the approximately 300 meters already driven in 2010.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

The wash plant was substantially complete at the time of the visit, and it was foreseeable that it could be operating in early 2012.
The two raw coal storage silos were substantially complete.
The surface facilities were also substantially complete at the time of Gustavson’s visit.
The 4 Seam mine layout was completed and the operation would proceed in accordance with the discussed plan. The mine manager mentioned that a mine plan for the 9[-1] Seam was also developed.
Given the overall development of the project, Gustavson considers that Chongsheng will likely start production of raw coal before the end of 2011, with production of clean coal by early to mid 2012.

8.4 Combined Schedule and Production

No bar charts or Microsoft Project type schedules were provided during the site visits. Xingtao is well into full production and the main issue is the timing of the longwall panel development and extraction. Fengxi is already in production (raw coal only) and Chongsheng is in an advanced construction phase with foreseeable raw coal production before the end of 2011.

9. OPERATING AND CAPITAL COSTS

A complete life-of-mine model was completed for the three individual mines. In addition, a model was built that combines the three mines into a model that generates information for the combined operations. These models include the labor, operating costs and capital costs. The models were completed based on the information from the owners for budgeted production until the Reserves were exhausted. The overall effect of this analysis is to provide a sales volume and coal quality on a per-year basis for the individual mines and the value of the mining as stand-alone operations. Some of the results of the models developed are presented in this section to define the capital and operating costs for the mines. This was done in detail for each mine and as a combined project to provide Gustavson and BMITC with the information required for Section 9.

The costs within the model were directly obtained from Xingtao’s Profit & Losses Statements and other accounting documents provided by the Owner, as well as some indicators obtained from the feasibility studies. The objective was to rely primarily on the current Xingtao costs and apply these as best as possible to Fengxi and Chongsheng.

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

9.1 External Considerations

The initial determination for the analysis was to set the market assumptions. Table 9-1 provides the basic parameters that Gustavson and BMITC used for the market parameters within the model. The price of clean coal was provided by the owner’s representative and later confirmed by the client. Actual sales invoices and contracts were also provided by client. The sales price does include an amount for the VAT.

Table 9-1 Market Assumptions

	Value Unit RoM Coal Sales $0.00 $/t Clean Coal Sales $65.51 $/t Freight to Buyer $0.00 $/t Marketing & Insurance $0.00 $/t Resource Tax (Royalty) $0.00 $/t Lease (Xingtao) (Royalty) $0.00 $/yr

9.2 Currency Exchange Rate Considerations

The exchange rate to convert from Yuan to US Dollars is shown in Table 9-2 and reflects the average for the 12-month period of September 2010-September 2011:

Table 9-2 Exchange Rates

	Exchange Rate per USD US Dollars $1.00 Yuan ¥6.56

Most of these parameters utilized within the models were defined within the feasibility studies. Gustavson and BMITC have included a 20% contingency for Fengxi and Chongsheng to cover funds that we feel will be spent, but are undefined at this point. No contingency was added to Xingtao because the mine is in production and provided actual costs.

9.3 Production

The estimated production summary for each mine and the clean coal production by year were presented in Sections 6 and 7. Table 9-3 provides the total production of raw coal for each mine. The total of 187.3 million tonnes was used as the total tonnes mined.

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Table 9-3 LoM Mine Raw Coal Production Summary

	Description Total Preproduction Production Xingtao Develop Waste (kt) 0 0 0 Xingtao RoM Coal (kt) 85,474 12,000 73,474 Fengxi Develop Waste (kt) 0 0 0 Fengxi RoM Coal (kt) 50,050 8,050 42,000 Chongsheng Develop Waste (kt) 0 0 0 Chongsheng RoM Coal (kt) 50,516 7,175 43,341 Develop Material Mined (kt) 0 0 0 RoM Coal Mined (kt) 186,040 27,225 158,815

Table 9-4 shows the clean coal produced at each mine for the life of the operation. The tonnes presented in Table 9-4 are all 65% of the raw coal tonnage as provided by Huameiao. Gustavson and BMITC believe that the 65% yield is reasonable, considering the actual yields reported by Xingtao during 2011.

Table 9-4 LoM Clean Coal Summary Based on 65% Yield

Description
Total
Preproduction
Production
Xingtao RoM Coal (kt)
0
0
0
Xingtao Clean Coal (kt)
55,558
7,800
47,758
Fengxi RoM Coal (kt)
1,350
1,350
0
Fengxi Clean Coal (kt)
31,655
4,355
27,300
Chongsheng RoM Coal (kt)
875
875
0
Chongsheng Clean Coal (kt)
32,266
4,095
28,171
RoM Coal Sales (kt)
2,225
2,225
0
Clean Coal Sales (kt)
119,480
16,250
103,230

9.4 Capital Costs

The total life of mine capital expenditures for all three mines is shown in Table 9-5. This summary does not include the capital costs spent prior to 2011, which were considered to be sunk costs. As can be seen from Table 9-5, no sustaining or replacement capital has been included, but a sustaining capital fund was included in the operating costs. Gustavson and BMITC feel that there will be ongoing capital costs to sustain production and feels the costs should be capital costs and not as operating costs.

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Table 9-5 LoM Capital Cost Summary

	Initial ($000) Sustaining ($000) LoM ($000) Mine Equipment 70,776 0 70,776 Prep Plant Capital 2,277 0 2,277 Other 10,965 0 10,965 Owners Costs 0 0 0 Mine Closure 0 0 0 Subtotal Capital 84,018 0 84,018 Contingency 15,466 0 15,466 Total Capital Costs 99,484 0 99,484

Table 9-6 lists the capital costs by mine and again they do not include the spending prior to 2011 or sustaining capital spending.

Table 9-6 Mine & Plant Capital Cost Summary

	Xingtao ($000) Fengxi ($000) Chongsheng ($000) Total ($000) Mine Equipment 4,411 15,240 51,125 70,776 Prep Plant Capital 2,277 0 0 2,277 Other 0 9,146 1,820 10,965 Owners Costs 0 0 0 0 Mine Closure 0 0 0 0 Subtotal Capital 6,688 24,386 52,945 84,018 Contingency 0 4,877 10,589 15,466 Total Capital Costs 6,688 29,263 63,534 99,484

9.5 Operating Costs

The mine annual production rate for each mine is provided in Table 9-7. These maximum production rates were defined by the owner and are above the levels permitted by the mining licenses, but Gustavson and BMITC believe that the mines will receive approval for these higher production levels as have other coal producing projects within China. Gustavson and BMITC also believe that the mining method and equipment that are employed in the mines will allow the production at the projected levels. The total production for each mine is from the Reserve calculations in Section 5.

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Table 9-7 Mine Operating Schedule

	Parameter Xingtao (kt) Fengxi (kt) Chongsheng (kt) Max Annual Production (ktpy) 4,000 3,500 3,500 Total Production (kt) 85,474 50,050 50,516

The total operating costs per mine and broken into various line items are shown in Table 9-8.

Table 9-8 LoM Mine Operating Costs

	Xingtao		Chongsheng
	LoM	Fengxi LoM	LoM	Total
	($000)	($000)	($000)	($000)
Materials	114,709	67,168	67,793	249,670
Power/Fuel	29,447	17,243	17,403	64,094
Employee Salary/
Benefits	236,022	232,133	238,324	706,479
Repair Overhaul	22,862	13,387	13,511	49,760
Wall Support/ Rock
Dust	82,879	48,530	48,982	180,391
Roadway	41,969	24,575	24,804	91,348
Maintenance &
Inspect Exp	1,795	1,051	1,061	3,907
Safety	102,694	60,133	60,692	223,519
Sustainable Develop
Fund	146,695	85,898	86,697	319,290
Environment &
Restoration	83,944	49,154	49,611	182,710
Development Fee	88,142	51,612	52,092	191,847
Misc Expense	186,340	109,112	110,127	405,580
Local Charges
(Taxes)	156,495	91,636	92,489	340,620
Other	77,330	45,281	45,702	168,314
Subtotal Operating
Costs	1,371,325	896,916	909,289	3,177,529
Contingency	0	179,383	181,858	361,241
Total Operating
Costs	1,371,325	1,076,299	1,091,146	3,538,770

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

The documentation provided to Gustavson and BMITC listed operating costs in a main category as presented in Table 9-8 and a category of Other Capital Costs, which is summarized by mine in Table 9-9.

Table 9-9 LoM Mine Other Operating Costs

	Xingtao	Xingtao			Chongsheng	Chongsheng
	LoM		Fengxi LoM		LoM		Total
	($000)		($000)		($000)		($000)
Depreciation	189,947		111,224		112,259		413,430
Amortization	33,062		19,359		19,539		71,960
Interest Expense		0		0		0	0
Other	36,949		21,636		21,837		80,423
Subtotal Operating
Costs	259,958		152,220		153,636		565,813
Contingency		0	30,444		30,727		61,171
Total Operating
Costs	259,958		182,664		184,363		626,985

The annual production and total clean tonnes from the preparation plant based on a 80% yield are provided in Table 9-10.

Table 9-10 Prep Plant Operating Schedule

	Parameter Xingtao (kt) Fengxi (kt) Chongsheng (kt) Max Annual Production (ktpy) 2,600 2,275 2,275 Total Clean Coal Production (kt) 55,558 31,655 32,266

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

The operating costs for each preparation plant and by various line items are shown in Table 9-11.

Table 9-11 LoM Preparation Plant Operating Costs

	Xingtao	Xingtao		Chongsheng	Chongsheng
		LoM	Fengxi LoM		LoM		Total
		($000)	($000)	($000)		($000)
Materials		36,518	20,807	21,209		78,534
Power/Fuel		13,224	7,534		7,680	28,438
Employee Salary/
Benefits		42,361	28,165	28,505		99,032
Repair Overhaul		20,207	11,513	11,735		43,455
Misc. Expense		0	0		0		0
Subtotal Operating
Costs	112,310		68,019	69,129		249,459
Contingency		0	13,604	13,826		27,430
Total Operating
Costs	112,310		81,623	82,955		276,889

As with the mine, the preparation plants have a category of operating costs for the plant and a category for Other Plant. Table 9-12 is a listing of the Other Plant Operation cost.

Table 9-12 LoM Prep Plant Other Operating Costs

	Xingtao	Xingtao			Chongsheng	Chongsheng
	LoM		Fengxi LoM		LoM		Total
	($000)		($000)		($000)		($000)
Depreciation	29,318		16,704		17,027		63,049
Amortization		0		0		0	0
Interest Expense		0		0		0	0
Other		0		0		0	0
Subtotal Operating
Costs	29,318		16,704		17,027		63,049
Contingency		0	3,341		3,405		6,746
Total Operating
Costs	29,318		20,045		20,432		69,795

9.6 Summary of Costs

All of the information listed above was used as the basis for a summarized presentation for the individual mines and also as a combined complex. Table 9-13 lists some of the basic parameters used within the model. Most of the parameters were provided by the owners

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APPENDIX IV

within various documentations, but the mine life was determined by the mining rate and the amount of Reserves available to be mined. The pre-production period is the tones mined prior to each individual mine reaching full production.

Table 9-13 Combined Parameters

	Model Parameter Technical Input Pre-production Period 3 years Mine Life 19 years RoM Coal Price $38.45 Clean Coal Price $65.51 Operating Days per Year 330 RoM Production Rate (t/d) 33,333 Clean Coal Production (t/d) 21,667

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APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

The results of the combined summary of the mines are presented within Table 9-14.

Table 9-14 Combined Summary Results

Description		Units	Units		Value	$/t-Clean	$/t-Clean
Production
RoM Coal Mined			kt		186,040		–
RoM Coal Sales			kt		2,225		–
Clean Coal Sales			kt		119,480		–
Estimate of Cash Flows
Market Price – RoM Sales		US$/t		$	38.45
Market Price – Clean Coal Sales US$/t				$	65.51		–
Gross Revenue		US$000s		$7,912,304		$66.223
Freight & Marketing		US$000s		$	0	$	0.000
Royalty		US$000s		($	49,045)	($	0.410)
Gross Income		US$000s		$7,863,259		$65.812
Operating Costs
Underground Mines		US$000s		$3,177,529		$26.595
Underground Mines – Other		US$000s		$	565,813	$	4.736
Interest Expense		US$000s		$	0	$	0
Preparation Plants		US$000s		$	249,459	$	2.088
Preparation Plants – Other		US$000s		$	63,049	$	0.528
Interest Expense		US$000s		$	0	$	0.000
Subtotal Operating Costs		US$000s		$4,055,850		$33.946
Contingency		US$000s		$	456,588	$	3.821
Total Operating	Costs	US$000s		$4,512,438		$37.767
Cash Cost						$38.178
Operating Margin		US$000s		$3,350,821		$28.045
Capital
Mine Equipment		US$000s		$	70,776		–
Prep Plant Capital		US$000s		$	2,277		–
Other		US$000s		$	10,965		–
Owners Costs		US$000s		$	0		–
Mine Closure		US$000s		$	0		–
Subtotal Capital		US$000s		$	84,018		–
Contingency		US$000s		$	15,466
Total Project Capital (Equity) US$000s				($	99,484)

Gustavson and BMITC believe that the model defines a mine life that is attractive and that by adding additional Reserves, the mine life can be extended and production continued.

– IV-94 –

APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

Tables 9-15, 9-16 and 9-17 have been included to demonstrate the economic parameters for each of the individual mines.

Table 9-15 Xingtao Summary Results

Description		Units	Units		Value	$/t-Clean	$/t-Clean
Production
RoM Coal Mined			kt		85,474		–
RoM Coal Sales			kt		0		–
Clean Coal Sales			kt		55,558		–
Estimate of Cash Flows
Market Price – RoM Sales		US$/t			–
Market Price – Clean Coal Sales US$/t				$	65.94		–
Gross Revenue		US$000s		$3,663,561		$65.941
Freight & Marketing		US$000s		$	0	$	0.000
Royalty		US$000s		$	0	$	0.000
Gross Income		US$000s		$3,663,561		$65.941
Operating Costs
Underground Mines		US$000s		$1,371,325		$24.683
Underground Mines – Other		US$000s		$	259,958	$	4.679
Undg Interest Expense		US$000s		$	0	$	0
Preparation Plants		US$000s		$	112,310	$	2.021
Preparation Plants – Other		US$000s		$	29,318	$	0.528
Prep Interest Expense		US$000s		$	0	$	0.000
Subtotal Operating Costs		US$000s		$1,772,911		$31.911
Contingency		US$000s		$	0	$	0.000
Total Operating	Costs	US$000s		$1,772,911		$31.911
Cash Cost						$31.911
Operating Margin		US$000s		$1,890,650		$34.030
Capital
Mine Equipment		US$000s		$	4,411		–
Prep Plant Capital		US$000s		$	2,277		–
Other		US$000s		$	0		–
Owners Costs		US$000s		$	0		–
Mine Closure		US$000s		$	0		–
Subtotal Capital		US$000s		$	6,688		–
Contingency		US$000s		$	0
Total Project Capital (Equity) US$000s				($	6,688)

– IV-95 –

COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

Table 9-16 Fengxi Summary Results

Description		Units	Units		Value	$/t-Clean	$/t-Clean
Production
RoM Coal Mined			kt		50,050		–
RoM Coal Sales			kt		1,350		–
Clean Coal Sales			kt		31,655		–
Estimate of Cash Flows
Market Price – RoM Sales		US$/t		$	38.45
Market Price – Clean Coal Sales US$/t				$	65.13		–
Gross Revenue		US$000s		$2,113,595		$66.770
Freight & Marketing		US$000s		$	0	$	0.000
Royalty		US$000s		($	24,409)	($	0.771)
Gross Income		US$000s		$2,089,186		$65.999
Operating Costs
Underground Mines		US$000s		$	896,916	$28.334
Underground Mines – Other		US$000s		$	152,220	$	4.809
Undg Interest Expense		US$000s		$	0	$	0
Preparation Plants		US$000s		$	68,020	$	2.149
Preparation Plants – Other		US$000s		$	16,704	$	0.528
Undg Interest Expense		US$000s		$	0	$	0.000
Subtotal Operating Costs		US$000s		$1,133,859		$35.819
Contingency		US$000s		$	226,772	$	7.164
Total Operating	Costs	US$000s		$1,360,631		$42.983
Cash Cost						$43.754
Operating Margin		US$000s		$	728,555	$23.015
Capital
Mine Equipment		US$000s		$	15,240		–
Prep Plant Capital		US$000s		$	0		–
Other		US$000s		$	9,146		–
Owners Costs		US$000s		$	0		–
Mine Closure		US$000s		$	0		–
Subtotal Capital		US$000s		$	24,386		–
Contingency		US$000s		$	4,877
Total Project Capital (Equity) US$000s				($	29,263)

– IV-96 –

COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

Table 9-17 Chongsheng Summary Results

Description		Units	Units		Value	$/t-Clean	$/t-Clean
Production
RoM Coal Mined			kt		50,516		–
RoM Coal Sales			kt		875		–
Clean Coal Sales			kt		32,266		–
Estimate of Cash Flows
Market Price – RoM Sales		US$/t			38.45
Market Price – Clean Coal Sales US$/t				$	65.13		–
Gross Revenue		US$000s		$2,135,147		$66.173
Freight & Marketing		US$000s		$	0	$	0.000
Royalty		US$000s		($	24,636)	($	0.764)
Gross Income		US$000s		$2,110,511		$65.409
Operating Costs
Underground Mines		US$000s		$	909,289	$28.181
Underground Mines – Other		US$000s		$	153,636	$	4.761
Undg Interest Expense		US$000s		$	0	$	0
Preparation Plants		US$000s		$	69,129	$	2.142
Preparation Plants – Other		US$000s		$	17,027	$	0.528
Undg Interest Expense		US$000s		$	0	$	0.000
Subtotal Operating Costs		US$000s		$1,149,080		$35.612
Contingency		US$000s		$	229,816	$	7.122
Total Operating	Costs	US$000s		$1,378,896		$42.735
Cash Cost						$43.498
Operating Margin		US$000s		$	731,615	$22.674
Capital
Mine Equipment		US$000s		$	51,125		–
Prep Plant Capital		US$000s		$	0		–
Other		US$000s		$	1,820		–
Owners Costs		US$000s		$	0		–
Mine Closure		US$000s		$	0		–
Subtotal Capital		US$000s		$	52,944		–
Contingency		US$000s		$	10,589
Total Project Capital (Equity) US$000s				($	63,533)

– IV-97 –

APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

10. ENVIRONMENT AND SAFETY

The environmental and safety issues were covered in considerable detail for each mine in the feasibility studies. The safety and environmental practices in the Xingtao underground mine were much better than expected and were at a high standard for coal mines in China. That said, there is still room for improvement in both the safety and environment areas for both the surface and underground operations.

It appears from the documentation that all three mine operations have been instructed in the regulations for both safety and environmental improvement and that the practices were meeting China standards and regulations. Great awareness of the importance of appropriate safety practices was observed at all three operations during the site visits in October 2011.

10.1 Safety

One of the primary concerns when assessing a coal mining operation in China is the safety practices and the overall approach to worker’s safety. Historically, the China coal mining industry has had many problems and accidents. The approach in the Ping Lu coal field where the three mines are located is to merge/consolidate the smaller properties and producers into larger tracts that can be mined using highly productive mining methods. This move to larger mines and higher production has also inspired a move to a safer work environment.

The feasibility studies for the three mines included the results of studies to determine the various underground conditions. The results and assessments of these studies are presented in Section 6 of this report and mine designs and layouts were made in consideration of this information. The owners and management have considered the needs resulting from the studies and have developed a safety program to educate and train the workers.

During the site visits to Xingtao, Fengxi and Chongsheng, in October 19 and 20, 2011, Gustavson and BMITC discussed at length with the corresponding mine managers the most relevant aspects of their safety practices and policies. Special emphasis was given to ventilation plans, escape routes, etc. Generally speaking, the information provided by those managers and the team’s independent observations at the three sites show a high level of commitment towards safety practices. Safety-related signs were prominently displayed at various areas of the operations and numerous billboards with safety-education themes were strategically located in the three operations.

Safety equipment, procedures and practices were evident in the three visited operations. New hard hats were worn, safety glasses were used, self rescuers were carried and signs were posted to inform workers of potentially dangerous conditions.

The monitoring at Xingtao is accomplished by way of a state-of-the-art system located in a centralized control room in the main office building, near the mine manager’s office. The system monitors gas, ventilation, diesel emissions, cameras viewing various main areas and the location of every worker that is underground via a Radio Frequency Identification

– IV-98 –

COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

system (RFID). This feature of knowing the location of each person is specifically implemented to provide information in case of any emergency. The system continually records the position of all the workers underground in real-time.

Not all safety issues are solved, but the program and focus on safety at Xingtao is the proper approach and a culture of safety awareness appears to have been developed. The same approach was observed at Fengxi and Chongsheng. At the latter, the team observed continuous movement of equipment of personnel towards and from the underground development works, and it was evident that all the safety features and practices fully implemented at the other two operations are also being adopted. The projects will greatly benefit from a safety program designed for their mines.

Safety at any mine is dynamic and must be continuously monitored and assessed. The management’s approach for these three mines is well organized and is a priority. If this continues, then the mines should continue to be safety-focused and some of the safer mines in China.

10.2 Environmental

10.2.1 Laws & Rules Basis of Environmental Protection and Water and Soil Conservation (As listed in the feasibility studies)

The following are the regulations and control laws for the protection during the construction and operation of all three mine projects. There was no information to suggest that the mines were out of compliance with the design and operating environmental laws and regulations.

“Law of Environment Protection of the People’s Republic of China”, December 26, 1989.
“Air Pollution Prevention and Control Law of the People’s Republic of China”, April 29, 2000.
“Specific Rules for Enforcing the Prevention and Cure Law on Water Pollution of the P.C.C”, March 20, 2000.
“Law on the Prevention of Environmental Pollution from Solid Wastes”, revised on December 29, 2004.
“Law of the People’s Republic of China on the Prevention and Control of Environmental Noise Pollution”, October 29, 1996.
“National Outline of Ecologic Environmental Protection”, November 26, 2002
“Soil and Water Conservation Law of the People’s Republic of China”, June 29, 1991.

– IV-99 –

APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

“Implementation Rules for Water and Soil Conservation Method of the People’s Republic of China”, August 1, 1993.
“Formulation Examination & Approval Management Regulations for Water and Soil Conservation Program of Development Construction Project,” No.5 Command of the Ministry of Water Resources in 1995.
“Management Method for Water and Soil Conservation Program of Development Construction Project”, No.513 document issued by the Ministry of Water Resources, State Development Planning Commission, State Environmental Protection Administration and Water Protection on November 12, 1994.
“Regulations on the Administration of Construction Project Environmental Protection”, November 18, 1998.
“Code for Design of Environmental Protection of Coal Industry.”

The mines are all new or in construction. Observations during the site visit suggest that the construction and operation are to high standards. The mines are in close proximity to each other and the lessons learned at Xingtao appeared to be used to improve the construction process at the other two mines.

The feasibility studies for each mine addressed the environmental standards and regulations that were to be complied with during construction and operation. The mine managers or project managers confirmed that the projects were built as per the feasibility studies. If this is truly the situation, then the mines are in compliance with all local and Chinese Environmental Laws. It would require an extensive audit to determine the exact compliance situation, but observations onsite were that the mines were built/are being built to good standards. Barriers to prevent coal dust from being blown towards populated areas, drainage and sediment control structures, slope stabilization and revegetation of affected areas were some of the environmental measures observed during Gustavson’s site visits in October 2011.

One area of concern to Gustavson and BMITC during their first visit in December 2010 was the amount of dust from the roads and coal piles. As mentioned in the description of the area and climate, the mines are located where the wind blows 270 plus days per year. It was windy and dusty at the site and in the general area during all of the site visit and Xingtao as constructed is stable and reasonable clean. Xingtao looks cleaner and better organized than other mines in the immediate area. Gustavson and BMITC noticed during their visit in October 2011 that several measures had been implemented at the mines in order to mitigate the migration of dust from the coal piles, including the construction of coal-dust barriers around the coal yards. This is an effective control measure and will greatly contribute to mitigate coal dust problems affecting the surrounding areas.

Gustavson and BMITC requested information on any environmental violations, but was told that Xingtao does not have any violations and that inspectors are at Fengxi and Chongsheng for the construction period to correct potential problems as they are noticed.

– IV-100 –

APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

Gustavson and BMITC consider that there has been improvement in the dust control area and the mines need to continue the adopted practices, along with the addition of other measures such as dust-suppression systems at coal transfer and storage areas. Overall, the improvement is noticeable.

11. RISKS, OPPORTUNITIES AND CRITICAL ISSUES

11.1 Risk Summary

The following are the potential risks that Gustavson and BMITC believe may negatively impact the economic or safety potential for the mining operations:

The mining of several successively lower coal seams within a close proximity to each other may cause the development of rock mechanic conditions that will be unsafe or cause the loss of Reserves. Rock mechanics studies need to be done sooner than later and the results integrated into the mine design for the lower seams.
The old mine workings near and above the planned mining areas could be a risk of flooding to the new mine operations, if the old areas are not dewatered in advance. The management of each mine must ensure that the assessment and correction of these old mine areas is done well in advance of any mining that is below the old works. During their visit in October 2011, Gustavson and BMITC were informed that an accident had occurred at another mine in the region, due to a flood originated in old mine works, resulting in 11 casualties. These risks need to be kept in mind and good practices such as advance dewatering need to be implemented at all times.
Gustavson and BMITC are concerned that in later years when the longwall mining moves to lower seams and the equipment is older, that sustaining the projected production levels may be difficult. Good maintenance and rock mechanics applications will need to be continuously applied to maintain high production levels.
Gustavson and BMITC agree with the mining approach and have accepted that the lower seams will have mine plans that will allow the recovery of the Resources in the lower seams. Gustavson and BMITC have a concern that detailed mine plans have not been developed for the lower seams and that the actual plans will need to incorporate detailed rock mechanic studies to maximize the safety and Resource recovery in the lower seams. This planning based on ongoing rock mechanic studies is necessary and needs to be completed as soon as possible. The potential interferences from the mining in the upper seams may require that the mining in the lower seams be changed and these changes could result in a lower recovery of the coal Resources and has the potential to increase operating costs.

– IV-101 –

COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX IV

In later mine years when the mining moves to the 9[-2] and 11 seams, there will be a higher percentage of sulfur in the coal that is produced. Mine management will need to understand that this higher sulfur may reduce the marketability of the coal and potentially reduce income

11.2 Opportunity Summary

The following are areas where Gustavson and BMITC believe that the operations have opportunities for improvements that will increase the safety and or profitability of the mines.

Gustavson and BMITC believe that all three mines will be able to produce at the projected levels or higher, based on the way the mines are constructed or are being constructed, combined with the operating experience from the longwall operations at Xing Tao.
The existence of other mineable seams within the mine boundaries provides the opportunity to add Resources and Reserves by obtaining the mining licenses. This additional Resource is currently estimated at over 59 million tonnes.
There are adjacent properties to Xingtao, Fengxi and Chongsheng that could possibly be purchased to add mining Resources and Reserves.
Each mine has or will have a wash plant with sufficient capacity to process more volume than is currently produced. If the mining production increases, then there is existing processing capacity without additional capital cost.
All the mines operate with or are being built with State-of-the-Art monitoring systems and have a good focus on worker’s safety. Good safety within the mines is not only good for the workers, but helps lower operation costs.

– IV-102 –

APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX A -Certificates of Competent Person

Edmundo J. Laporte Vice President/Director – Mining Services ECSI, LLC 340 South Broadway, Suite 200 Lexington, KY 40508 Telephone: 859-233-2103 Facsimile: 856-259-3394 Email: [email protected] CERTIFICATE of AUTHOR

I, Edmundo J. Laporte do hereby certify that:

I am currently employed as Vice President, Mining by Gustavson Associates, LLC at:

274 Union Boulevard Suite 450

Lakewood, Colorado 80228

I have greater than five years experience relevant to this type of deposit and project.
I hold a Bachelor Degree in Engineering.
I am a Professional Engineer in 14 States in the United States
I am a Professional Engineer in the Province of Alberta, Canada
I am a Chartered Professional Engineer in Australia.
I am a Registered Professional Engineer in Queensland.
I am a Member of the Association of Professional Engineers, Geologists, and Geophysicists of Alberta (APEGGA).
I am a Registered Member of the Society for Mining, Metallurgy & Exploration Inc. (SME).
I do not have any economic or beneficial interest, present or contingent, in any of the report assets.
I have not received a fee dependent on the findings outlined in the Competent Person’s Report.
I am not an officer, employee or proposed officer for the issuer or any group, holding or associate company of the issuer.
I assume overall responsibility for this Competent Person’s Report.
I am a member of the Gustavson team.

Dated this 30 rd day of September, 2011.

/s/Edmundo J. Laporte (Signature)

Signature of Qualified Person

“Edmundo J. Laporte”

Print name of Qualified Person

– IV-103 –

APPENDIX IV COMPETENT PERSON’S REPORT ON THE MINES

APPENDIX B −Glossary of Terms

ABBREVIATIONS AND GLOSSARY OF TERMS

º degrees % percent Ag T he chemical symbol for silver ASL above sea level Au The chemical symbol for gold AusIMM Australasian Institute of Mining and Metallurgy c centimetres C Celsius cm centimetres Cu The chemical symbol for copper E east EW eastwest Fe The chemical symbol for iron g/t grams per tonne HKEx The Stock Exchange of Hong Kong IPO Initial Public Offering JORC Code Australian Joint Ore Reserves Committee code kg/m kilo grams per metre km kilometres km[2] square kilometres kV kilovolt kVa kilovolt m metres m[3] /min cubic metres per minute MLR Ministry of Land and Resources mm millimetres MPa Megapascals m/sec metres per second N north NNE northnorth-east NW northwest Pb The chemical symbol for lead PRC People’s Republic of China RMB Renminbi S south SN southnorth t tonnes t/d tonnes per day t/m[3] tonnes per cubic metre tpa tonnes per annum V volt W west Yuan/t Yuan per tonne

– IV-104 –

APPENDIX V VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

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 30 September 2011 of the fair market value of the 48% equity interest in 山西華美奧能源集團有限公司 and its subsidiaries (referred to as “Huameiao Energy Group”).

==> picture [227 x 77] intentionally omitted <==

8 December 2011

The Directors China Qinfa Group Limited Room 1303, 13th Floor MassMutual Tower No. 38 Gloucester Road Wanchai Hong Kong

Dear Sirs,

INSTRUCTIONS

We refer to the instructions from China Qinfa Group Limited (referred to as the “Company”) for us to provide our opinion on the fair market value of the 48% equity interest in Huameiao Energy Group as at 30 September 2011.

This report presents the purpose and the basis of valuation, the background of Huameiao Energy Group, 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.

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 changes 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.”

– V-1 –

VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

APPENDIX V

**BACKGROUND OF HUAMEIAO ENERGY GROUP AND 朔州市廣發能源投資有限公司 (SHUOZHOU GUANGFA ENERGY INVESTMENT COMPANY LIMITED*) (referred to as “Guangfa Energy”)**

Huameiao Energy Group was established under the laws of the People’s Republic of China (referred to as the “PRC”) as a limited liability company on 12 January 2004 with a fully-paid registered capital of RMB300 million, and its scope of business includes wholesale and retail of construction materials and chemical products.

Huameiao Energy Group has three wholly-owned subsidiaries, namely 山西朔州平魯區華美奧興陶煤業有限公司 (Shanxi Shuozhou Pinglu District Huameiao Xingtao Coal Company Limited) (referred to as “Xingtao Coal”), 山西朔州平魯區華美奧馮西煤業有限公司 (Shanxi Shuozhou Pinglu District Huameiao Fengxi Coal Company Limited) (referred to as “Fengxi Coal”) and 山西朔州平魯區華美奧崇升煤業有限公司 (Shanxi Shuozhou Pinglu District Huameiao Chongsheng Coal Company Limited*) (referred to as “Chongsheng Coal”). Xingtao Coal, Fengxi Coal and Chongsheng Coal (collectively referred to as the “Coal Mine Companies”) hold three coal mines in Shanxi Province, the PRC.

Organization Chart of Huameiao Energy Group

==> picture [398 x 106] intentionally omitted <==

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

Huameiao Energy
100% 100% 100%
Xingtao Coal Fengxi Coal Chongsheng Coal
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According to the announcement of the Company dated 4 November 2011, Guangfa Energy, a limited liability company established on 1 September 2010 under the laws of the PRC and a wholly-owned subsidiary of the Company, has conditionally agreed to acquire the 48% equity interest in Huameiao Energy Group.

The coal mine of Xingtao Coal is located in the eastern part of Pinglu District. There is a good connection between this area and the other locations of the PRC through the existing public roads and railway system. The coal mine of Fengxi Coal is about 2 km from the coal mine of Xingtao Coal and the coal mine of Chongsheng Coal is approximately 5 km from the coal mine of Fengxi Coal.

– V-2 –

VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

APPENDIX V

According to a report named “Competent Person’s Report on the Shanxi Huameiao Energy Group Co, Ltd. Coal Mines Pinglu District, Shuozhou, Shanxi, China” (referred to as the “Competent Person’s Report”), jointly issued by Gustavson Associates, LLC and BMI Technical Consulting (Resources) Limited 30 September 2011, the proved and probable reserves of the Coal Mines under the Australian Code for reporting of Exploration Results, Mineral Resources and Ore Reserves, 2004 edition (referred to as the “JORC Code”) are estimated to be 184.5 million tonnes (Mt). Details of the reserve estimates are summarized as follows:

Marketable Reserves under JORC Code

Coal Mine Xingtao Coal Fengxi Coal Chongsheng Coal Total:	Marketable Reserves (tonnes) Proved Probable Total 68,566,644 13,858,360 82,425,004 23,760,000 27,255,000 51,015,000 32,820,750 18,219,750 51,040,500 125,147,394 59,333,110 184,480,504	Marketable Reserves (tonnes) Proved Probable Total 68,566,644 13,858,360 82,425,004 23,760,000 27,255,000 51,015,000 32,820,750 18,219,750 51,040,500 125,147,394 59,333,110 184,480,504
		184,480,504

INDUSTRY OVERVIEW

The PRC General Economy

According to National Bureau of Statistics （國家統計局）, an agency in charge of statistics and economic accounting in the PRC, the gross domestic product of the PRC in year 2010 was RMB39,798.3 billion, up by 10.3% over the previous year. Analyzed by different industries, the added value of the primary industry was RMB4,049.7 billion, up by 4.3%, that of the secondary industry was RMB18,648.1 billion, up by 12.2% and that of the tertiary industry was RMB17,100.5 billion, up by 9.5%.

– V-3 –

VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

APPENDIX V

GDP Growth Rate of the PRC, 2000-2015 (%)

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

16%
14%
12%
10%
8%
6%
4%
2%
0%
14.2%
12.7%
11.3%
10.3%
10.0% 10.1%
9.6%
9.1% 9.2%
8.4% 8.3% 8.9% 8.6%
8.2% 8.0%
7.4%
2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011F 2012F 2013F 2014F 2015F
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Source: National Bureau of Statistics of the PRC, Economist Intelligence Unit

The general level of consumer price of the PRC in year 2010 went up by 2.2% over the previous year. Of this total, the price for food went up by 7.2%. The prices for investment in fixed assets increased by 3.6%. The producer prices for manufactured goods were up by 5.5%. The purchasing prices for raw materials, fuels and power went up by 9.6%. The producer prices for farm products were up by 10.9%.

Consumer Price Growth Rate of the PRC, 2005-2015 (%)

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

7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
5.9%
4.8%
4.4%
4.1% 4.0%
3.8%
3.7%
3.3%
1.8%
1.5%
-0.7%
2005A 2006A 2007A 2008A 2009A 2010A 2011F 2012F 2013F 2014F 2015F
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Source: National Bureau of Statistics of the PRC, Economist Intelligence Unit

– V-4 –

VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

APPENDIX V

In year 2010, the PRC overtook Japan to become the world’s second-largest economy.

According to Economist Intelligence Unit, a global provider of country, industry and management analysis, real GDP growth in the PRC will reach 9.0% in year 2011, as stimulus spending comes to an end and policy tightening leads to a slowdown in fixed investment. In year 2012 to year 2015, GDP growth of the PRC will slow down to an annual average rate of 8.27%. This largely reflects a slowing of investment as the side effects of the stimulus package are emerged, such as high inflation, the record high housing price.

The contribution from net exports will also weaken, as the rising Renminbi, anaemic growth in many developed economies and declining competitiveness cause export growth to slow down relative to imports. Also, the second dip recession in western countries hit the export oriented economies.

The PRC Coal Industry

Coal is an important source of energy and an essential material in iron and steel production. According to BP statistical review of world energy, June 2011, the PRC ranked the third in proven coal reserve in the world with approximate 114,500 Mt at end of 2010.

World Proved Coal Reserve at end 2010

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US
Russian Federation
20%
China
28% Australia
India
Germany
Others
5%
7%
18%
9%
13%
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Source: BP Statistical Review of World Energy June 2011

According to the BP Statistical Review of World Energy, June 2011, the United States of America (referred to on the “U.S.”) has proved coal reserve of 237,295 Mt , which ranked the first in the world. Followed by Russian Federation and the PRC with 157,010 Mt and 114,500 Mt. The top 3 controlled around 59% of the total global proved coal reserve.

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VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

APPENDIX V

Energy Consumption of the PRC in 2009

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Coal
70%
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Crude Oil
28%
Hydro Power, Nuclear
Power, and Other Power
8%
Natural Gas
4%
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Source: CEIC Database

Due to the rapid development of the PRC economy, the demand for energy becomes greater. According to CEIC Data Company Ltd (referred to as “CEIC database”), coal is the dominant source of energy in the PRC energy portfolio contributing about 70% to the total energy consumption. 50% of coal produced was used for electricity generation in the end of year 2008.

Production of Coal Top Five Provinces in the PRC, 2009

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Shannxi
10%
Henan
Others 8%
35%
Shangdong
5%
Shanxi
20%
Inner
Mongolia
22%
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Source: CEIC Database

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VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

APPENDIX V

Inner Mongolia and Shanxi provinces are the major producers and they contribute 44% of the coal production to the whole country. As mine safety is one of the industry key issues, the PRC government closed down more than 1,000 small coal mines in year 2009. In the future, the PRC government is likely to shut down the smaller coal mines. This policy will facilitate the industry integration and favour the middle to large coal mine producers.

The PRC is a world leader in terms of both reserves and production of coal. In the first 8 months of year 2011, the production of raw coal was 2,343 Mt, an increase of 8.01% period on period. The production of coal in March, April and May were 317 Mt, 316 Mt and 323 Mt, respectively. The compound annual growth rate (“CAGR”) of the coal production between year 2000 and year 2010 was 8.74%. However, this growth may not cope with the increasing demand as there were 7.87 Mt of coal imported to the PRC in the first half of year 2010, up 19.86% year on year.

Shanxi Shou Zhou City, Thermal Coal, 5200 KJ, FOR Price (RMB/Ton)

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600.00
550.00
500.00
450.00
400.00
350.00
Shanxi Shou Zhou City, Thermal Coal, 5200 KJ, FOR Price (RMB/Ton)
Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11
----- End of picture text -----

The strong domestic demand has driven the coal price. For example, the free on train (“referred to as FOR”) thermal coal price in Shouzhou city reached a highest level since year 2008 and up around 19.0% in the first nine months of year 2011. With the strong fundamental demand for coal and industry reformation, the future of the coal mining industry remains bright.

SOURCE OF INFORMATION

For the purpose of our valuation, we have been furnished with the information in respect of Huameiao Energy Group 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 Huameiao Energy Group including the overall market, industry sector and geographical location;
The information in respect of Huameiao Energy Group provided by the senior management of the Company;

– V-7 –

APPENDIX V VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

The Competent Person’s Report in respect of the Coal Mines prepared by the Competent Person;
The specific economic environment and competition for the market in which Huameiao Energy Group currently operates or will operate; and
Other factors that will materially affect the operation of Huameiao Energy Group.

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 with the senior management of the Company and obtained relevant information in respect of Huameiao Energy Group;
Conducted on-site inspection to the Coal Mines in October 2011;
Examined the information in respect of Huameiao Energy Group provided by the senior management of the Company;
Examined the information in respect of the Coal Mine Companies stated in the Competent Person’s Report;
Conducted research and prepared the valuation based on generally accepted valuation procedures and practices; and
Presented the purpose and the basis of valuation, the background of Huameiao Energy Group, 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 licenses and permits issued by any authorized entity that will materially affect the operation of Huameiao Energy Group been obtained or can be obtained upon request;
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 Huameiao Energy Group currently operates or will operate;
The core operation of Huameiao Energy Group will not differ materially from those of present or expected;

– V-8 –

APPENDIX V VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

The information in respect of Huameiao Energy Group 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 Mines stated in the Competent Person’s Report have been prepared on a reasonable basis after due and careful considerations by the Competent Person; and
There will be no human disruptions or natural disasters that will materially affect the operation of Huameiao Energy Group.

VALUATION METHODOLOGY

The Valuation Approaches

The following generally accepted valuation approaches have been considered in the valuation:

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 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 was considered to be the most appropriate valuation approach in this valuation, as it takes the future growth potential and asset-specific issues of Huameiao Energy Group 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 Production Schedule

According to the Competent Person’s Report, the planned productions of the Xingtao Coal, Fengxi Coal and Chongsheng Coal in year 2012 are 4.0 Mt, 3.5 Mt and 2.8 Mt respectively as advised by the Company is achievable as it is the existing production capacity. After year 2012, the planned productions of Xingtao, Fengxi and Chongsheng will reach 4.0 Mt, 3.5 Mt and 3.5 Mt respectively as stated in the Competent Person’s Report.

– V-9 –

APPENDIX V VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

The expired coal production permits and the expanded mining licenses of Xingtao, Fengxi and Chongsheng of 1.5 Mt, 0.9 Mt and 0.9 Mt respectively are currently under application and the Company believes that the expanded mining license will be obtained without substantial time, cost and any other difficulties.

The PRC Legal Adviser also confirmed that various licenses will be reasonable in the future if proper procedures established by the licensing agencies are followed.

The coal price

According to the Competent Person’s Report, the selling price of the clean coal per ton in year 2011 is US$65.51 and the exchange rate of US Dollar to RMB is 6.56. As a result, RMB429.74 clean coal per ton which excludes 17% of the value added tax (referred to as “VAT”) was adopted in our valuation.

Liabilities of Huameiao Energy Group

As advised by the senior management of the Company and with reference to Clause 4.1 in the Equity Interest Transfer Agreement dated 26 October 2011 provided by the senior management of the Company (referred to as the “Equity Interest Transfer Agreement”), the Company and Guangfa Energy do not have any obligation to bear any liabilities or any future liabilities (referred to as the “Liabilities”) that occurred before the date of sign . As a result, our valuation does not include the effect of the liabilities in the balance sheets of Xingtao Coal, Fengxi Coal and Chongsheng Coal.

Current Assets of Huameiao Energy Group

As advised by the senior management of the Company and with reference to the Clause 4.1 in the Equity Interest Transfer Agreement, part of the current assets of Xingtao Coal, Fengxi Coal and Chongsheng Coal (referred to as the “Current Assets”) are contributed from the Liabilities. In our valuation, we do not include the effect of the Current Assets.

The Capital Expenditure

According to the Competent Person’s Report, the initial capital expenditure of the Coal Mines is around RMB666 Million.

In accordance to statement 3 in the Supplementary Agreement of the Equity Interest Transfer Agreement and the explanation of the senior management of the Company, the Company and Guangfa Energy have no any obligation to bear any capital expenditure on the mines of Xingtao Coal and Chongsheng Coal, except the capital expenditure for developing coal seam No. 9 of Fengxi Coal.

– V-10 –

VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

APPENDIX V

The Comparable Companies

In the valuation, certain publicly listed companies that are considered to be comparable to the Coal Mines (referred to as the “Comparable Companies”) have been selected.

List of the Comparable Companies

China Coal Energy Company Ltd.
Shanxi Lu’an Environmental Energy Development Co., Ltd.
Kailuan Energy Chemical Co., Ltd
Shanxi Xishan Coal & Electricity Power Co., Ltd.
Jizhong Energy Resources Co., Ltd.
Datong Coal Industry Co., Ltd. 7. Guizhou Panjiang Refind Coal Co., Ltd.

Bloomberg Ticker 601898 CH 601699 CH 600997 CH 000983 CH 000937 CH 601001 CH 600395 CH

We selected the Comparable Companies based on 3 major criteria:

The companies are principally engaged in coal mining;
The companies’ principal business were located in the PRC; and
The financial information of the companies is 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 and it is believed that the list of the Comparable Companies is exhaustive.

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

– V-11 –

APPENDIX V VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

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 R = risk-free rate f β = beta coefficient MRP = market risk premium

The yield rate of the 10-year U.S. Treasury Bonds of 1.92% was adopted as the risk-free rate in the valuation.

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 6.42% was determined by the market risk premium of the U.S. and the country risk premium of the PRC.

The beta coefficient measures the risk of an asset relative to the overall market. To determine the beta coefficient of Huameiao Energy Group, the unlevered beta was 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 1.259 was then being relevered based on the specific corporate tax rate and the weight of debt applied to Huameiao Energy Group. The beta coefficient was then calculated as 1.348.

To convert the cost of equity in U.S. dollars into a cost of equity in local currency, the figure was scaled by 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 U.S. dollar IRLC = inflation rate of a specific country IRUS = inflation rate of the U.S.

In addition, a company specific premium with 3.00% was added to cost of equity. As a result, the cost of equity was calculated as 15.59%.

– V-12 –

VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

APPENDIX V

The cost of debt of 7.05% was determined by the expected lending rate of Huameiao Energy Group. 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 5.29% was calculated by multiplying one minus the corporate tax rate of the PRC of 25.00% by the cost of debt.

The weight of debt of 8.59% was determined by the average of the weights of debt of the Comparable Companies, and the weight of equity of 91.41% was calculated as one minus the weight of debt. As a result, the WACC of Huameiao Energy Group was calculated as 14.71%.

The Discount for the 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 is a downward adjustment to the value of an investment to reflect its reduced level of marketability. In the valuation, 13.00% has been adopted as the discount for the lack of marketability.

SENSITIVITY ANALYSIS

The sensitivity analysis has been applied to determine the impact of changes in the discount rate and clean coal price on the fair market value of Huameiao Energy Group. The results of the sensitivity analysis were as follows:

Change in		Concluded Fair	Change in Fair
Discount Rate	Discount Rate	Market Value	Market Value
(%)	(%)	(RMB in Million)	(%)
+2%	16.71%	2,716	-11.0%
+1%	15.71%	2,876	-5.8%
Base level	14.71%	3,053	0%
-1%	13.71%	3,247	6.4%
-2%	12.71%	3,462	13.4%
Change in
Clean Coal	Clean Coal	Concluded Fair
Price per Ton	Price per Ton with	Market Value with	Change in Fair
with 17% VAT	17% VAT	17% VAT	Market Value
(RMB)	(RMB)	(RMB in Million)	(%)
+10%	550	3,784	23.9%
+5%	525	3,418	12%
Base level	500	3,053	0%
-5%	475	2,687	-12%
-10%	450	2,322	-24%

– V-13 –

VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

APPENDIX V

REMARKS

For the purpose of our valuation, we have been furnished with the information in respect of Huameiao Energy Group 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 Renminbi (RMB).

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, Huameiao Energy Group, Guangfa Energy or us.

Based on our investigation and analysis outlined in this report, it is our opinion that the fair market value of the 48% equity interest in Huameiao Energy Group as at 30 September 2011 was RMB3,053,000,000 (RENMINBI THREE THOUSAND AND FIFTY THREE MILLION ONLY) .

We hereby certify that we have neither present nor prospective interest in the Company, Huameiao Energy Group, Guangfa Energy or the result reported.

Yours faithfully, For and on behalf of

BMI APPRAISALS LIMITED

Marco T. C. Sze

B.Eng(Hon), PGD(Eng), MBA(Acct), CFA, AICPA/ABV, RBV Director

C. S. Kong

Bsc, MSc, MA(Econ), EurGeol CGeol, FGS, CSci, MIMMM MAusIMM(CP), HKCPG Director

– V-14 –

VALUATION REPORT ON THE 48% EQUITY INTEREST IN HUAMEIAO ENERGY GROUP

APPENDIX V

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.

– V-15 –

LETTER IN RELATION TO DISCOUNTED FUTURE ESTIMATED CASH FLOWS

APPENDIX VI

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Unit 1305, 13 Floor, Carpo Commerical Building, 18-20 Lyndhurst Terrace, Central, Hong Kong

8 December 2011

The Board of Directors CHINA QINFA GROUP LIMITED Room 1303, 13th floor, MassMutual Tower 38 Gloucester Road Wanchai Hong Kong

Dear Sirs,

We refer to the valuation dated 8 December 2011 prepared by the BMI Appraisals Limited (the “Valuers”) in relation to the appraisal of the fair market value of the 48% equity interest of Huameiao Energy Group (the “Valuation”). As stated in the valuation report from the Valuer, the Valuation has been arrived at and based on the income approach, which takes into account the cash flow projection of the business relating to the Huameiao Energy Group for the period from 2011 to 2032 (the “Projection”). As such, the Projection is regarded as a profit forecast under Rule 14.61 of the Listing Rules. Terms used in this letter have the same meanings as defined elsewhere in the circular dated 8 December 2011 (the “Circular”), of which this letter forms part, unless the context requires otherwise.

We have reviewed the Projection upon which the Valuation has been made, and have discussed with you and the Valuer the information and documents provided by you, which formed part of the bases and assumptions upon which the Projection have been made. We have also considered, and relied upon, the letter addressed to the Board from Mabel Chan & Co., as set out in Appendix VI to the Circular regarding the calculations for the Projection also have been made.

On the basis of the foregoing, we are satisfied that the Projection for which you as the directors of the Company are solely responsible, have been made after due and careful enquiry.

Yours faithfully, For and on behalf of

Donvex Capital Limited Doris Sy Director

– VI-1 –

LETTER IN RELATION TO DISCOUNTED FUTURE ESTIMATED CASH FLOWS

APPENDIX VI

Mabel Chan & Co. Certified Public Accountants

Suites 2208-11, 22/F., Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong Tel: (852) 2122 9736 Fax: (852) 2180 9163

ACCOUNTANTS’ REPORT ON PROFIT FORECASTS TO THE DIRECTORS OF CHINA QINFA GROUP LIMITED

We have reviewed, in accordance with the Auditing Guideline 3.341 “Accountants’ report on profit forecasts” issued by the Hong Kong Institute of Certified Public Accountants, the accounting policies adopted and calculations made in arriving at the forecast of the profit from Shanxi Huameiao Energy Group Company Limited (the “Target Group”) attributable to China Qinfa Group Limited (the “Company”) for the year ending 31 December 2011 (the “Profit Forecast”), for which the Directors are solely responsible, as set forth in the section headed Financial Information in the circular of the Company dated 8 December 2011 (the “Circular”).

The Profit Forecast has been prepared by the Directors based on the audited results of the Target Group for the six-month period ended 30 June 2011.

In our opinion, so far as the accounting policies and calculations are concerned, the Profit Forecast has been properly compiled in accordance with the bases and assumptions made by the Directors as set out in Appendix V of the Circular and is presented on a basis consistent in all material respects with the accounting policies normally adopted by the Group.

Mabel Chan & Co.

Certified Public Accountants Hong Kong, 8 December 2011

– VI-2 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

The following is the text of a letter, summary of values and valuation certificates, prepared for the purpose of incorporation in this circular received from BMI Appraisals Limited, an independent valuer, in connection with its valuations as at 30 September 2011 of the properties located in the People’s Republic of China and Hong Kong.

==> picture [227 x 77] intentionally omitted <==

8 December 2011

The Directors

Room 1303, 13th Floor MassMutual Tower No. 38 Gloucester Road Wanchai Hong Kong

Dear Sirs,

INSTRUCTIONS

We refer to your instructions for us to value the properties held / leased by China Qinfa Group Limited (the “Company”) and / or its subsidiaries (together referred to as the “Group”) located in the People’s Republic of China (the “PRC”) and Hong Kong and the properties held / leased by Shanxi Huameiao Energy Group Company Limited (the “Target Company”) and / or its subsidiaries (hereinafter referred to as the “Target Group”) located in the PRC. We confirm that we have conducted inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market values of the properties as at 30 September 2011 (the “date of valuation”).

BASIS OF VALUATION

Our valuations of the concerned properties have been based on the Market Value, which is defined as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”.

– VII-1 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

PROPERTY CATEGORISATIONS

In the course of our valuations, the portfolio of the properties are categorised into the following groups:–

Group I – Properties held for owner-occupation by the Group in the PRC Group II – Property held by the Group under development in the PRC Group III – Property partly held for owner-occupation and partly leased by the Group in the PRC
Group IV – Properties leased or provided to and occupied by the Group in the PRC
Group V – Property leased by the Group in Hong Kong Group VI – Properties held for owner-occupation by the Target Group in the PRC
Group VII – Property partly held for owner-occupation and partly held under development by the Target Group in the PRC
Group VIII – Properties partly leased and partly held under development / held and occupied by the Target Group in the PRC
Group IX – Property leased by the Target Group in the PRC

VALUATION METHODOLOGIES

We have valued Property No. 1 on market basis by the Comparison Approach assuming sale in its existing state with the benefit of vacant possession and by making reference to comparable sales evidence as available in the market. Appropriate adjustments have been made to account for the differences between the property and the comparables in terms of time, floor level, size and other relevant factors.

In valuing Property No. 2, we have adopted the Depreciated Replacement Cost Approach. Depreciated replacement cost is defined as “the aggregate amount of the value of the land for the existing use or a notional replacement site in the same locality and the new replacement cost of the buildings and other site works, from which appropriate deductions may then be made to allow for the age, condition, economic or functional obsolescence and environmental factors, etc.; all of these might result in the existing property being worth less to the undertaking in occupation than would a new replacement”. This basis has been used due to the lack of an established market upon which to base comparable transactions, which generally furnishes the most reliable indication of values for assets without a known used market. This opinion of value does not necessarily represent the amount that might be realized from the disposition of the subject asset in the market and is subject to adequate profitability of the business compared to the value of the total assets employed.

For Property Nos. 4 and 17 to 19, we have assumed that the properties will be developed and completed in accordance with the latest development proposal provided to us. We have adopted the direct comparison approach by making reference to the comparables

– VII-2 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

sales evidence as available in the relevant market and have also taken into account the accrued construction cost and professional fees relevant to the stage of construction as at the date of valuation and the remainder of the cost and fees expected to be incurred for completing the development.

We have attributed no commercial value to the remaining properties due either to the short-term nature of the leases or the prohibition against assignment or sub-letting or otherwise due to the lack of substantial profit rents or that the titles of the properties are not vested in the Group or the Target Group.

TITLE INVESTIGATION

We have been provided with copies of title documents and have been advised by the Group that no further relevant documents have been produced. However, we have not examined the original documents to verify ownership or to ascertain the existence of any amendment documents, which may not appear on the copies handed to us. In the course of our valuations, we have relied upon the advice and information given by the Group’s PRC legal advisor – Zhong Lun Law Firm（中倫律師事務所）regarding the title of the properties located in the PRC. All documents have been used for reference only.

VALUATION ASSUMPTIONS

Our valuations have been made on the assumption that the properties are sold in the market without the benefit of deferred terms contract, leaseback, joint venture, management agreement or any other similar arrangement which would serve to affect the values of the properties.

In addition, no account has been taken of any option or right of pre-emption concerning or affecting the sale of the properties and no forced sale situation in any manner is assumed in our valuations.

VALUATION CONSIDERATIONS

We have inspected the properties externally and where possible, the interior of the properties. In the course of our inspections, we did not note any serious defects. However, no structural surveys have been made. We are, therefore, unable to report whether the properties are free from rot, infestation or any other structural defects. No tests were carried out on any of the services.

In the course of our valuations, we have relied to a considerable extent on the information given by the Group and have accepted advice given to us on such matters as planning approvals or statutory notices, easements, tenures, particulars of occupancy, site / floor areas, completion dates of the buildings, identification of the properties and other relevant information.

Except otherwise stated, dimensions, measurements and site / floor areas included in the valuation certificates are based on information contained in the leases and other documents provided to us and are therefore only approximations.

– VII-3 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

We have not carried out detailed on-site measurements to verify the correctness of the site / floor areas in respect of the properties but have assumed that the site / floor areas shown on the documents handed to us are correct.

We have no reason to doubt the truth and accuracy of the information provided to us by the Group and we have relied on your confirmation that no material facts have been omitted from the information provided. We consider that we have been provided with sufficient information for us to reach an informed view.

No allowance has been made in our valuations for any charges, mortgages or amounts owing on the properties or for any expenses or taxation, which may be incurred in effecting a sale or purchase.

Unless otherwise stated, it is assumed that the properties are free from encumbrances, restrictions and outgoings of an onerous nature, which could affect their values.

Our valuations have been prepared in accordance with the HKIS Valuation Standards on Properties (First Edition 2005) published by the Hong Kong Institute of Surveyors.

Our valuations have been prepared under the generally accepted valuation procedures and are in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

REMARKS

We hereby certify that we neither have any present nor any prospective interest in the Group or the appraised properties or the values reported.

Unless otherwise stated, all monetary amounts stated herein are in Renminbi (RMB).

Our summary of values and the valuation certificates are attached herewith.

Yours faithfully, For and on behalf of

BMI APPRAISALS LIMITED Dr. Tony C.H. Cheng Joannau W.F. Chan BSc., MUD, MBA(Finance), MSc.(Eng), PhD(Econ), BSc., MSc., MRICS, MHKIS, RPS(GP) SIFM, FCIM, CPA UK, MHKIS, MCIArb, Senior Director MASCE, MIET, MIEEE, MASME, MIIE

Managing Director

Notes: Dr. Tony C. H. Cheng is a member of the Hong Kong Institute of Surveyors (General Practice) who has over 18 years’ experience in valuations of properties in Hong Kong and the People’s Republic of China.

Ms. Joannau W.F. Chan is a member of The Hong Kong Institute of Surveyors (General Practice) who has over 18 years’ experience in valuations of properties in Hong Kong and over 12 years’ experience in valuations of properties in the People’s Republic of China.

– VII-4 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

SUMMARY OF VALUES

No. Property

Market Value in existing state as at 30 September 2011 RMB

Group I – Properties held for owner-occupation by the Group in the PRC

1.
Unit Nos. 2201 to 2208, Level 22, Tower B,
Poly International Plaza,
No. 1 Pa Zhou Avenue East,
Haizhu District,
Guangzhou City,
Guangdong Province,
The PRC
中國廣東省
廣州市海珠區
琶洲大道東1號
保利國際廣場B座第22層2201至2208室
2.
A parcel of land (Land Parcel No. 140232203007), various
buildings and structures located at
Xiezhuang Village,
Beijiazao Town,
Datong County,
Shanxi Province,
The PRC
位於中國山西省
大同縣倍加造鎮
解莊村之一塊土地（地號：140232203007）、若干房屋及構築物
3.
A parcel of land, various buildings and structures located at
Qiangfengling,
Hunyuan County,
Datong City,
Shanxi Province,
The PRC
位於中國山西省
大同市渾源縣
搶風岭
之一塊土地、若干房屋及構築物
Sub-total:

42,200,000
21,340,000
No Commercial Value

63,540,000

– VII-5 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

No. Property

Market Value in existing state as at 30 September 2011 RMB

Group II – Property held by the Group under development in the PRC

A public coal terminal under construction located at the No Commercial Value North Coast of Gaolan Harbour, Zhuhai City, Guangdong Province, The PRC

位於中國廣東省珠海市高欄港北順岸之在建公用煤碼頭

Sub-total: Nil

Group III – Property partly held for owner-occupation and partly leased by the Group in the PRC

2 parcels of land, various buildings and No Commercial Value structures located at the north of Dongguan Village, Xicheng Town, Yangyuan County, Zhangjiakou City, Hebei Province, The PRC

位於中國河北省張家口市陽原縣西城鎮東關村以北之兩塊土地、若干房屋及構築物

Sub-total: Nil

– VII-6 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

No. Property

Market Value in existing state as at 30 September 2011 RMB

Group IV – Properties leased or provided to and occupied by the Group in the PRC

Units 10 and 11, Level 22, Yuecai Building, No. 188 Jing Shan Road, Zhuhai City, Guangdong Province, The PRC 中國廣東省珠海市景山路188號粵財大廈第22層 10及11室 7. Rooms 1107-1108, Holiday Inn Pudong Shanghai, No. 899 Dong Fang Road, Pudong District, Shanghai, The PRC 中國上海市浦東區東方路899號上海浦東假日酒店 1107及1108室 8. Rooms 801, 802, 805 to 809 and 816 to 818, Qinfa Holiday Hotel, No. 123 Ying Bin Road, Qinhuangdao City, Hebei Province, The PRC 中國河北省秦皇島市迎賓路123號秦發假日酒店 801、802、805至809及816至818室

No Commercial Value

– VII-7 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

No. Property

Room 551, Gaolan Custom Administrative Building, Zhuhai City, Guangdong Province, The PRC

Market Value in existing state as at 30 September 2011 RMB No Commercial Value

中國廣東省珠海市高欄海關辦公大樓551室

Room 102, Ancillary Block of Gaolan Custom Administrative Building, Zhuhai City, Guangdong Province, The PRC

No Commercial Value

中國廣東省珠海市高欄海關辦公大樓附屬大樓102室

Room 103, No Commercial Value Ancillary Block of Gaolan Custom Administrative Building, Zhuhai City, Guangdong Province, The PRC 中國廣東省珠海市高欄海關辦公大樓附屬大樓103室 12. Portion of the Ancillary Block of Da Chang Quick Hotel No Commercial Value located at Heng Shan North Road, Hunyuan County, Datong City, Shanxi Province, The PRC

位於中國山西省大同市渾源縣恒山北路之大昌快捷酒店附樓之部分

– VII-8 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

No. Property

Market Value in existing state as at 30 September 2011 RMB

Room 102, front shop and the basement, Gate 1, Block 4, Yuanlinxiaoqu, Shuozhou City Development Zone, Shanxi Province, The PRC

No Commercial Value

中國山西省朔州市開發區園林小區4號樓一單元102室及前門面房及地下室

Sub-total:

Nil

Group V – Property leased by the Group in Hong Kong

Room 1303 on 13th Floor, MassMutual Tower, No. 38 Gloucester Road, Wanchai, Hong Kong

No Commercial Value

香港灣仔告士打道38號美國萬通大廈13樓1303室

Sub-total:

Nil

Group VI – Properties held for owner-occupation by the Target Group in the PRC

A parcel of land, various buildings and structures located at No Commercial Value Xisunzhuang Village North, Taocun Township, Pinglu District, Shuozhou City, Shanxi Province, The PRC

位於中國山西省朔州市平魯區陶村鄉西孫莊村北之一塊土地、若干房屋及構築物

– VII-9 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

No. Property

Market Value in existing state as at 30 September 2011 RMB

Block 5, Xingfu Yin Estate, Er Ji Road, Shuozhou City, Shanxi Province, The PRC

No Commercial Value

中國山西省朔州市二級路幸福銀苑5號樓

Sub-total:

Nil

Group VII – Property partly held for owner-occupation and partly held under development by the Target Group in the PRC

A parcel of land, various buildings and structures located at No Commercial Value the west of Fengjialing Village, Xiamiangao Township, Pinglu District, Shuozhou City, Shanxi Province, The PRC

位於中國山西省朔州市平魯區下面高鄉馮家岭村西之一塊土地、若干建築物及構築物

Sub-total:

Nil

Group VIII – Properties partly leased and partly held under development / held and occupied by the Target Group in the PRC

3 Parcels of land, various buildings and structures located in No Commercial Value Xiamiangao Village, Xiamiangao Township, Pinglu District, Shuozhou City, Shanxi Province, The PRC

位於中國山西省朔州市平魯區下面高鄉下面高村之三塊土地、若干房屋及構築物

– VII-10 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

No. Property

A parcel of land, 3 buildings and various buildings and structures under development located in Fengjialing Village, Xiamiangao Village and Beiyandun Village, Xiamiangao Township, Pinglu District, Shuozhou City, Shanxi Province, The PRC

Market Value in existing state as at 30 September 2011 RMB No Commercial Value

位於中國山西省朔州市平魯區下面高鄉馮家嶺村、下面高村及北煙墩村之一塊土地、3棟房屋及在建中之若干房屋及構築物

Sub-total: Nil Group IX – Property leased by the Target Group in the PRC 20. 11 office units on No Commercial Value Level 3, Huayuan International Tower, Zhenhua East Street, Shuozhou City Development Zone, Shanxi Province, The PRC

中國山西省朔州市開發區振華東街華源國際大廈3樓之11間辦公室

Sub-total: Grand-total:	Nil
	63,540,000

– VII-11 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Group I – Properties held for owner-occupation by the Group in the PRC

				Market Value in
			Particulars of	existing state as at
No.	Property	Description and tenure	occupancy	30 September 2011
				RMB
1.	Unit Nos. 2201 to 2208,	The property comprises 8	The property is	42,200,000
	Level 22, Tower B,	office units on Level 22 of a	occupied by the
	Poly International Plaza,	34-storey office building	Group for office
	No. 1 Pa Zhou	completed in about 2007.	purpose.
	Avenue East,
	Haizhu District,	The total gross floor area
	Guangzhou City,	(“GFA”) of the property is
	Guangdong Province,	approximately 1,758.35 sq.m.
	The PRC
		The land use rights of the
	中國廣東省	property have been granted for
	廣州市海珠區	a term of 50 years
	琶洲大道東1號	commencing on 2 June 2004
	保利國際廣場B座	for office use.
	第22層2201至2208室

Notes:

Pursuant to 8 Commodity House Sale and Purchase Agreement entered into between Poly Real Estate Group Company Limited（保利房地產（集團）股份有限公司）and Zhuhai Qinfa Trading Company Limited

（珠海秦發貿易有限公司）(“Zhuhai Qinfa Trading”) dated 19 December 2006, the property with a total GFA of approximately 1,786.56 sq.m. was contracted to be purchased by the Zhuhai Qinfa Trading at a total consideration of RMB27,661,009.

Pursuant to 8 Real Estate Title Certificates, Yue Fang Di Quan Zheng Sui Zi Di Nos. 0820005907, 0820005908, 0820005909, 0820005910, 0820005911, 0820005912, 0820005913 and 0820005914, the land use rights of the property have been granted for a term of 50 years commencing on 2 June 2004 for office use and the building ownership rights of the property with a total gross floor area of approximately 1,758.35 sq.m. are legally vested in Zhuhai Qinfa Trading.
The opinion given by the PRC legal advisor to the Group is as follows:
a. The land use rights and the building ownership rights of the property are legally vested in Zhuhai Qinfa Trading and Zhuhai Qinfa Trading has the rights to use, transfer and lease the property;
b. The property is subject to mortgages in favour of Bank of China (Hong Kong) Limited Shenzhen Branch（中國銀行（香港）有限公司深圳分行）with a common loan term commencing on 30 January 2007 and expiring on 15 February 2022; and
c. Apart from the above mentioned mortgages, the property is not subject to any other material encumbrances.
Zhuhai Qinfa Trading is an indirectly wholly-owned subsidiary of the Company.

– VII-12 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Market Value in Particulars of existing state as at No. Property Description and tenure occupancy 30 September 2011 RMB 2. A parcel of land The property comprises a land The property is 21,340,000 (Land Parcel No. parcel with a site area of occupied by the 140232203007), approximately 106,460 sq.m. Group for coal various buildings and and 12 buildings and various transportation station structures located at ancillary structures completed purpose. Xiezhuang Village, in various stages between Beijiazao Town, 1999 and 2011 erected Datong County, thereon. Shanxi Province, The PRC The total gross floor area (“GFA”) of the buildings is 位於中國山西省 approximately 3,205.87 sq.m. 大同縣倍加造鎮解莊村之一塊土地 The buildings mainly include (地號:140232203007)、 office buildings, dormitories 若干房屋及構築物 and a pump room.

The structures mainly include a water tower, walls, a well, railway links and roads.

The land use rights of the property have been granted for a term expiring on 9 April 2053 for coal station use.

Notes:

Pursuant to a State-owned Land Use Rights Certificate, Da Guo Yong (2003) Zi Di No. 01005, the land use rights of the property with a site area of approximately 106,460 sq.m. have been granted to Datong Xiejiazhuang Jinfa Trading and Transportation Company Limited（大同解家莊晉發運銷有限公司） (“Datong Jinfa”) for a term expiring on 9 April 2053 for coal station use.
Pursuant to 3 Building Ownership Certificates, Da Fang Quan Zheng Bei Zi Di No. B0500004 and Da Fang Quan Zheng Da Tong Xian Zi Di Nos. B0500011 and B0500012, the building ownership rights of 9 buildings of the property with a total GFA of approximately 3,125.87 sq.m. are legally owned by Datong Jinfa.
For the remaining 3 buildings of the property with a total GFA of approximately 80 sq.m., we have not been provided with any title certificates.
In the valuation of this property, we have attributed no commercial value to the buildings stated in Note 3 as relevant title certificates of the buildings have not been obtained. However, for your reference purpose, we are of the opinion that the depreciated replacement cost of the buildings (excluding the land) as at the date of valuation would be in the sum of approximately RMB60,000 assuming all relevant title certificates have been obtained and the buildings could be freely transferred in the market.

– VII-13 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

The opinion given by the PRC legal advisor to the Group is as follows:
a. The land use rights of the property are legally vested in Datong Jinfa and Datong Jinfa has the rights to use, transfer, mortgage and lease the land use rights of the property with the residual term of the land use rights;
b. The land premium of the property has been settled in full;
c. The land use rights and the buildings of the property with relevant title certificates are not subject to mortgage, lease and other encumbrances;
d. The building ownership rights of the property with title certificates are legally vested in Datong Jinfa and Datong Jinfa has the rights to use, transfer, lease or mortgage the buildings of the property; and
e. The title certificates of the 3 buildings stated in Note 3 have not been obtained, thus the ownership of these buildings cannot be ascertained.
Datong Jinfa is an indirectly wholly-owned subsidiary of the Company.

– VII-14 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Market Value in Particulars of existing state as at No. Property Description and tenure occupancy 30 September 2011 RMB 3. A parcel of land, various The property comprises a land As advised by the No Commercial Value buildings and structures parcel with a site area of Group, the property is located at approximately 79,000 sq.m. occupied by Shanxi Qiangfengling, and 25 buildings and various Hunyuan Ruifeng Hunyuan County, ancillary structures completed Coal Mine Limited Datong City, in various stages between （山西渾源瑞豐煤業有限 Shanxi Province, 1990 and 2007 erected 公司）(“Ruifeng The PRC thereon. Coal”) for industrial, ancillary office and 位於中國山西省 The total gross floor area storage purposes. 大同市渾源縣 (“GFA”) of the buildings is 搶風岭之一塊土地、 approximately 4,347 sq.m. 若干房屋及構築物 The buildings mainly include office buildings, storage buildings and dormitories.

The structures mainly include walls and roads.

Notes:

Pursuant to a Land Requisition Agreement entered into between (Hunyuan County Qiangfengling Coal Mine Construction Preparatory Department) （渾源縣搶風嶺煤礦籌建處） (the “Department”) and (Yanbei Administrative Office Hunyuan County Zhongzhuangpu Township Gantuling Village)（雁北行署渾源縣中莊鋪鄉甘土嶺村）dated 25 July 1986, the land parcel of the property with a site area of approximately 87,000 sq.m. was contracted to be obtained by the Department for the construction of coal mine. As advised by the Group, the Department is a branch of Qiangfengling Coal Mine（搶風嶺煤礦）, which is held by Ruifeng Coal.
Pursuant to a Land Requisition Notice, Hun Zheng Zheng Tu Zi (1987) Di No. 27, the application of Qiangfengling Coal Mine for the requisition of the land parcel of the property with a site area of approximately 118.5 mu (or about 79,000 sq.m.) has been approved by Shanxi Province People’s Government（山西省人民政府）.
For the land parcel and the buildings of the property, we have not been provided with any title certificates.
In the valuation of this property, we have attributed no commercial value to the property as the title certificates of the property have not been obtained. However, for your reference purpose, we are of the opinion that the depreciated replacement cost of the buildings and structures (excluding the land) as at the date of valuation would be in the sum of approximately RMB2,700,000 assuming all relevant title certificates have been obtained and the buildings and structures could be freely transferred in the market.
The opinion given by the PRC legal advisor to the Group is as follows:
a. Ruifeng Coal is permitted to use the land parcel of the property;
b. There exist no legal impediments for Ruifeng Coal to obtain relevant Land Use Rights Certificate of the land parcel of the property; and
c. The title documents of the buildings of the property have not been obtained, thus the ownership of the buildings of the property cannot be ascertained.
Ruifeng Coal is an 87.88%-owned subsidiary of the Company.

– VII-15 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Group II – Property held by the Group under development in the PRC

Market Value in Particulars of existing state as at No. Property Description and tenure occupancy 30 September 2011 RMB 4. A public coal terminal The property comprises a The property is No Commercial Value under construction reclaimed land which is under under construction. located at the reclamation with a proposed North Coast of site area of approximately Gaolan Harbour, 340,320 sq.m. and various Zhuhai City, structures which are under Guangdong Province, construction (the “CIP”). The PRC The estimated total 位於中國廣東省珠海市 construction cost is 高欄港北順岸之 approximately 在建公用煤碼頭 RMB1,900,000,000 (including land reclamation cost), of which approximately RMB174,000,000 had been paid up to the date of valuation. The construction works of the CIP are scheduled to be completed in 2012. The land use rights of the property will be granted for a term expiring on 30 December 2056 for storage and public port uses.

Notes:

Pursuant to a Sea Area Use Certificate, Guo Hai Zheng No. 101100075, issued by State Oceanic Administration, dated 28 September 2010, the sea area use rights of the property with a sea plot area of 34.03 ha. have been granted to Zhuhai Qinfa Port Company Limited （珠海秦發港務有限公司） (“Zhuhai Port”) for a term expiring on 28 September 2060 for land reclamation and for port purposes.
Pursuant to a State-owned Land Use Rights Grant Contract and its supplemental contract dated 31 December 2006 and 25 February 2007 respectively, the land use rights of the property with a proposed total site area of approximately 340,320 sq.m. and relevant coastline with a length of approximately 709 m. after reclamation were contracted to be granted to Zhuhai Qinfa Storage Company Limited （珠海秦發倉儲有限公司） (“Zhuhai Storage”) at a total consideration of RMB78,014,766.
In the valuation of this property, we have attributed no commercial value to the property as relevant title certificates of the property have not been obtained. However, for your reference purpose, we are of the opinion that the depreciated replacement cost of the CIP (excluding the land) as at the date of valuation would be in the sum of approximately RMB174,000,000 assuming all relevant title certificates have been obtained and the CIP could be freely transferred in the market.
The opinion given by the PRC legal advisor to the Group is as follows:
a. The sea area use fee and the land premium have been settled in full;
b. The land reclamation works are in progress. Thus, the title certificate of the land parcel has not been obtained by Zhuhai Storage;

– VII-16 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

c. The State-owned Land Use Rights Grant Contract and its supplemental contract are legal and valid; and
d. There exist no legal impediments for Zhuhai Storage to obtain relevant title certificate of the land parcel of the property.
Zhuhai Port is an indirectly 60%-owned subsidiary of the Company and Zhuhai Storage is an indirectly 80%-owned subsidiary of the Company.

– VII-17 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Group III – Property partly held for owner-occupation and partly leased by the Group in the PRC

Market Value in Particulars of existing state as at No. Property Description and tenure occupancy 30 September 2011 RMB 5. 2 parcels of land, various The property comprises 2 land The property is No Commercial Value buildings and structures parcels with a total site area occupied by the located at the of approximately of 200,000 Group for coal north of Dongguan sq.m. and 10 buildings and transportation station Village, various structures completed purpose. Xicheng Town, in various stages between Yangyuan County, 1993 and 2009 erected Zhangjiakou City, thereon. Hebei Province, The PRC As advised by the Group, the total gross floor area (“GFA”) 位於中國河北省 of the buildings is 張家口市陽原縣 approximately 2,214 sq.m. 西城鎮東關村以北之兩塊土地、若干房屋及 The buildings mainly include 構築物 office buildings, storage buildings and a canteen. The structures mainly include open storage yard, fencing wall and railway.

Notes:

Pursuant to a Tenancy Agreement entered into between Yangyuan Guotong Coal Trading and Transportation Company Limited （陽原國通煤炭運銷有限公司） (“Yangyuan Guotong”) and Hebei Province Yangyuan Tongyuan Coal Company （河北省陽原通源煤炭公司） (“Yangyuan Tongyuan”), an independent third party, dated 26 February 2008, portions of the property are leased to Yangyuan Guotong for a term of 8 years commencing on 21 May 2008 and expiring on 20 May 2016 at an annual rent of RMB3,300,000 (the “leased portion”). As advised by the Group, the leased portion comprises a land parcel with a site area of approximately 148,000 sq.m. and 7 buildings with a total GFA of approximately 2,196 sq.m. erected thereon.
For the remaining portion of the property (the “owned portion”), we have not been provided with any title certificates.
In the valuation of this property, we have attributed no commercial value to the property as the title of the leased portion of the property is not vested in the Group and the title certificates of the owned portion of the property have not been obtained. However, for your reference purpose, we are of the opinion that the depreciated replacement cost of the buildings and structures (excluding the land) of the owned portion as at the date of valuation would be in the sum of approximately RMB9,000,000 assuming all relevant title certificates have been obtained and the buildings and structures of the owned portion could be freely transferred in the market.
The opinion given by the PRC legal advisor to the Group is as follows:
a. The lessor has obtained the State-owned Land Use Rights Certificate of the land parcel of the leased portion and has the rights to lease the land parcel of the leased portion;

– VII-18 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

b. The Tenancy Agreement has been registered;
c. The land parcel of the leased portion is not subject to any material encumbrances that might affect the validity of the tenancy agreement;
d. The Tenancy Agreement is legally valid and is binding on the contractual parties;
e. The existing use of the property is in compliance with relevant title certificates;
f. Yangyuan Guotong is not subject to any administrative penalties arose from the use of the land parcel of the owned portion;
g. Yangyuan Guotong is liaising with relevant government authorities on obtaining the land use rights of the owned portion and there exist no legal impediments for Yangyuan Guotong to obtain relevant Land Use Rights Certificate of the land parcel of the owned portion through relevant procedures; and
h. The title documents of the buildings of the owned portion have not been obtained, thus the ownership of the buildings of the owned portion cannot be ascertained.
Yangyuan Guotong is an indirectly wholly-owned subsidiary of the Company.

– VII-19 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Group IV – Properties leased or provided to and occupied by the Group in the PRC

Market Value in Particulars of existing state as at No. Property Description and tenure occupancy 30 September 2011 RMB 6. Units 10 and 11, The property comprises 2 The property is No Commercial Value Level 22, office units on Level 22 of a occupied by the Yuecai Building, 30-storey office building (plus Group for office No. 188 Jing Shan Road, 2 basement levels) completed purpose. Zhuhai City, in about 2001. Guangdong Province, The PRC As advised by the Group, the total gross floor area (“GFA”) 中國廣東省珠海市 of the property is 景山路188號 approximately 195.3 sq.m. 粵財大廈第22層 10及11室

Notes:

Pursuant to a Tenancy Contract entered into between Zhuhai Qinfa Trading Company Limited（珠海秦發貿易有限公司）(“Zhuhai Qinfa Trading”) and Zhuhai Yuecai Industrial Company Limited（珠海粵財實業有限公司）, an independent third party, the property is leased to Zhuhai Qinfa Trading for a term of 2 years commencing on 28 May 2011 at a monthly rent of RMB12,694.5 exclusive of management fee and service charges.
The opinion given by the PRC legal advisor to the Group is as follows:
a. The lessor has obtained the Building Ownership Certificates of the property and has the rights to lease the property;
b. The Tenancy Contract has not been registered;
c. The non-registration will not affect the legality of the Tenancy Contract;
d. The property is not subject to any material encumbrances that might affect the validity of the Tenancy Contract;
e. The Tenancy Contract is legally valid and is binding on the contractual parties; and
f. The existing use of the property is in compliance with relevant title certificates.
Zhuhai Qinfa Trading is an indirectly wholly-owned subsidiary of the Company.

– VII-20 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Description and tenure

No. Property

Rooms 1107-1108, The property comprises 2 Holiday Inn Pudong office units on Level 11 of a Shanghai, 38-storey office / hotel No. 899 Dong complex completed in about Fang Road, 2001. Pudong District, Shanghai, As advised by the Group, the The PRC total gross floor area (“GFA”) of the property is 中國上海市 approximately 210 sq.m.

中國上海市浦東區東方路899號上海浦東假日酒店 1107及1108室

Market Value in Particulars of existing state as at occupancy 30 September 2011 RMB The property is No Commercial Value occupied by the Group for office purpose.

Notes:

Pursuant to a Tenancy Agreement entered into between Zhuhai Qinfa Trading Company Limited（珠海秦發貿易有限公司）(“Zhuhai Qinfa Trading”) and Shanghai China Coal Building Company Limited, Holiday Inn Pudong Shanghai （上海中國煤炭大廈有限責任公司上海浦東假日酒店）, an independent third party, the property is leased to Zhuhai Qinfa Trading for a term of 2 years commencing on 28 December 2010 at a monthly rent of RMB31,415.4 inclusive of management fee but exclusive of utility services charges.
The opinion given by the PRC legal advisor to the Group is as follows:
a. The lessor has obtained the Building Ownership Certificates of the property and has the rights to lease the property;
b. The Tenancy Agreement has not been registered;
c. The non-registration will not affect the legality of the Tenancy Agreement;
d. The property is not subject to any material encumbrances that might affect the validity of the Tenancy Agreement;
e. The Tenancy Agreement is legally valid and is binding on the contractual parties; and
f. The existing use of the property is in compliance with relevant title certificates.
Zhuhai Qinfa Trading is an indirectly wholly-owned subsidiary of the Company.

– VII-21 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Description and tenure

No. Property

Rooms 801, 802, 805 to The property comprises 10 809 and 816 to 818, hotel rooms on Level 8 of a Qinfa Holiday Hotel, 24-storey hotel complex No. 123 Ying Bin Road, completed in about 2001. Qinhuangdao City, Hebei Province, As advised by the Group, the The PRC total gross floor area (“GFA”) of the property is

中國河北省 approximately 542.97 sq.m. 秦皇島市迎賓路123號秦發假日酒店 801、802、805至809及 816至818室

Market Value in Particulars of existing state as at occupancy 30 September 2011 RMB The property is No Commercial Value occupied by the Group for office purpose.

Notes:

Pursuant to a Tenancy Contract entered into between Qinhuangdao Development Zone Qinfa Trading Company Limited （秦皇島開發區秦發貿易有限公司）(“Qinhuangdao Trading”) and Qinhuangdao Qinfa Industry Group Company Limited（秦皇島秦發實業集團有限公司）(“Qinfa Industry”), a related party of the Group, the property is leased to Qinhuangdao Trading for a term of 10 years commencing on 1 January 2008 and expiring on 31 December 2017 at an annual rent of RMB680,000 from 1 January 2008 to 31 December 2009. The rental for the remaining term is subject to the prevailing market rent.
The opinion given by the PRC legal advisor to the Group is as follows:
a. The lessor has obtained the Building Ownership Certificates of the property and has the rights to lease the property;
b. The Tenancy Contract has been registered;
c. The property is not subject to any material encumbrances that might affect the validity of the Tenancy Contract;
d. The Tenancy Contract is legally valid and is binding on the contractual parties; and
e. The existing use of the property is in compliance with relevant title certificates.
Qinhuangdao Trading is an indirectly wholly-owned subsidiary of the Company.

– VII-22 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Market Value in Particulars of existing state as at No. Property Description and tenure occupancy 30 September 2011 RMB 9. Room 551, The property comprises an The property is No Commercial Value Gaolan Custom office unit on Level 5 of a occupied by the Administrative Building, 12-storey building completed Group for ancillary Zhuhai City, in about 1997. office use. Guangdong Province, The PRC As advised by the Group, the floor area of the property is 中國廣東省珠海市 approximately 38 sq.m.

中國廣東省珠海市高欄海關辦公大樓551室

Notes:

Pursuant to a Certificate issued by Zhuhai Gaolan Port Economic Zone Administration Committee（珠海高欄港經濟區管理委員會） (the “Committee”) dated 21 December 2010, Zhuhai Qinfa Logistics Company Limited（珠海秦發物流有限公司）(“Qinfa Logistics”) has the rights to use the property for a term commencing on 31 December 2010 expiring on 31 December 2013 at nil rent.
The opinion given by the PRC legal advisor to the Group is as follows:
a. The Committee has obtained the Building Ownership Certificate of the property and has the rights to provide the property to Qinfa Logistics; and
b. The existing use of the property is in compliance with relevant title certificates.
Qinfa Logistics is an indirectly wholly-owned subsidiary of the Company.

– VII-23 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Market Value in Particulars of existing state as at No. Property Description and tenure occupancy 30 September 2011 RMB 10. Room 102, The property comprises an The property is No Commercial Value Ancillary Block of office unit on Level 1 of a occupied by the Gaolan Custom 7-storey building completed in Group for ancillary Administrative Building, about 1994. office use. Zhuhai City, Guangdong Province, As advised by the Group, the The PRC total gross floor area (“GFA”) of the property is 中國廣東省珠海市 approximately 20 sq.m.

中國廣東省珠海市高欄海關辦公大樓附屬大樓102室

Notes:

Pursuant to a Certificate issued by Zhuhai Lingang Industrial Zone Administration Committee（珠海臨港工業區管理委員會）(the “Committee”) dated 28 June 2006, Zhuhai Qinfa Trading Company Limited（珠海秦發貿易有限公司）(“Zhuhai Qinfa Trading”) has the rights to use the property for a long term at nil rent.
The opinion given by the PRC legal advisor to the Group is as follows:
a. The Committee has obtained the Building Ownership Certificate of the property and has the rights to provide the property to Zhuhai Qinfa Trading; and
b. The existing use of the property is in compliance with relevant title certificates.
Zhuhai Qinfa Trading is an indirectly wholly-owned subsidiary of the Company.

– VII-24 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Market Value in Particulars of existing state as at No. Property Description and tenure occupancy 30 September 2011 RMB 11. Room 103, The property comprises an The property is No Commercial Value Ancillary Block of office unit on Level 1 of a occupied by the Gaolan Custom 7-storey building completed in Group for ancillary Administrative Building, about 1994. office use. Zhuhai City, Guangdong Province, As advised by the Group, the The PRC total gross floor area (“GFA”) of the property is 中國廣東省珠海市 approximately 20 sq.m.

中國廣東省珠海市高欄海關辦公大樓附屬大樓103室

Notes:

Pursuant to a Certificate Zhuhai Gaolan Port Economic Zone Administration Committee（珠海高欄港經濟區管理委員會）(the “Committee”) dated 13 August 2007, Zhuhai Qinfa Shipping Company Limited（珠海秦發航運有限公司）(“Zhuhai Qinfa Shipping”) has the rights to use the property for a long term at nil rent.
The opinion given by the PRC legal advisor to the Group is as follows:
a. The Committee has obtained the Building Ownership Certificate of the property and has the rights to provide the property to Zhuhai Qinfa Trading; and
b. The existing use of the property is in compliance with relevant title certificates.
Zhuhai Qinfa Shipping is an indirectly wholly-owned subsidiary of the Company.

– VII-25 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Description and tenure

No. Property

Portion of the Ancillary The property comprises a Block of Da Chang portion of a 2-storey ancillary Quick Hotel located at building completed in 1990s. Heng Shan North Road, Hunyuan County, As advised by the Group, the Datong City, total gross floor area (“GFA”) Shanxi Province, of the property is The PRC approximately 200 sq.m.

Market Value in Particulars of existing state as at occupancy 30 September 2011 RMB The property No Commercial Value occupied by the Group for office purpose.

位於中國山西省大同市渾源縣恒山北路之大昌快捷酒店附樓之部分

Notes:

Pursuant to a Tenancy Contract dated 1 January 2011, the property is subject to a lease for a term of 1 year commencing on 1 January 2011 and expiring on 31 December 2011 at an annual rent of RMB45,000 inclusive of water and heating charges and exclusive of electricity and other charges. As advised by the Group, the tenant of the property is Shanxi Hunyuan Ruifeng Coal Mine Limited（山西渾源瑞豐煤業有限公司）(“Ruifeng Coal”).
The opinion given by the PRC legal advisor to the Group is as follows:
a. The lessor has obtained the Building Ownership Certificate of the property and has the rights to lease the property;
b. The Tenancy Contract has not been registered;
c. The non-registration will not affect the legality of the Tenancy Contract;
d. The property is not subject to any material encumbrances that might affect the validity of the Tenancy Contract;
e. The Tenancy Contract is legally valid and is binding on the contractual parties; and
f. The existing use of the property is in compliance with relevant title certificate.
Ruifeng Coal is an 87.88%-owned subsidiary of the Company.

– VII-26 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Description and tenure

No. Property

Room 102, front shop The property comprises and the basement, Gate 1, portions of a 6-storey building Block 4, completed in about 2010. Yuanlinxiaoqu, Shuozhou City As advised by the Group, the Development Zone, total gross floor area (“GFA”) Shanxi Province, of the property is The PRC approximately 245.7 sq.m.

Market Value in Particulars of existing state as at occupancy 30 September 2011 RMB The property is No Commercial Value occupied by the Group for dormitory use.

中國山西省朔州市開發區, 園林小區4號樓一單元102室及前門面房及地下室

Notes:

Pursuant to a Tenancy Contract entered into between Shuozhou Guangfa Energy Investment Company Limited（朔州市廣發能源投資有限公司）(“Guangfa Energy”) and Li Hai Rong（李海榮）, an independent third party, dated 25 February 2011, the property is leased to Guangfa Energy for a term of 1 year commencing on 25 February 2011 and expiring on 24 February 2012 at an annual rent of RMB30,000 exclusive of management fee and other outgoings.
The opinion given by the PRC legal advisor to the Group is as follows:
a. The lessor has obtained the Building Ownership Certificates of the property and has the rights to lease the property;
b. The Tenancy Contract has not been registered;
c. The non-registration will not affect the legality of the Tenancy Contract;
d. The property is not subject to any material encumbrances that might affect the validity of the Tenancy Contract;
e. The Tenancy Contract is legally valid and is binding on the contractual parties; and
f. The existing use of the property is in compliance with relevant title certificates.
Guangfa Energy is an indirectly wholly-owned subsidiary of the Company.

– VII-27 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Group V – Property leased by the Group in Hong Kong

				Market Value in
			Particulars of	existing state as at
No.	Property	Description and tenure	occupancy	30 September 2011
				RMB
14.	Room 1303 on	The property comprises an	The property is	No Commercial Value
	13th Floor,	office unit on the 13th floor of	occupied by the
	MassMutual Tower,	a 26-storey office building	Group for office use.
	No. 38 Gloucester Road,	completed in about 1985.
	Wanchai,
	Hong Kong	The property has a lettable
		area of approximately 110
	香港灣仔告士打道38號	sq.m.
	美國萬通大廈13樓1303室

Notes:

Pursuant to an agreement entered into between Hong Kong Qinfa Shipping Limited (“Qinfa Shipping”) and Pioneer Time Investment Limited, an independent third party, the property is leased to Qinfa Shipping for a term of 3 years commencing on 8 December 2009 and expiring on 7 December 2012 at a monthly rent of HK$52,704 exclusive of government rates and service charges.
The registered owner of the property is Pioneer Time Investment Limited, an independent third party of the Company.
Qinfa Shipping is an indirectly wholly-owned subsidiary of the Company.

– VII-28 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Group VI – Properties held for owner-occupation by the Target Group in the PRC

				Market Value in
			Particulars of	existing state as at
No.	Property	Description and tenure	occupancy	30 September 2011
				RMB
15.	A parcel of land, various	The property comprises a	The property is	No Commercial Value
	buildings and structures	parcel of land with a site area	occupied by the Target
	located at	of approximately 176,642.42	Group for coal
	Xisunzhuang Village	sq.m. and 29 buildings and	production purpose.
	North,	various ancillary structures
	Taocun Township,	completed in various stages
	Pinglu District,	between 1996 and 2011
	Shuozhou City,	erected thereon.
	Shanxi Province,
	The PRC	The total gross floor area
		(“GFA”) of the buildings of
	位於中國山西省	the property is approximately
	朔州市平魯區	29,265.3 sq.m. The buildings
	陶村鄉西孫莊村北	mainly include office
	之一塊土地、若干房屋及構	buildings and dormitories.
	築物
		The structures mainly include
		water pools, walls and roads.
		The land use rights of the
		property have been obtained
		for industrial use.

Notes:

Pursuant to a State-owned Land Use Rights Certificate, Ping Ji Yong (2006) Di No. 000005, the land use rights of the property with a site area of approximately 176,642.42 sq.m. have been obtained by Shuozhou City Pinglu District Xingtao Coal Mine（朔州市平魯區興陶煤礦）(“Xintao Coal Mine”) for industrial use. As advised by the Target Group, Xintao Coal Mine is held by Shanxi Shuozhou Pinglu District Huameiao Xintao Coal Company Limited （山西朔州平魯區華美奧興陶煤業有限公司） (“Xintao Coal”).
For the 29 buildings of the property with a total GFA of approximately 29,265.3 sq.m., we have not been provided with any title certificate.
In the valuation of this property, we have attributed no commercial value to the property as the nature of the land use rights of the property could not be ascertained. However, for your reference purpose, we are of the opinion that the depreciated replacement cost of the buildings and structures (excluding the land) as at the date of valuation would be in the sum of approximately RMB74,340,000 assuming all relevant title certificates have been obtained and the buildings and the structures could be freely transferred in the market.
The opinion given by the PRC legal advisor to the Group is as follows:
a. Xingtao Coal has the rights to use the land parcel of the property; and
b. The title documents of the buildings of the property have not been obtained, thus the ownership of the buildings of the property cannot be ascertained.
Xingtao Coal is an indirectly wholly-owned subsidiary of the Target Company.

– VII-29 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Market Value in Particulars of existing state as at No. Property Description and tenure occupancy 30 September 2011 RMB 16. Block 5, The property comprises a As advised by the No Commercial Value Xingfu Yin Estate, 7-storey residential building Target Group, the Er Ji Road, completed in about 2005. property is occupied Shuozhou City, by Shanxi Shuozhou Shanxi Province, The total gross floor area Pinglu District The PRC (“GFA”) of the property is Xingtao Coal approximately 8,463 sq.m. Company Limited 中國山西省（山西朔州平魯區華美奧朔州市二級路興陶煤業有限公司）幸福銀苑5號樓 (“Xintao Coal”) for staff quarters purpose.

Notes:

For the property, we have not been provided with any title certificates.
In the valuation of this property, we have attributed no commercial value to the property as relevant title certificates of the property have not been provided. However, for your reference purpose, we are of the opinion that the depreciated replacement cost of the building (excluding the land) as at the date of valuation would be in the sum of approximately RMB4,130,000 assuming all relevant title certificates have been obtained and the building could be freely transferred in the market.
The opinion given by the PRC legal advisor to the Group is as follows:

The title documents of the property have not been obtained, thus the ownership of the property cannot be ascertained.

Xingtao Coal is a wholly-owned subsidiary of the Target Company.

– VII-30 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

Group VII – Property partly held for owner-occupation and partly held under development by the Target Group in the PRC

No. Property

Description and tenure

Market Value in Particulars of existing state as at occupancy 30 September 2011 RMB

A parcel of land, various buildings and structures located at the west of Fengjialing Village, Xiamiangao Township, Pinglu District, Shuozhou City, Shanxi Province, The PRC

位於中國山西省朔州市平魯區下面高鄉馮家岭村西之一塊土地、若干建築物及構築物

The property comprises a parcel of land with a site area of approximately 20,925.64 sq.m. and 28 buildings and various ancillary structures completed in various stages between 2004 to 2010 erected thereon (the “completed property”).

The total gross floor area (“GFA”) of the buildings of the completed property is approximately 14,886.57 sq.m.

The completed No Commercial Value property is occupied by the Target Group for coal production purpose whilst the CIP is under development.

The buildings mainly include office buildings, dormitories and warehouses.

The structures mainly include water pools and a transformer room.

In addition to the completed property, the property also comprises 10 buildings and various structures which are under construction (the “CIP”). The planned total GFA of the buildings of the CIP will be approximately 7,956.77 sq.m. upon completion. The estimated total construction cost is approximately RMB54,000,000, of which approximately RMB32,000,000 had been paid up to the date of valuation. The construction works of the CIP are scheduled to be completed in about 2011.

The land use rights of the property have been obtained for mining use.

– VII-31 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

Notes:

Pursuant to a State-owned Land Use Rights Certificate, Ping Ji Yong (2006) Di No. 000012, the land use rights of the property with a site area of approximately 20,925.64 sq.m. have been obtained by Shuozhou City Pinglu District Fengxi Coal Mine （朔州市平魯區馮西煤礦）(“Fengxi Coal Mine”) for mining use. As advised by the Group, Fengxi Coal Mine is held by Shanxi Shuozhou Pinglu District Huameiao Fengxi Coal Company Limited（山西朔州平魯區華美奧馮西煤業有限公司）(“Fengxi Coal”).
For the buildings of the completed property and the CIP, we have not been provided with any title certificates or construction permits.
In the valuation of this property, we have attributed no commercial value to the property as the nature of the land use rights of the property could not be ascertained. However, for your reference purpose, we are of the opinion that the depreciated replacement cost of the buildings, structures and the CIP (excluding the land) as at the date of valuation would be in the sum of approximately RMB113,100,000 assuming all relevant title certificates and planning / construction permits have been obtained and the buildings, structures and the CIP could be freely transferred in the market.
The opinion given by the PRC legal advisor to the Group is as follows:
a. Fengxi Coal has the rights to use the land parcel of the property;
b. The title documents of the buildings of the completed property have not been obtained, thus the ownership of the buildings of the completed property cannot be ascertained; and
c. Relevant construction permits and planning permits of the CIP have not been obtained, thus whether the title certificates of the buildings of the CIP could be obtained by Fengxi Coal upon completion cannot ascertained.
Fengxi Coal is an indirectly wholly-owned subsidiary of the Target Company.

– VII-32 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Group VIII – Properties partly leased and partly held under development / held and occupied by the Target Group in the PRC

No. Property

Description and tenure

Market Value in Particulars of existing state as at occupancy 30 September 2011 RMB

3 Parcels of land, various The property comprises 3 buildings and structures parcels of land with a total located in site area of approximately Xiamiangao Village, 26,925.02 sq.m. (“Land Parcel Xiamiangao Township, I”, “Land Parcel II” and Pinglu District, “Parcel II”) and 15 buildings Shuozhou City, and various structures Shanxi Province, completed in various stages The PRC between 1993 and 1995 erected thereon.

The property is No Commercial Value vacant.

位於中國山西省朔州市平魯區 The total gross floor area 下面高鄉下面高村 (“GFA”) of the buildings of 之三塊土地、若干房屋及構 the property is approximately 築物 3,066.8 sq.m.

The buildings mainly include office buildings, a guard room, storage buildings and a boiler room.

The structures mainly include walls and roads.

The land use rights of the property have been obtained by/leased to the Target Group for industrial use.

Notes:

Pursuant to a State-owned Land Use Rights Certificate, Ping Guo Yong (2002) Zi Di No. 0017（平國用(2002)字第0017號）, the land use rights of Land Parcel I with a site area of approximately 12,533.3 sq.m. have been obtained by Shuozhou City Pinglu District Siergou Coal Mine（朔州市平魯區寺兒溝煤礦） (“Siergou”) for industrial use. As advised by the Target Group, Siergou is held by Shanxi Shouzhou Pinglu District Huameiao Chongsheng Coal Company Limited（山西朔州平魯區華美奧崇升煤業有限公司）(“Chongsheng Coal”).
Pursuant to 3 agreements all issued in 2007, Land Parcel II with a site area of approximately 19.99 mu (or about 13,325.05 sq.m.) has been leased to Siergou from 3 independent third parties for a term until the mine has been fully exploited at a total rent of RMB144,900.
Pursuant to an agreement dated 16 September 2006, Land Parcel III with a site area of approximately 1.6 mu (or about 1,066.67 sq.m.) has been leased to Siergou from an independent third party for a term of 15 years at a total rent of RMB9,600.
For the 15 buildings of the property with a total GFA of approximately 3,066.8 sq.m., we have not been provided with any title certificates.

– VII-33 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

In the valuation of this property, we have attributed no commercial value to the property as the nature of the land use rights of Land Parcel I could not be ascertained and the title of Land Parcel II and Land Parcel III are not vested in Siergou. However, for your reference purpose, we are of the opinion that the depreciated replacement cost of the buildings and structures (excluding the land) as at the date of valuation would be in the sum of approximately RMB27,778,000 assuming all relevant title certificates have been obtained and the buildings and the structures could be freely transferred in the market.
The opinion given by the PRC legal advisor to the Group is as follows:
a. Chongsheng Coal has the rights to use Land Parcel I of the property;
b. Chongsheng Coal is not subject to any administrative penalties arose from the use of Land Parcel II and Land Parcel III;
c. Chongsheng Coal is liaising with relevant government authorities on obtaining the land use rights of Land Parcel II and Land Parcel III and there exist no legal impediments for Chongsheng Coal to obtain relevant Land Use Rights Certificates of Land Parcel II and Land Parcel III through relevant procedures; and
d. The title documents of the buildings of the property have not been obtained, thus the ownership of the buildings of the property cannot be ascertained.
Chongsheng Coal is a wholly-owned subsidiary of the Target Company.

– VII-34 –

APPENDIX VII

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

VALUATION CERTIFICATE

No. Property

Description and tenure

Market Value in Particulars of existing state as at occupancy 30 September 2011 RMB

A parcel of land, 3 The property comprises a buildings and various parcel of land with a site area buildings and structures of approximately 46,907.57 under development sq.m. and 6 buildings and located in various structures completed Fengjialing Village, in 2011 erected thereon (the Xiamiangao Village and “completed property”). Beiyandun Village, Xiamiangao Township, The total gross floor area Pinglu District, (“GFA”) of the buildings of Shuozhou City, the completed property is Shanxi Province, approximately 9,182.13 sq.m. The PRC
The property comprises a parcel of land with a site area of approximately 46,907.57 sq.m. and 6 buildings and various structures completed in 2011 erected thereon (the “completed property”).

The completed No Commercial Value property is occupied by the Target Group for office and dormitory purposes whilst the CIP is under development.

In addition to the completed
位於中國山西省 property, the property also 朔州市平魯區 comprises 15 buildings and 下面高鄉 various structures which are 馮家嶺村、下面高村及北煙 under construction (the 墩村之一塊土地、3棟房屋及 “CIP”). The planned total 在建中之 GFA of the buildings of the 若干房屋及構築物 CIP will be approximately 18,705.96 sq.m. upon completion. The estimated total construction cost is approximately RMB68,900,000, of which approximately RMB23,500,000 had been paid up to the date of valuation. The construction works of the CIP are scheduled to be completed in about 2011.

The land use rights of the property have been leased to the Target Group for various terms of 20 years.

Notes:

Pursuant to 20 Land Tenancy Agreements（租用土地協議書）entered into between various independent third parties and Shanxi Shuozhou Pinglu District Huameiao Chongsheng Mining Company Limited（山西朔州平魯區華美奧崇升煤業有限公司）(“Chongsheng Coal”), the land use rights of the property with a site area of approximately 70.361 mu (or about 46,907.57 sq.m.) have been leased to Chongsheng Coal with various terms of 20 years at a total rent of RMB1,218,728.
For the buildings of the completed property and the CIP, we have not been provided with any title certificates or construction permits.

– VII-35 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

In the valuation of this property, we have attributed no commercial value to the property as the land use rights of the property are not vested in the Target Group. However, for your reference purpose, we are of the opinion that the depreciated replacement cost of the buildings, structures and the CIP (excluding the land) as at the date of valuation would be in the sum of approximately RMB23,500,000 assuming all relevant title certificates and planning / construction permits have been obtained and the buildings, structures and the CIP could be freely transferred in the market.
The opinion given by the PRC legal advisor to the Group is as follows:
a. Chongsheng Coal is not subject to any administrative penalties arose from the use of the land parcel of the property;
b. Chongsheng Coal is liaising with relevant government authorities on obtaining the land use rights of the property and there exist no legal impediments for Chongsheng Coal to obtain relevant Land Use Rights Certificates of the property through relevant procedures;
c. The title documents of the buildings of the completed property have not been obtained, thus the ownership of the buildings of the completed property cannot be ascertained; and
d. Relevant construction permits and planning permits of the CIP have not been obtained, thus whether the title certificates of the buildings of the CIP could be obtained by Chongsheng Coal upon completion cannot ascertained.
Chongsheng Coal is a wholly-owned subsidiary of the Target Company.

– VII-36 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VII

VALUATION CERTIFICATE

Group IX – Property leased by the Target Group in the PRC

Market Value in Particulars of existing state as at No. Property Description and tenure occupancy 30 September 2011 RMB 20. 11 office units on The property comprises 11 The property is No Commercial Value Level 3, office units on Level 3 of a occupied by the Target Huayuan International 6-storey office building Group for office use. Tower, completed in about 2011. Zhenhua East Street, Shuozhou City The property has a total gross Development Zone, floor area (“GFA”) of Shanxi Province, approximately 723 sq.m. The PRC 中國山西省朔州市開發區振華東街華源國際大廈3樓之11間辦公室

Notes:

Pursuant to a tenancy contract entered into between Shanxi Huameiao Energy Group Company Limited （山西華美奧能源集團有限公司） (“Huameiao Energy”) and Shuozhou City Xuanyuan Property Management Company Limited（朔州市宣源物業管理有限公司）, an independent third party, dated 1 July 2011, the property is leased to Huameiao Energy for a term of 2 years commencing on 1 July 2011 and expiring on 30 June 2013 at an annual rent of RMB537,200 exclusive of management fee and other outgoings.
The opinion given by the PRC legal advisor to the Group is as follows:

The title documents of the property have not been provided, thus the lessor’s rights to lease the property and the lessee’s rights to use the property cannot be ascertained.

– VII-37 –

GENERAL INFORMATION

APPENDIX VIII

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors 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 Group. 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. DISCLOSURE OF INTERESTS

Interests of Directors

As of the Latest Practicable Date, the interests of the Directors in the share capital of the Company which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests which they were taken or deemed to have under such provisions of the SFO), or were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers set forth in Appendix 10 to the Listing Rules (the “ Model Code ”), to be notified to the Company and the Stock Exchange were as follows:–

(1) Interest in the Company

				Approximate	Approximate	Approximate
				percentage	of issued
				share capital of the
		Number of Shares		Company		(%)
Name of	Nature of	Long	Short	Long		Short
Director	Interest	positions	positions	positions	positions
Mr. Xu	Corporate	1,186,000,000	Nil	57.15		Nil
		(Note 1)
Ms. Wang	Beneficial	100,000,000	Nil	4.82		Nil
Jianfei	Owner	(Note 2)
Mr. Weng Li	Beneficial	6,000,000	Nil	0.29		Nil
	Owner	(Note 3)
Ms. Liu Xiaomei	Beneficial	600,000	Nil	0.03		Nil
	Owner	(Note 4)

Notes:

The Shares are held directly by Fortune Pearl which is wholly-owned by Mr. Xu. By virtue of the SFO, Mr. Xu is deemed to have interests in the 1,186,000,000 Shares.

– VIII-1 –

GENERAL INFORMATION

APPENDIX VIII

Ms. Wang holds 60,000,000 Shares and the remaining Shares are held under the trust scheme adopted by Fortune Pearl on 13 June 2009.
Mr. Weng holds 3,600,000 Shares and the remaining Shares are held under the trust scheme adopted by Fortune Pearl on 13 June 2009.
The beneficial interest is in the form of options granted under the Pre-IPO Share Option Scheme adopted by the Company on 12 June 2009.

(2) Interests in associated corporations

	Name of			Percentage
	associated		Number	of issued
Name of Director	corporations	Capacity	of shares	shares
				(%)
Mr. Xu	Fortune	Beneficial	1	100
	Pearl	owner

Save as disclosed above, as of the Latest Practicable Date, none of the Directors or chief executive of the Company had interests or short positions 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 or short positions which each of them had taken or deemed to have taken under the provisions of the SFO); or (b) to be recorded in the register required to be kept by the Company pursuant to section 352 of the SFO; or (c) to be notified to the Company and the Stock Exchange pursuant to the Model Code.

Interests in contract or arrangement

None of the Directors had any material interests in contract or arrangement subsisting at the Latest Practicable Date which is significant in relation to the business of the Group taken as a whole, save for the Structure Contracts as defined in the prospectus of the Company dated 19 June 2009 in which Mr. Xu is interested.

Interests in assets

None of the Directors has any direct or indirect interest in any assets acquired or disposed of by or leased to any member of the Group or is proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2010, being the date to which the latest published audited consolidated financial statements of the Group were made up.

– VIII-2 –

GENERAL INFORMATION

APPENDIX VIII

Service contracts

There is no existing or proposed service contract between any member of the Group and any Director or proposed Director excluding contracts expiring or determinable by the Group within one year without payment of compensation (other than statutory compensations).

3. COMPETING BUSINESS

None of the Directors has any interest in any business which competes or is likely to compete, either directly or indirectly, with the Group’s business.

4. LITIGATION

As at the Latest Practicable Date, no member of the Enlarged Group was engaged in any material litigation, claim or arbitration of material importance and no litigation, claim or arbitration of material importance is known to the Directors to be pending or threatened against any member of the Enlarged Group.

5. MATERIAL ADVERSE CHANGES

The Directors are not aware of any material adverse changes in the financial or trading position of the Group since 31 December 2010, being the date of which the latest published audited financial statements of the Group were made up.

6. QUALIFICATIONS AND CONSENTS OF EXPERTS

The following are the qualifications of the experts who have given opinion or advice which are contained in this circular:–

Name	Qualification
Donvex Capital Limited	Financial Adviser
Mabel Chan & Co	Certified public accountants
BMI Appraisals Limited	Independent valuer
BMI Technical Consulting	Independent Technical adviser
(Resources) Limited
Gustavson Associates, LLC	Independent technical adviser
Zhong Lun Law Firm	Legal advisers to the Company as to PRC laws

Each of the experts above has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its report and/or letter and/or summary of valuations and/or opinion (as the case may be), and/or the references to its name included in the form and context in which it is respectively included.

– VIII-3 –

GENERAL INFORMATION

APPENDIX VIII

As of the Latest Practicable Date, none of the experts above 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.

As of the Latest Practicable Date, all the experts above did not, directly or indirectly, had any interest in any assets which had since 31 December 2010 (being the date to which the latest published audited financial statements of the Group were made up) been acquired or disposed of by or leased to any member of the Enlarged Group, or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.

7. MATERIAL CONTRACTS

The following contracts (not being contracts in the ordinary course of business) have been entered into by members of the Enlarged Group within the two years preceding the date of this circular and are or may be material:–

(a) the shipbuilding contract dated 15 December 2009 and entered into between Super Grace Enterprises Limited (“ Super Grace ”) (a wholly-owned subsidiary of the Company) and Oriental Wise Group Limited (“ Oriental Wise ”), a wholly-owned subsidiary of the Company, and China Shipbuilding and CSSC Guangzhou Longxue (collectively referred to as the “ Sellers ”) for the construction of a vessel at a consideration of US$35.2 million;
(b) the acquisition and debt restructuring agreement dated 30 December 2009 and entered into between 鄂爾多斯市晉發物資有限公司 (Ordos Jinfa Materials Company Limited) (“ Jinfa Materials ”), a wholly-owned subsidiary of the Company, 鄂爾多斯市巴音孟克投資集團有限公司 (Ordos Bayin Mengke Investment Group Company Limited) (“ Bayin Mengke Investment ”), Mr. Li Shan （李山） (“ Mr. Li ”) and Ms. Wang Liying （王麗英） (“ Ms. Wang ”) (Bayin Mengke Investment, Mr. Li and Ms. Wang are collectively referred to as the “ Bayin Mengke Acquisition Vendors ”) for the acquisition of 60% equity interest in 鄂爾多斯市巴音孟克納源煤炭有限責任公司 (Ordos Bayin Mengke Nayuan Coal Company Limited) (“ Bayin Mengke Nayuan ”) (the “ Equity Interests ”) at an aggregate consideration of RMB857.3 million (the “ Bayin Mengke Acquisition* ”). Bayin Mengke Investment, Mr. Li, Ms. Wang and Bayin Mengke Nayuan are Independent Third Parties;
(c) the second share subscription agreement dated 30 April 2010 and entered into between Bright Rock Holdings Limited and Tiaro Coal Limited in relation to Bright Rock Holdings Limited’s subscription of 8,000,000 new shares in the share capital of Tiaro Coal Limited at the subscription price of A$2,000,000.
(d) the shipbuilding contract dated 15 May 2010 and entered into between Harbour Well Limited, a wholly-owned subsidiary of the Company, with the Sellers for the construction of a vessel at a consideration of US$34.5 million;

– VIII-4 –

GENERAL INFORMATION

APPENDIX VIII

(e) the shipbuilding contract dated 15 May 2010 and entered into between Merit Sino International Limited, a wholly-owned subsidiary of the Company, and the Sellers for the construction of a vessel at a consideration of US$34.5 million;
(f) the termination agreement dated 19 July 2010 and entered into between Jinfa Materials and the Bayin Mengke Acquisition Vendors for the cancellation of the Bayin Mengke Acquisition, pursuant to which the Bayin Mengke Acquisition Vendors shall repay the sum of RMB129 million to Jinfa Materials during the period of 12 months from the date of the termination agreement and Jinfa Materials shall transfer the Equity Interests to Bayin Mengke Investment or its nominee upon full repayment of the RMB129 million;
(g) a secured acquisition loan agreement with principal amount of RMB800 million dated 27 October 2010 and entered into between Guangfa Energy and China Minsheng Banking Corp., Ltd. in relation to the First Acquisition;
(h) a facility agreement dated 2 November 2010 in relation to a secured pre-delivery term loan facility of up to US$15,840,000 and a secured post-delivery term loan facility of up to US$22,880,000 and entered into between Oriental Wise and Bank of Communications Co., Ltd. Hong Kong Branch;
(i) an equity interest transfer agreement dated 17 November 2010 between Guangfa Energy, a wholly-owned subsidiary of the Company, and Huiyong Jinyuan Energy, Ms. Guan and Mr. Jin, for the acquisition of 32% equity interest in Huameiao Energy, at the total consideration of RMB1.6 billion (equivalent to approximately HK$1.9 billion);
(j) a facility agreement dated 10 December 2010 in relation to a secured pre-delivery term loan facility of up to US$15,840,000 and a secured post-delivery term loan facility of up to US$22,880,000 and entered into between Super Grace and Bank of Communications Co., Ltd. Hong Kong Branch;
(k) the addendum to deed of charge dated 8 May 2009 over the shares in Perpetual Goodluck Limited (“ Perpetual Goodluck ”) (a wholly-owned subsidiary of the Company), dated 24 June 2011 and entered into between Qinfa Investment Limited (“ Qinfa Investment ”) (a wholly-owned subsidiary of the Company) and Bank of China (Hong Kong) Limited to amend the said deed of charge;
(l) the addendum to deed of charge dated 8 May 2009 over the shares in Hong Kong Qinfa Shipping Limited (“ Qinfa Shipping ”) (a wholly-owned subsidiary of the Company), dated 24 June 2011 and entered into between Qinfa Investment and Bank of China (Hong Kong) Limited to amend the said deed of charge;
(m) the addendum to debenture dated 8 May 2009, dated 24 June 2011 and entered into between Qinfa Shipping and Bank of China (Hong Kong) Limited to amend the said debenture;

– VIII-5 –

APPENDIX VIII

GENERAL INFORMATION

(n) a fourth supplemental agreement dated 24 June 2011 to a facility agreement dated 21 November 2007 as supplemented by a supplemental agreement dated 13 May 2008, a second supplemental agreement dated 6 June 2008 and a third supplemental agreement dated 8 May 2009 (the “ Facility Agreement ”), and entered into between Qinfa Shipping, Hong Kong Qinfa Trading Limited (a wholly-owned subsidiary of the Company), Mr. Xu, Hong Kong Qinfa International Trading Limited (a wholly-owned subsidiary of the Company), the Company and Bank of China (Hong Kong) Limited to amend the Facility Agreement pursuant to which, inter alia, Hong Kong Qinfa International Trading Limited ceased to be a guarantor whereas the Company became a new guarantor to the Facility Agreement;
(o) a first preferred Panamanian ship mortgage of m.v. “Qinfa 6”, dated 24 June 2011 and executed by Qinfa Shipping in favour of Bank of China (Hong Kong) Limited whereby Qinfa Shipping mortgaged its rights, title and interest in Qinfa 6 in favour of Bank of China (Hong Kong) Limited to secure its payment of the outstanding indebtedness owed under the Facility Agreement;
(p) a general assignment of m.v. “Qinfa 6” dated 24 June 2011 and entered into between Qinfa Shipping and Bank of China (Hong Kong) Limited whereby Qinfa Shipping assigns to Bank of China (Hong Kong) Limited each charter all earnings, insurances and requisition compensation payable in respect of Qinfa 6 to secure its payment of the outstanding indebtedness owed under the Facility Agreement;
(q) a second addendum to deed of covenants dated 10 December 2007 as supplemented by an addendum to deed of covenants dated 8 May 2009 m.v. “Qinfa 9”, dated 24 June 2011 and entered into between Perpetual Goodluck and Bank of China (Hong Kong) Limited to amend the said deed of covenants;
(r) a second addendum to general assignment dated 10 December 2007 as supplemented by an addendum to general assignment dated 8 May 2009 m.v. “Qinfa 9”, dated 24 June 2011 and entered into between Perpetual Goodluck and Bank of China (Hong Kong) Limited to amend the said general assignment;
(s) an agreement dated 28 October 2011 between the Company and Genvon Group Limited, an Independent Third Party, for the acquisition of the entire issued share capital of Genards (Commercial Offshore de Macau) Limtade at the total consideration of HK$1 million; and
(t) the Acquisition Agreement.

– VIII-6 –

GENERAL INFORMATION

APPENDIX VIII

8. GENERAL

(a) The secretary of the Company is Mr. Wong Chi Kin who is a member of Hong Kong Institute of Certified Public Accountants and CPA Australia.
(b) The registered office of the Company is situated at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands.
(c) The Hong Kong branch share registrar and transfer office of the Company is Union Registrars Limited, 18th Floor, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong.
(d) The English text of this circular shall prevail over the Chinese text for the purpose of interpretation.

9. DOCUMENTS AVAILABLE FOR PUBLIC INSPECTION IN HONG KONG

Copies of the following documents will be available for inspection at the principal place of business of the Company in Hong Kong at Room 1303, 13th Floor, MassMutual Tower, No. 38 Gloucester Road, Wanchai, Hong Kong during normal business hours for a period of 14 days from the date of this circular:–

(a) the memorandum of association and articles of association of the Company;
(b) the annual reports of the Company for the two years ended 31 December 2009 and 2010;
(c) the interim report of the Company for the six months ended 30 June 2011;
(d) the accountants’ report on Huameiao Energy as set out in Appendix II to this circular;
(e) the report on unaudited pro forma financial information of the Enlarged Group as set out in Appendix III to this circular;
(f) the Competent Person’s Report as set out in Appendix IV to this circular;
(g) the Valuation Report as set out in Appendix V to this circular;
(h) the written consents from the experts as referred to under the section headed “Qualifications and Consents of Experts” in this appendix;
(i) the Company’s circular dated 30 June 2011 in relation to the Company’s acquisition of 32% equity interest in Huameiao Energy, which is the only circular (save and except this circular) of the Company issued pursuant to Chapter 14 and/ or 14A of the Listing Rules since 31 December 2010, being the date to which the latest published audited consolidated financial statements of the Group were made up;

– VIII-7 –

GENERAL INFORMATION

APPENDIX VIII

(j) this circular; and
(k) the material contracts referred to in the paragraph headed “Material Contracts” in this appendix.

– VIII-8 –

NOTICE OF THE EGM

==> picture [87 x 47] intentionally omitted <==

CHINA QINFA GROUP LIMITED 中國秦發集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 866)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that the extraordinary general meeting of China Qinfa Group Limited (the “ Company ”) will be held at Room 2, 10/F., United Centre, 95 Queensway, Admiralty, Hong Kong on 23 December 2011 at 10:30 a.m. for the purpose of considering and, if thought fit, passing, with or without modifications, the following resolution which will be proposed as an ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT :

(a) the agreement dated 26 October 2011 (the “ Acquisition Agreement ”, a copy of which has been produced to this meeting marked “A” and initialled by the chairman of this meeting for identification purpose) entered into between the wholly owned subsidiary of the Company, Shuozhou Guangfa Energy Investment Company Limited as purchaser, and Ms. Guan Gexia, Mr. Jin Huiguo, Ms. Suo Na and Shanxi Huiyong Jinyuan Energy Technology Company Limited as vendors in relation to the acquisition of 48% equity interest of 山西華美奧能源集團有限公司 (Shanxi Huameiao Energy Group Company Limited*), details of which are set out in the circular of the Company dated 8 December 2011, be and is hereby confirmed, approved and ratified; and
(b) any one director of the Company be and is hereby authorized, for and on behalf of the Company, to do all such acts and things and execute all such documents as he/she may, in his/her absolute discretion, consider necessary or expedient to give effect to the Acquisition Agreement and the implementation of all transactions contemplated thereunder.”

By Order of the Board WONG CHI KIN Company Secretary

Hong Kong, 8 December 2011

– EGM-1 –

NOTICE OF THE EGM

Notes:

Any member of the Company entitled to attend and vote at a meeting of the Company shall be entitled to appoint another person (who must be an individual) as his/her proxy to attend and vote instead of him/her. On a poll, votes may be given either personally or by proxy. A proxy need not be a member of the Company. A member who is holder of more than one share may appoint more than one proxy to attend in his/her stead.
The enclosed form of proxy and the power of attorney or other authority (where relevant), under which it is signed, or a certified copy of such power or authority shall be delivered at the Company’s branch share registrar and transfer office, Union Registrars Limited, 18th Floor, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding the above meeting or adjourned meeting at which the person named in the enclosed form of proxy proposes to vote, or, in the case of a poll taken subsequent to the date of the above meeting or adjourned meeting, not less than 48 hours before the time appointed for the taking of the poll, and in default the enclosed form of proxy shall not be treated as valid provided always that the chairman of the meeting may at his discretion direct that an instrument of proxy shall be deemed to have been duly deposited upon receipt of telex or cable or facsimile confirmation from the appointor that the instrument of proxy duly signed is in the course of transmission to the Company. Delivery of any instrument appointing a proxy shall not preclude a member from attending and voting in person at the meeting or poll concerned and, in such event, the instrument appointing a proxy shall be deemed to be revoked.
Where there are joint registered holders of any share, any one of such persons may vote at any meeting, either personally or by proxy, in respect of such share as if he/she were solely entitled thereto; but if more than one of such joint holders be present at any meeting personally or by proxy, that one of the said persons so present whose name stands first on the register of members in respect of such shares shall alone be entitled to vote in respect of the relevant joint holding and, for this purpose, seniority shall be determined by reference to the order in which the names of the joint holders stand on the register in respect of the relevant joint holding.
The enclosed form of proxy must be signed by the appointor or by his attorney authorised in writing or, if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person duly authorised to sign the same.
The English translation marked with “*” is for identification only.

– EGM-2 –

AI assistant

China Qinfa Group Limited — Proxy Solicitation & Information Statement 2011

49525_rns_2011-12-08_156f229f-309a-45b7-905c-14d3acc94773.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

CHINA QINFA GROUP LIMITED 中國秦發集團有限公司

VERY SUBSTANTIAL ACQUISITION IN RELATION TO THE ACQUISITION OF 48% INTEREST OF HUAMEIAO ENERGY

AND

NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser to the Company

DEFINITIONS

DEFINITIONS

DEFINITIONS

CHINA QINFA GROUP LIMITED 中國秦發集團有限公司

(Stock code: 866)

Executive Directors:

To Shareholders

VERY SUBSTANTIAL ACQUISITION IN RELATION TO THE ACQUISITION OF 48% INTEREST OF HUAMEIAO ENERGY

AND

NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

THE ACQUISITION AGREEMENT

The equity interest to be acquired

Shareholding structure of Huameiao Energy before and after Completion

Consideration

LETTER FROM THE BOARD

Appointment of directors to Huameiao Energy

Conditions precedent

Completion

INFORMATION OF THE VENDORS

INFORMATION OF HUAMEIAO ENERGY

Background of Huameiao Energy

LETTER FROM THE BOARD

Principal business of Huameiao Energy

Xingtao Coal

Fengxi Coal

LETTER FROM THE BOARD

Chongsheng Coal

LETTER FROM THE BOARD

FINANCIAL INFORMATION OF HUAMEIAO ENERGY GROUP

MANAGEMENT DISCUSSION AND ANALYSIS OF HUAMEIAO ENERGY GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2008, 2009 AND 2010

Financial results

Revenue

Gross profit margin

Other revenue

Administrative expenses

Finance costs

Profit and total comprehensive income for the year

Liquidity and Financial resources

Charges on assets

Contingent liabilities

Capital commitment

Income tax expense

Foreign exchange and currency risks

Staff and remuneration policies

LETTER FROM THE BOARD

MANAGEMENT DISCUSSION AND ANALYSIS OF HUAMEIAO ENERGY GROUP FOR THE SIX MONTHS ENDED 30 JUNE 2011

Financial results

Revenue

Gross profit margin

Other revenue

Administrative expenses

Finance costs

Profit and total comprehensive income

Liquidity and Financial Resources

Charges on assets

Contingent liabilities

Amounts due to shareholders

Capital commitments

LETTER FROM THE BOARD

Capital Structure

Income tax expense

Material investments

Foreign exchange risk and currency risks

Staff and remuneration policies

PRINCIPAL BUSINESS ACTIVITIES OF THE COMPANY

REASON FOR THE PROPOSED ACQUISITION

(i) Improvement in the liquidity of the Group

(ii) Improvement in the equity of the Group

(iii) Reduction of transportation cost

(iv) Potential acquisition and integration opportunity of the Group

China Qinfa Group Limited Proxy Solicitation & Information Statement 2011