Design Capital Limited - Proxy Solicitation & Information Statement 2011

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

If you have sold or transferred all your shares in King Stone Energy Group Limited (the ‘‘Company’’), you should at once hand this circular to the purchaser or transferee or to the bank, licensed securities dealer or other agents through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

KING STONE ENERGY GROUP LIMITED 金山能源集團有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 663)

VERY SUBSTANTIAL ACQUISITION IN RELATION TO ACQUISITION OF COAL MINES IN THE PRC INVOLVING ISSUE OF CONSIDERATION SHARES AND CONVERTIBLE BONDS

Financial adviser to the Company

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A notice convening the extraordinary general meeting of the Company to be held at Room 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong at 12:00 noon on Friday, 25 February 2011 is set out on pages EGM-1 to EGM-2 of this circular. If you are not able to attend the meeting in person, you are requested to complete the form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Tricor Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the meeting. Completion and return of the form of proxy will not prevent you from attending and voting in person at the meeting or any adjournment thereof should you so wish.

9 February 2011

CONTENTS

				Page
Definitions	. . . .		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .				8
Appendix I		—	Financial information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	I-1
Appendix II		—	Financial information on the Target Group . . . . . . . . . . . . . . . . . . . . . . . . .	II-1
Appendix III		—	Unaudited pro forma financial information on the Enlarged Group . . .	III-1
Appendix IV		—	Independent technical review and competent person’s report . . . . . . . . .	IV-1
Appendix V		—	Valuation report on Shaoyaohua and Youyi . . . . . . . . . . . . . . . . . . . . . . . . .	V-1
Appendix VI		—	General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	VI-1
Notice of EGM			. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	EGM-1

– i –

DEFINITIONS

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

‘‘1st Tranche Conversion Shares’’
the 1,764,600,000 new Shares falling to be issued and allotted upon exercise of the conversion rights in full attached to the 1st Tranche Convertible Bonds at the conversion price of HK$0.21 (subject to adjustment) each
‘‘1st Tranche Convertible Bonds’’
the convertible bonds in the principal amount of HK$370,566,000 to be issued by the Company to the Vendor or its nominee for the partial settlement of the Consideration pursuant to the terms of the Acquisition Agreement
‘‘2nd Tranche Conversion Shares’’
the 4,857,000,000 new Shares (subject to adjustment) falling to be issued and allotted upon exercise of the conversion rights in full attached to the 2nd Tranche Convertible Bonds at the conversion price of HK$0.21 (subject to adjustment) each
‘‘2nd Tranche Convertible Bonds’’
the convertible bonds in the aggregate principal amount of up to HK$1,019,970,000 (subject to adjustment) that may be issued by the Company to the Vendor or its nominee for the partial settlement of the Consideration pursuant to the terms of the Acquisition Agreement
‘‘3rd Tranche Conversion Shares’’
the 1,176,400,000 new Shares falling to be issued and allotted upon exercise of the conversion rights in full attached to the 3rd Tranche Convertible Bonds at the conversion price of HK$0.21 (subject to adjustment) each
‘‘3rd Tranche Convertible Bonds’’
the convertible bonds in the principal amount of HK$247,044,000 to be issued by the Company to the Vendor or its nominee for the partial settlement of the Call Option Consideration pursuant to the terms of the Call Option Agreement
‘‘4th Tranche Conversion Shares’’
the 3,238,000,000 new Shares (subject to adjustment) falling to be issued and allotted upon exercise of the conversion rights in full attached to the 4th Tranche Convertible Bonds at the conversion price of HK$0.21 (subject to adjustment) each
‘‘4th Tranche Convertible Bonds’’
the convertible bonds in the aggregate principal amount of up to HK$679,980,000 (subject to adjustment) that may be issued by the Company to the Vendor or its nominee for the partial settlement of the Call Option Consideration pursuant to the terms of the Call Option Agreement
‘‘Acquisition’’
the acquisition of the Sale Shares by the Purchaser from the Vendor pursuant to the Acquisition Agreement (as amended by the Supplemental Agreement)

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DEFINITIONS

‘‘Acquisition Agreement’’
the sale and purchase agreement dated 21 October 2010 entered into between the Purchaser, the Vendor and the Company in relation to the Acquisition (as amended by the Supplemental Agreement)
‘‘Acquisition Completion’’
completion of the sale and purchase of the Sale Shares in accordance with the terms and conditions of the Acquisition Agreement (as amended by the Supplemental Agreement)
‘‘Actual Net Profit’’
the aggregate sum of the audited net profit after tax of Shaoyaohua and Youyi audited by the auditors appointed by the Purchaser in accordance with the HK GAAP during the First Year Profit Guarantee Period or the Second Year Profit Guarantee Period (as the case may be), after translating into equivalent amount in HK$
‘‘Announcement’’
the announcement of the Company dated 4 November 2010 in relation to, inter alia, the Acquisition Agreement, the Call Option Agreement and the Acquisition
‘‘associate(s)’’
the meaning ascribed to it under the Listing Rules
‘‘Board’’
the board of Directors
‘‘Bondholder(s)’’
the holder(s) of the 1st Tranche Convertible Bonds, the 2nd Tranche Convertible Bonds, the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds (as the case may be)
‘‘Business Day’’
a day other than a Saturday, Sunday or public holiday in Hong Kong on which licensed banks in Hong Kong are open for business
‘‘BVI’’ British Virgin Islands
‘‘CAGR’’
compound annual growth rate
‘‘Call Option’’
the call option which the Vendor has granted to the Purchaser pursuant to which the Purchaser will be entitled to acquire the Call Option Shares for the Call Option Consideration within nine months from the date of the Acquisition Completion
‘‘Call Option Agreement’’
the call option agreement dated 21 October 2010 entered into between the Purchaser, the Vendor and the Company in relation to the granting of the Call Option

– 2 –

DEFINITIONS

‘‘Call Option Consideration’’
the maximum aggregate consideration of HK$2,360,000,000 (subject to adjustment) which shall be payable by the Purchaser to the Vendor for exercising the Call Option in full pursuant to the Call Option Agreement
‘‘Call Option Consideration 3,164,800,000 new Shares to be issued and allotted by the Shares’’ Company to the Vendor or its nominee for the partial settlement of the Call Option Consideration pursuant to the terms of the Call Option Agreement
‘‘Call Option Notice’’
the notice to be given to the Vendor by the Purchaser on exercise of the Call Option
‘‘Call Option Shares’’
up to 20,000 issued and fully-paid up shares of the Target Company, representing 40% of the issued share capital of the Target Company
‘‘Coal Mine A’’
the coal mine situated in Shanyin County, Shuozhou City, Shanxi Province, the PRC, the mining permit of which is held by Shaoyaohua, details of which are set out in the paragraph headed ‘‘Information on the Target Coal Mines’’ in the section headed ‘‘Letter from the Board’’ in this circular
‘‘Coal Mine B’’
the coal mine situated in Shanyin County, Shuozhou City, Shanxi Province, the PRC, the mining permit of which will be held by Youyi, details of which are set out in the paragraph headed ‘‘Information on the Target Coal Mines’’ in the section headed ‘‘Letter from the Board’’ in this circular
‘‘Company’’
King Stone Energy Group Limited, a company incorporated in Hong Kong with limited liability, the Shares of which are listed on the Main Board of the Stock Exchange
‘‘connected person(s)’’
the meaning ascribed to it under the Listing Rules
‘‘Consideration’’
the maximum aggregate consideration of HK$3,540,000,000 (subject to adjustment) which shall be payable by the Purchaser to the Vendor for the purchase of the Sale Shares pursuant to the Acquisition Agreement
‘‘Consideration Shares’’
4,747,200,000 new Shares to be issued and allotted by the Company to the Vendor or its nominee for the partial settlement of the Consideration pursuant to the terms of the Acquisition Agreement
‘‘Convertible Bonds’’
the 1st Tranche Convertible Bonds, the 2nd Tranche Convertible Bonds, the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds

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DEFINITIONS

‘‘Deposit Agreement’’ the deposit agreement dated 27 September 2010 entered into between the Purchaser, the Vendor and Mr. Liu Yong, who is the sole beneficial owner of the Vendor

‘‘Directors’’

the directors of the Company

‘‘EGM’’ the extraordinary general meeting of the Company to be held at Room 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong at 12:00 noon on Friday, 25 February 2011 for the purpose of considering and, if thought fit, approving the Acquisition Agreement, the Call Option Agreement and the transactions contemplated thereunder

‘‘Enlarged Group’’ the Group immediately after the Acquisition Completion

‘‘First Distribution Day’’ the fifth Business Day after the date of issue of the audited accounts of Shaoyaohua and Youyi for the year ending 31 December 2011 audited in accordance with the HK GAAP

‘‘First Year Profit Guarantee the financial year from 1 January 2011 to 31 December 2011 Period’’

‘‘Framework Agreement’’ the framework agreement dated 9 June 2010 entered into between the Company and the Vendor in respect of the Acquisition, details of which were set out in the announcement of the Company dated 9 June 2010

‘‘Group’’ the Company and its subsidiaries

‘‘Haimei’’ 山西海煤礦業有限公司 (Shanxi Haimei Mining Co., Ltd.*), a company established in the PRC with limited liability

‘‘Hengming’’ 山西恒明礦業有限公司 (Shanxi Hengming Mining Co., Ltd.*), a company established in the PRC as a wholly foreign owned enterprise with limited liability

‘‘HK GAAP’’ generally accepted accounting principles in Hong Kong ‘‘Hong Kong’’ the Hong Kong Special Administrative Region of the PRC

‘‘JORC Code’’ Australian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves prepared by the Joint Ore Reserves Committee of the Australian Institute of Mining and Metallurgy, Australian Institute of Geoscientists, and Minerals Council of Australia

‘‘Last Trading Day’’ 21 October 2010, being the last trading date prior to the signing of the Acquisition Agreement and the Call Option Agreement

– 4 –

DEFINITIONS

‘‘Latest Practicable Date’’ 1 February 2011, being the latest practicable date prior to the printing of this circular for the purposes of ascertaining certain information contained herein
‘‘Listing Rules’’ the Rules Governing the Listing of Securities on the Stock Exchange
‘‘Lvhai’’ 山西綠海礦業有限公司 (Shanxi Lvhai Mining Co., Ltd.*), a company established in the PRC with limited liability
‘‘MOU’’
the memorandum of understanding dated 26 April 2010 entered into between the Company and the Vendor in respect of the Acquisition, details of which are set out in the announcement of the Company dated 26 April 2010
‘‘PRC’’ the People’s Republic of China
‘‘Profit Guarantee’’
the guarantee by the Vendor on the aggregate audited net profit after tax of Shaoyaohua and Youyi audited in accordance with the HK GAAP during the Profit Guarantee Period, of HK$1,700 million, taking into account any expenses or costs incurred or to be incurred by the Target Company, Shaoyaohua and Youyi for the purpose of providing guarantee and/or security for bank loans to the Purchaser or the Company
‘‘Profit Guarantee Period’’ the First Year Profit Guarantee Period and the Second Year Profit Guarantee Period
‘‘Purchaser’’
Jetway Group Limited, a company incorporated in the BVI with limited liability, being a wholly-owned subsidiary of the Company
‘‘Sale Shares’’
30,000 issued and fully-paid up shares of the Target Company, representing 60% of the issued share capital of the Target Company
‘‘Second Distribution Day’’
the fifth Business Day after the date of issue of the audited accounts of Shaoyaohua and Youyi for the year ending 31 December 2012 audited in accordance with the HK GAAP
‘‘Second Year Profit Guarantee Period’’
the financial year from 1 January 2012 to 31 December 2012
‘‘SFO’’

the Securities and Future Ordinance, Chapter 571 of the Laws of Hong Kong

– 5 –

DEFINITIONS

‘‘Shaoyaohua’’
山西山陰芍藥花煤業有限公司 (Shanxi Shanyin Shaoyaohua Coal Co., Ltd.*), a company established in the PRC with limited liability
‘‘Share(s)’’ share(s) of HK$0.01 each in the share capital of the Company
‘‘Shareholder(s)’’ holder(s) of the Share(s)
‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited
‘‘Supplemental Agreement’’ the supplemental agreement dated 31 December 2010 entered into between the Vendor, the Purchaser and the Company to amend certain terms of the Acquisition Agreement
‘‘Takeovers Code’’ The Hong Kong Code on Takeovers and Mergers
‘‘Target Coal Mines’’ Coal Mine A and Coal Mine B
‘‘Target Company’’ Triumph Fund A1 Limited, a company incorporated in the Cayman Islands with limited liability
‘‘Target Group’’ comprising the Target Company, Hengming, Lvhai, Haimei, Shaoyaohua and Youyi
‘‘Vendor’’ All Aces Investments Limited, a company incorporated in the BVI with limited liability and wholly-owned by Mr. Liu Yong
‘‘Youyi’’ 山西朔州山陰酉宜煤業有限公司 (Shanxi Shuozhou Shanyin Youyi Coal Co., Ltd.*), a company to be established in the PRC with limited liability
‘‘HK$’’ or ‘‘HKD’’
Hong Kong dollars, the lawful currency of Hong Kong
‘‘RMB’’ Renminbi, the lawful currency of the PRC
‘‘US$’’ or ‘‘USD’’ United States dollars, the lawful currency of the United States of America
‘‘mm’’
millimetre
‘‘Mt’’ million tonne
‘‘Mtpa’’ million tonne per annum
‘‘kt’’
kilotonne
‘‘km’’ kilometers ‘‘sq. km.’’ square kilometers ‘‘%’’ per cent.

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DEFINITIONS

For the purpose of this circular, unless otherwise stated, translation of RMB into HK$ are based on the approximate exchange rate of RMB0.86 to HK$1.00. The exchange rate is for illustration purpose only and does not constitute a representation that any amounts have been, could have been or may be exchanged at this or any other rates at all.

for identification purpose only

– 7 –

LETTER FROM THE BOARD

KING STONE ENERGY GROUP LIMITED 金山能源集團有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 663)

Executive Directors: Mr. Wang Da Yong Mr. Tian Wenwei Mr. Wang Tongtian

Non-executive Directors: Mr. Li Yi Mr. Su Bin

Registered office in Hong Kong: Suite 3603, 36th Floor One Exchange Square 8 Connaught Place Central Hong Kong

Independent non-executive Directors:

Mr. Jacobsen William Keith Mr. Cao Kuangyu Mr. Chiu Sui Keung

9 February 2011

To the Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION IN RELATION TO ACQUISITION OF COAL MINES IN THE PRC INVOLVING ISSUE OF CONSIDERATION SHARES AND CONVERTIBLE BONDS

1. INTRODUCTION

Reference is made to the announcements of the Company dated 26 April 2010 and 9 June 2010 in relation to the MOU and the Framework Agreement respectively, the Announcement in relation to the Acquisition Agreement, the Call Option Agreement and the Acquisition and the announcement of the Company dated 31 December 2010 in relation to the Supplemental Agreement.

– 8 –

LETTER FROM THE BOARD

On 4 November 2010, the Board announced that, subsequent to the signing of the MOU and the Framework Agreement, on 21 October 2010, the Vendor, the Purchaser and the Company entered into the Acquisition Agreement pursuant to which the Vendor has conditionally agreed to sell and the Purchaser has conditionally agreed to purchase, the Sale Shares at the aggregate Consideration of HK$3,540,000,000 (subject to adjustment).

In addition to the Acquisition Agreement, on 21 October 2010, the Vendor, the Purchaser and the Company entered into the Call Option Agreement in respect of the granting of the Call Option by the Vendor to the Purchaser pursuant to which the Purchaser will be entitled to acquire the Call Option Shares, in whole or in part, representing up to a maximum additional 40% of the issued share capital of the Target Company, for the Call Option Consideration of HK$2,360,000,000 (subject to adjustment) within nine months from the date of the Acquisition Completion by giving the Call Option Notice to the Vendor.

On 31 December 2010, the Vendor, the Purchaser and the Company entered into the Supplemental Agreement to amend certain terms of the Acquisition Agreement including, among others, (i) the adding of an additional condition precedent that, as of the date of the Acquisition Completion, the total amount of all liabilities and capital commitments (after deducting all the intra-group payables between the Target Company and its subsidiaries and excluding any deferred tax liability arising from valuation gains of the mining permits) as shown in the management accounts of each of the Target Company and its subsidiaries shall not exceed RMB300 million; and (ii) the Vendor shall, at the request of the Purchaser and/or the Company, indemnify the Purchaser and/or the Company against (a) all capital commitments arising from the acquisition of Shaoyaohua and Youyi by the Target Group (whether such capital commitment(s) has been reflected in the accounts of the Target Group as at the date of the Acquisition Completion); and (b) any taxation falling on the Target Group in any jurisdiction resulting from any income, profits or gains earned, accrued or received on or before the date of the Acquisition Completion, except the taxation which has been reflected in the accounts of the Target Group as at the date of the Acquisition Completion or to the extent that reserve or provision has been made for such taxation in the accounts of the Target Group.

The purpose of this circular is to provide you with, among others, (i) further details of the Acquisition and the Call Option; (ii) financial information of the Group; (iii) financial information of the Target Group; (iv) the unaudited pro forma financial information on the Enlarged Group; (v) the valuation report on Shaoyaohua and Youyi; (vi) the independent technical review and competent person’s report on the Target Coal Mines prepared under Chapter 18 of the Listing Rules; (vii) the information required under Rule 18.05 (2) to (6) of the Listing Rules; and (viii) a notice of the EGM.

THE ACQUISITION AGREEMENT (AS AMENDED BY THE SUPPLEMENTAL AGREEMENT)

Date : 21 October 2010 Parties Purchaser : Jetway Group Limited, a wholly-owned subsidiary of the Company Vendor : All Aces Investments Limited Issuer : the Company

– 9 –

LETTER FROM THE BOARD

Subject matter of the Acquisition Agreement

Pursuant to the Acquisition Agreement, the Vendor has conditionally agreed to sell and the Purchaser has conditionally agreed to purchase, the Sale Shares.

The Sale Shares represent 60% of the issued share capital of the Target Company. The Target Group has commenced a reorganisation. The reorganisation with respect to Shaoyaohua was completed on 2 December 2010 and as a result, Haimei is, through its equity interest in Shaoyaohua, beneficially interested in 95% of Coal Mine A. The reorganisation with respect to Youyi is in the process and upon completion of such reorganisation, Haimei will be, through its equity interest in Youyi, beneficially interested in 100% of Coal Mine B.

Upon the Acquisition Completion, the Company, through the Purchaser, will hold the Sale Shares and the financial position and results of the Target Group will be consolidated into the financial statements of the Group.

Consideration

The aggregate Consideration for the Sale Shares is HK$3,540,000,000 (subject to adjustment as described in the sub-paragraph headed ‘‘Adjustments to the Consideration’’ below), which shall be payable by the Purchaser to the Vendor in the following manner:

(i) as to HK$180,000,000 in cash as refundable earnest money which was paid on 27 September 2010 pursuant to the Deposit Agreement;
(ii) as to HK$1,020,024,000 in cash by way of remittance into the bank account designated by the Vendor on the Acquisition Completion;
(iii) as to HK$949,440,000 by way of allotment and issue of 4,747,200,000 Consideration Shares by the Company to the Vendor or its nominee at a price of HK$0.20 per Consideration Share on the Acquisition Completion;
(iv) as to HK$370,566,000 by way of issue of the 1st Tranche Convertible Bonds by the Company to the Vendor or its nominee on the Acquisition Completion; and
(v) as to HK$1,019,970,000 (subject to adjustment as specified in the sub-paragraph headed ‘‘Adjustments to the Consideration’’ below) by way of issue of the 2nd Tranche Convertible Bonds by the Company to the Vendor or its nominee on the First Distribution Day and the Second Distribution Day (as the case may be), respectively issuable as described below.

Basis of the Consideration

The Consideration was agreed after arm’s length negotiations between the Vendor, the Purchaser and the Company taking into account (i) the potentially growing demand for coal resources in the future as highlighted in detail under the paragraph headed ‘‘Industry overview’’ below; (ii) the preliminary assessment of the measured and indicated resources/reserves of the Target Coal Mines under the PRC code, details of which are set out in the sub-paragraph headed ‘‘Resources and reserves’’ under the paragraph headed ‘‘Information on the Target Coal Mines’’

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LETTER FROM THE BOARD

below; and (iii) the Profit Guarantee of not less than HK$1,700,000,000 during the Profit Guarantee Period as guaranteed by the Vendor by means of the adjustment mechanism as detailed in the sub-paragraph headed ‘‘Adjustments to the Consideration’’ below.

Adjustments to the Consideration

Pursuant to the Acquisition Agreement, the Vendor has provided the Profit Guarantee to the Purchaser. The Profit Guarantee and the Profit Guarantee Period were determined after arm’s length negotiations between the Company, the Purchaser and the Vendor with reference to the estimated mining plans, the expected production volume, the average selling prices of coal and the estimated production costs of the Target Coal Mines. The Directors consider that the Profit Guarantee and the corresponding adjustment mechanism to the Consideration are normal commercial terms and that the inclusion of such terms as the principal terms of the Acquisition Agreement would help to safeguard the interests of the Company and the Shareholders as a whole.

If Actual Net Profit is recorded in the First Year Profit Guarantee Period, on the First Distribution Day the Company will issue to the Vendor the 2nd Tranche Convertible Bonds with an aggregate principal amount equivalent to 60% of the Actual Net Profit for the First Year Profit Guarantee Period (rounded down to the nearest integral multiple of HK$210,000 and the amount of such difference (if any) would be settled by the Company to the Vendor in cash) and up to a maximum principal amount of HK$1,019,970,000. If Actual Net Profit is recorded in the Second Year Profit Guarantee Period, on the Second Distribution Day, the Company will issue the 2nd Tranche Convertible Bonds with an aggregate principal amount equivalent to 60% of the Actual Net Profit for the Second Year Profit Guarantee Period (rounded down to the nearest integral multiple of HK$210,000 and the amount of such difference (if any) would be settled by the Company to the Vendor in cash) to the Vendor, provided that the aggregate principal amount of the 2nd Tranche Convertible Bonds issued to the Vendor on the First Distribution Day and the Second Distribution Day shall not exceed HK$1,019,970,000.

If Actual Net Profit is recorded in the First Year Profit Guarantee Period, on the First Distribution Day the Company will issue to the Vendor the 2nd Tranche Convertible Bonds with an aggregate principal amount equivalent to 60% of the Actual Net Profit for the First Year Profit Guarantee Period (rounded down to the nearest integral multiple of HK$210,000 and the amount of such difference (if any) would be settled by the Company to the Vendor in cash) and up to a maximum principal amount of HK$1,019,970,000 to the Vendor. However, if Shaoyaohua and Youyi record a loss which is audited by the auditors appointed by the Purchaser in accordance with HK GAAP (except for a loss incurred due to force majeure) for the Second Year Profit Guarantee Period, no 2nd Tranche Convertible Bonds will be issued to the Vendor on the Second Distribution Day and the Vendor will be obliged to pay the Purchaser the amount equivalent to 60% of the loss incurred during the Second Year Profit Guarantee Period in cash on the Second Distribution Day and there is no ceiling to such compensation from the Vendor.

– 11 –

LETTER FROM THE BOARD

If Shaoyaohua and Youyi record a loss (except for a loss incurred due to force majeure) for the First Year Profit Guarantee Period but record a profit in the Second Year Profit Guarantee Period and:

(i) if net loss is recorded for the Profit Guarantee Period, no 2nd Tranche Convertible Bonds will be issued to the Vendor on the First Distribution Day or the Second Distribution Day and the Vendor will be obliged to pay the Purchaser the amount equivalent to 60% of the net loss incurred during the Profit Guarantee Period in cash on the Second Distribution Day and there is no ceiling to such compensation from the Vendor; or
(ii) if net profit is recorded for the Profit Guarantee Period, no 2nd Tranche Convertible Bonds will be issued to the Vendor on the First Distribution Day and the Company will issue the 2nd Tranche Convertible Bonds with an aggregate principal amount equivalent to 60% of the net profit for the Profit Guarantee Period (rounded down to the nearest integral multiple of HK$210,000 and the amount of such difference (if any) would be settled by the Company to the Vendor in cash) and up to a maximum principal amount of HK$1,019,970,000 to the Vendor on the Second Distribution Day.

If Shaoyaohua and Youyi record a loss (except for loss incurred due to force majeure) for the First Year Profit Guarantee Period and the Second Year Profit Guarantee Period, no 2nd Tranche Convertible Bonds will be issued to the Vendor on the First Distribution Day and the Second Distribution Day, and the Vendor will be obliged to pay the Purchaser the amount equivalent to 60% of the loss incurred during the Profit Guarantee Period in cash on the Second Distribution Day and there is no ceiling to such compensation from the Vendor.

The Consideration Shares

At the Acquisition Completion, the Company will allot and issue, credited as fully paid, an aggregate of 4,747,200,000 Consideration Shares at an issue price of HK$0.20 per Consideration Share to the Vendor (or its nominee) as partial settlement of the Consideration. The 4,747,200,000 Consideration Shares represent approximately 20.09% of the existing issued share capital of the Company and approximately 16.73% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares (assuming that there is no change in the issued share capital of the Company from the Latest Practicable Date to the date of the Acquisition Completion and disregarding any Shares issuable upon exercise of any conversion rights under the Convertible Bonds).

The issue price per Consideration Share of HK$0.20 was arrived at after arm’s length negotiation between the Company, the Purchaser and the Vendor taking into account the recent trading prices of the Shares before the date of the Acquisition Agreement. The issue price of the Consideration Shares represents:

a discount of approximately 14.53% to the closing price of HK$0.2340 per Share as quoted on the Stock Exchange on the Last Trading Day;

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LETTER FROM THE BOARD

a discount of approximately 10.31% to the average closing price of HK$0.2230 per Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including the Last Trading Day;
a discount of approximately 7.75% to the average closing price of HK$0.2168 per Share as quoted on the Stock Exchange for the last 10 trading days up to and including the Last Trading Day;
a premium of approximately 8.11% over the closing price of HK$0.185 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and
a premium of approximately 8.64% over the average closing price of HK$0.1841 per Share as quoted on the Stock Exchange between the period from the date of the Framework Agreement (i.e. 9 June 2010) up to the Last Trading Day (both days are exclusive).

The 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds

At the Acquisition Completion, the Company will issue to the Vendor (or its nominee) the 1st Tranche Convertible Bonds as partial settlement of the Consideration for the Acquisition. On the First Distribution Day and the Second Distribution Day (as the case may be), the Company will issue to the Vendor (or its nominee) the 2nd Tranche Convertible Bonds.

Assuming all the 2nd Tranche Convertible Bonds are issued and no adjustment is required to be made to the Consideration, upon exercise of the conversion rights attached to the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds in full, the Company will allot and issue 1,764,600,000 1st Tranche Conversion Shares and 4,857,000,000 2nd Tranche Conversion Shares, which in aggregate represent (i) approximately 28.02% of the existing issued share capital of the Company; and (ii) approximately 18.92% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares, the 1st Tranche Conversion Shares and the 2nd Tranche Conversion Shares upon the exercise of the conversion rights attached to the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds in full (assuming that there is no change in the issued share capital of the Company from the Latest Practicable Date to the date of the Acquisition Completion other than the issue of the Consideration Shares, the 1st Tranche Conversion Shares and the 2nd Tranche Conversion Shares and assuming all the 2nd Tranche Convertible Bonds are issued). The aggregate nominal value of the 1st Tranche Conversion Shares and the 2nd Tranche Conversion Shares will be HK$66,216,000 assuming the conversion rights attached to the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds are exercised in full and assuming all the 2nd Tranche Convertible Bonds are issued.

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LETTER FROM THE BOARD

The principal terms of the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds are summarised below:

Principal amount: — The 1st Tranche Convertible Bonds — HK$370,566,000 — The 2nd Tranche Convertible Bonds — HK$1,019,970,000 (subject to adjustments as set out in the sub-paragraph headed ‘‘Adjustments to the Consideration’’ above) Interest: The 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds will not bear any interest. Maturity date: The date immediately preceding the fifth anniversary of the issue of the 1st Tranche Convertible Bonds or, if that is not a Business Day, the first Business Day thereafter. Conversion price: HK$0.21 per 1st Tranche Conversion Share and 2nd Tranche Conversion Share (subject to adjustments for share consolidation or share sub-division only). The conversion price of HK$0.21 was arrived at after arm’s length negotiations between the Company, the Purchaser and the Vendor taking into account the recent prices of the Shares before the date of the Acquisition Agreement. Such conversion price represents:

a discount of approximately 10.26% to the closing price of HK$0.2340 per Share as quoted on the Stock Exchange on the Last Trading Day;
a discount of approximately 5.83% to the average closing price of HK$0.2230 per Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including the Last Trading Day;
a discount of approximately 3.14% to the average closing price of HK$0.2168 per Share as quoted on the Stock Exchange for the last 10 consecutive trading days up to and including the Last Trading Day;
a premium of approximately 13.51% over the closing price of HK$0.185 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and

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LETTER FROM THE BOARD

a premium of approximately 14.07% over the average closing price of HK$0.1841 per Share as quoted on the Stock Exchange between the period from the date of the Framework Agreement (i.e. 9 June 2010) up to the Last Trading Day (both days are exclusive).

Redemption:

Conversion periods:

Conversion:

Upon the maturity date, the Company shall redeem the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds at the redemption amount which is 100% of the respective principal amount of the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds then outstanding which the Company may elect to satisfy the sums payable on redemption in cash or by the issue of the 1st Tranche Conversion Shares and the 2nd Tranche Conversion Shares at the conversion price of HK$0.21 each or a combination of both.

The periods will commence on the respective dates of the issue of the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds up to the maturity date.

Bondholder(s) shall have the right at any time during the conversion period to require the Company to convert the whole or any part (in HK$210,000 or in integral multiple thereof or if the aggregate holding of the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds by the Bondholder in question is less than the amount of HK$210,000, in the whole of that aggregate holding) of the principal amount outstanding under the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds into the 1st Tranche Conversion Shares and the 2nd Tranche Conversion Shares at the conversion price of HK$0.21 each.

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LETTER FROM THE BOARD

No conversion right may be exercised by the Bondholder (i) if the issue of the 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares, the 3rd Tranche Conversion Shares and/or the 4th Tranche Conversion Shares pursuant to such conversion will cause the issued Shares in the hands of the ‘‘public’’ (as defined in Rule 8.24 of the Listing Rules) to fall below 25% or such other minimum percentage of the total issued share capital of a listed company as prescribed under the Listing Rules that must remain in public hands; or (ii) if upon conversion, all the Shares (including the 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares, the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares issued or to be issued) held by the Bondholder, its associates and persons acting in concert (as defined under the Takeovers Code) on the relevant date of conversion will reach such amount of the issued share capital of the Company which will trigger a mandatory offer under Rule 26 of the Takeovers Code and in this connection, prior written confirmation shall be given by the Bondholder to the Company confirming that all the Shares (including the 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares, the 3rd Tranche Conversion Shares and/or the 4th Tranche Conversion Shares issued or to be issued) held by the Bondholder, its associates and persons acting in concert (as defined under the Takeovers Code) immediately upon conversion will not reach 30% or more of voting rights of the Company or trigger a mandatory offer under Rule 26 of the Takeovers Code.

Ranking of the 1st Tranche Conversion Shares and the 2nd Tranche Conversion Shares:

Shares issued upon conversion shall rank pari passu in all respects with all other Shares in issue on the relevant date of conversion and the Bondholder shall be entitled to all dividends, and other distributions, rights or entitlements the record date for which falls after the relevant date of conversion.

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LETTER FROM THE BOARD

Transferability:

The 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds (or any part thereof) may not be assigned or transferred to a connected person of the Company without the prior written consent of the Company. Without prejudice to the aforesaid any assignment and/or transfer of the 1st Tranche Convertible Bonds and/or the 2nd Tranche Convertible Bonds is subject to (i) compliance with the Listing Rules for so long as the Shares are listed on the Stock Exchange (and the rules of any other stock exchange on which the Shares may be listed at the relevant time) and all applicable laws and regulations; and (ii) the approval of the Shareholders in a general meeting if so required under, and in compliance with, the Listing Rules if such assignment and/or transfer is proposed to be made to a connected person of the Company.

Any assignment or transfer of the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds shall be of the whole or any part (being HK$210,000 or in integral multiple thereof) of the outstanding principal amount of the relevant tranche(s) of the Convertible Bonds.

Voting rights:

Bondholder(s) will not be entitled to receive notices of, attend or vote at any meetings of the Company by reason only of being Bondholder(s).

Application for listing:

Status:

No application will be made for the listing of the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds on the Stock Exchange or any other stock exchanges. The obligations of the Company arising under the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds will constitute general, unsubordinated, direct, unconditional and unsecured obligations of the Company and shall at all times rank equally among themselves and pari passu with all other present and future unsecured and unsubordinated obligations of the Company except for obligations accorded preference by mandatory provisions of applicable law.

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LETTER FROM THE BOARD

Conditions precedent to the Acquisition Agreement

Acquisition Completion is conditional upon the satisfaction of the following conditions:

(a) the Purchaser having completed, to its satisfaction, a due diligence review on the legal, financial and operational matters of the Target Group and no material adverse change relating to the Target Group having occurred since the date of the Acquisition Agreement up to the date of Acquisition Completion;
(b) the Purchaser having obtained a PRC legal opinion (in both form and substance satisfactory to the Purchaser) issued by a PRC lawyer which covers matters relating to (i) the due incorporation and valid existence of Hengming, Lvhai, Haimei, Shaoyaohua and Youyi and each of them has, since establishment (as in the case of Youyi, since the date of approval to be reformed as a limited liability company), (1) not committed any material breaches of laws or regulations in the PRC or has been the subject of any outstanding litigation and administrative punishments; (2) made all the required tax filings and has paid all outstanding tax liabilities in the PRC; (3) not involved in any serious industrial accidents or matters; (4) obtained land use rights and building ownership rights in respect of all its owned properties in the PRC (5) obtained all licenses, permits and certificates necessary to conduct its operations; and (6) lawfully engaged in coal mining business; (ii) the mining licences of Shaoyaohua and Youyi being valid as at the date of the issue of the PRC legal opinion and can be lawfully renewed on expiry; (iii) such other matters relating to the business, assets and liabilities of the Target Group in the PRC; and (iv) the Acquisition Agreement and the transactions contemplated thereunder will not be in breach of the Circular of the State Administration of Foreign Exchange on Relevant Issues concerning Foreign Exchange Administration of Financing and Round Trip Investment Undertaken by Domestic Residents through Overseas Special-purpose Vehicles issued on 21 October 2005 and the Implementing Rules for the Notice of the State Administration of Foreign Exchange on the Relevant Issues about Foreign Exchange Control over the Financing and Round Trip Investment of Domestic Residents through Overseas Special Purpose Companies issued on 29 May 2007, and other matters as may be reasonably required by the Purchaser;
(c) the Purchaser having obtained a Cayman Islands legal opinion (in both form and substance satisfactory to the Purchaser) issued by a Cayman Islands lawyer and a BVI legal opinion (in both form and substance satisfactory to the Purchaser) issued by a BVI lawyer within each of which covers matters relating to (i) the due incorporation and valid existence of the Vendor and the Target Company in the BVI and Cayman Islands respectively and the identities of the shareholder(s) and the director(s) of the Vendor and the Target Company; (ii) each of the Vendor and the Target Company not having applied for winding up, and is not in receivership or liquidation and no application has been made by any third party for the appointment of receiver or liquidator; and (iii) the Vendor being the registered owner of the Sale Shares and has the authority to sign, deliver and perform the Acquisition Agreement and such rights are not subject to any lien, charge and encumbrance;

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(d) the passing of the requisite resolution at the EGM by the Shareholders to approve the Acquisition Agreement and the transactions contemplated thereunder, including the issue of the Consideration Shares, the 1st Tranche Convertible Bonds, the 2nd Tranche Convertible Bonds, the 1st Tranche Conversion Shares and the 2nd Tranche Conversion Shares;
(e) the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the Consideration Shares, the 1st Tranche Conversion Shares and the 2nd Tranche Conversion Shares;
(f) the current listing status of the Shares has not been revoked or cancelled and the Shares continuing to be traded on the Stock Exchange (excluding the suspension of trading in the Shares for not more than 10 consecutive trading days and any suspension of trading in the Shares pending the release of Announcement) and no indication being received from the Stock Exchange that the listing status of the Shares would be revoked or cancelled due to or after the Acquisition Completion;
(g) the Purchaser having received a competent person’s report in compliance with the requirements under Chapter 18 of the Listing Rules) on the coal mines owned by the Target Company (in both form and substance satisfactory to the Purchaser) issued by a qualified independent technical adviser;
(h) the Purchaser having received a valuation report in compliance with the requirements under Chapter 18 of the Listing Rules) on the coal mines owned by the Target Company (in both form and substance satisfactory to the Purchaser) issued by a qualified independent valuer;
(i) the Vendor having executed and delivered the Call Option Agreement to the Purchaser and the Company;
(j) Haimei having received all relevant approvals from the governmental bodies in the PRC for completion of the acquisitions of Shaoyaohua and Youyi and Haimei is the legal and beneficial owner of 95% equity interest in Shaoyaohua and 100% equity interest in Youyi, respectively; and
(k) as of the date of the Acquisition Completion, the total amounts of all liabilities and capital commitments (after deducting all the intra-group payables between the Target Company and its subsidiaries and excluding any deferred tax liability arising from valuation gains of the mining permits) as shown in the management accounts (prepared in accordance with Hong Kong Financial Reporting Standards) of each of the Target Company and its subsidiaries (whether such amount(s) has been reflected in the aforesaid management accounts) shall not exceed RMB300 million.

In the event that the above conditions precedent are not fulfilled (or waived) on or before 31 March 2011, or such later date as the parties to the Acquisition Agreement may agree in writing, the Acquisition Agreement shall lapse and be of no further effect and no party to the Acquisition Agreement shall have any claim, liability or obligation against to the other party (save for any antecedent breaches of the Acquisition Agreement). The Vendor shall return the HK$180,000,000

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LETTER FROM THE BOARD

earnest money to the Purchaser within three Business Days after the date of termination of the Acquisition Agreement. The Acquisition Agreement provides the right for the Purchaser and the Company to waive any or all of the above conditions precedent by giving a written notice to the Vendor at any time before the lapse of the Acquisition Agreement.

Acquisition Completion

Acquisition Completion shall take place at 3:00 p.m. on the fifth Business Day immediately following the fulfillment or waiver of the conditions precedent set out in the Acquisition Agreement or such other date as the parties thereto may agree.

3. THE CALL OPTION AGREEMENT

Date : 21 October 2010

Parties

Grantee : Jetway Group Limited, a wholly-owned subsidiary of the Company Grantor : All Aces Investments Limited Issuer : the Company

Subject matter of the Call Option Agreement

In addition to the Acquisition, on 21 October 2010, the Vendor, the Purchaser and the Company entered into the Call Option Agreement in respect of the granting of the Call Option by the Vendor to the Purchaser pursuant to which the Purchaser will be entitled to acquire the Call Option Shares, in whole or in part, representing up to a maximum of additional 40% of the issued share capital of the Target Company, for the Call Option Consideration of HK$2,360,000,000 (subject to adjustment) within nine months from the date of the Acquisition Completion by giving the Call Option Notice to the Vendor. In the event that the Call Option has been exercised to purchase part of the Call Option Shares, the Call Option Consideration will be adjusted on a pro rata basis with reference to the number of shares in respect of which the Call Option is exercised.

To the extent that the Purchaser exercises the Call Option in full, the Call Option Consideration of HK$2,360,000,000 (subject to adjustment) is expected to be satisfied in the following manner:

(i) as to HK$800,016,000 in cash by way of remittance into the bank account designated by the Vendor on completion of the Call Option Agreement;
(ii) as to HK$632,960,000 by way of allotment and issue of 3,164,800,000 Call Option Consideration Shares by the Company to the Vendor or its nominee at a price of HK$0.20 per each Call Option Consideration Share on completion of the Call Option Agreement;

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LETTER FROM THE BOARD

(iii) as to HK$247,044,000 by way of issue of the 3rd Tranche Convertible Bonds by the Company to the Vendor or its nominee on completion of the Call Option Agreement; and
(iv) as to HK$679,980,000 (subject to adjustment as specified in the sub-paragraph headed ‘‘Adjustments to the Call Option Consideration’’ below) by way of issue of the 4th Tranche Convertible Bonds by the Company to the Vendor or its nominee on the First Distribution Day and the Second Distribution Day (as the case may be), respectively.

Basis of the Call Option Consideration

The Call Option Consideration was agreed after arm’s length negotiations between the Vendor, the Purchaser and the Company taking into account that (i) the potentially growing demand for coal resources in the future as highlighted in detail under the paragraph headed ‘‘Industry overview’’ below; (ii) the preliminary assessment of the measured and indicated resources/reserves of the Target Coal Mines under the PRC code, details of which are set out under the sub-paragraph headed ‘‘Resources and reserves’’ under the paragraph headed ‘‘Information on the Target Coal Mines’’ below; and (iii) the Profit Guarantee of not less than HK$1,700,000,000 during the Profit Guarantee Period as guaranteed by the Vendor by means of the adjustment mechanism as detailed in the sub-paragraph headed ‘‘Adjustments to the Call Option Consideration’’ below.

Adjustments to the Call Option Consideration

The Profit Guarantee and Profit Guarantee Period were determined after arm’s length negotiations between the Company, the Purchaser and the Vendor with reference to the estimated mining plans, the expected production volume, the average selling prices of coal and the estimated production costs of the Target Coal Mines. The Directors consider that the Profit Guarantee and the corresponding adjustment mechanism to the Call Option Consideration are normal commercial terms and that the inclusion of such terms as the principal terms of the Call Option Agreement would help to safeguard the interests of the Company and the Shareholders as a whole.

In the event that the Purchaser exercises the Call Option in full, if Actual Net Profit is recorded in the First Year Profit Guarantee Period, on the First Distribution Day, the Company will issue the 4th Tranche Convertible Bonds with an aggregate principal amount equivalent to 40% of the Actual Net Profit for the First Year Profit Guarantee Period (rounded down to the nearest integral multiple of HK$210,000 and the amount of such difference (if any) would be settled by the Company to the Vendor in cash) and up to a maximum principal amount of HK$679,980,000 to the Vendor. If Actual Net Profit is recorded in the Second Year Profit Guarantee Period, on the Second Distribution Day, the Company will issue the 4th Tranche Convertible Bonds with an aggregate principal amount equivalent to 40% of the Actual Net Profit for the Second Year Profit Guarantee Period (rounded down to the nearest integral multiple of HK$210,000 and the amount of such difference (if any) would be settled by the Company to the Vendor in cash) to the Vendor, provided that the aggregate principal amount of the 4th Tranche Convertible Bonds issued to the Vendor on the First Distribution Day and the Second Distribution Day shall not exceed HK$679,980,000.

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LETTER FROM THE BOARD

If Actual Net Profit is recorded in the First Year Profit Guarantee Period, on the First Distribution Day, the Company will issue the 4th Tranche Convertible Bonds with an aggregate principal amount equivalent to 40% of the Actual Net Profit for the First Year Profit Guarantee Period (rounded down to the nearest integral multiple of HK$210,000 and the amount of such difference (if any) would be settled by the Company to the Vendor in cash) and up to a maximum principal amount of HK$679,980,000 to the Vendor. However, if Shaoyaohua and Youyi record a loss which is audited by the auditors appointed by the Purchaser in accordance with HK GAAP (except for loss incurred due to force majeure) for the Second Year Profit Guarantee Period, no 4th Tranche Convertible Bonds will be issued to the Vendor on the Second Distribution Day and the Vendor will be obliged to pay the Purchaser the amount equivalent to 40% of the loss incurred during the Second Year Profit Guarantee Period in cash on the Second Distribution Day and there is no ceiling to such compensation from the Vendor.

If Shaoyaohua and Youyi record a loss (except for a loss incurred due to force majeure) for the First Year Profit Guarantee Period and record a profit in the Second Year Profit Guarantee Period and:

(i) if net loss is recorded for the Profit Guarantee Period, no 4th Tranche Convertible Bonds will be issued to the Vendor on the First Distribution Day and the Second Distribution Day and the Vendor will be obliged to pay the Purchaser the amount equivalent to 40% of the net loss incurred during the Profit Guarantee Period in cash on the Second Distribution Day and there is no ceiling to such compensation from the Vendor; or
(ii) if net profit is recorded for the Profit Guarantee Period, no 4th Tranche Convertible Bonds will be issued to the Vendor on the First Distribution Day and the Company will issue the 4th Tranche Convertible Bonds with an aggregate principal amount equivalent to 40% of the net profit for the Profit Guarantee Period (rounded down to the nearest integral multiple of HK$210,000 and the amount of such difference (if any) would be settled by the Company to the Vendor in cash) and up to a maximum principal amount of HK$679,980,000 to the Vendor on the Second Distribution Day.

If Shaoyaohua and Youyi record a loss (except for loss incurred due to force majeure) for the First Year Profit Guarantee Period and the Second Year Profit Guarantee Period, no 4th Tranche Convertible Bonds will be issued to the Vendor on the First Distribution Day and the Second Distribution Day, and the Vendor will be obliged to pay the Purchaser the amount equivalent to 40% of the loss incurred during the Profit Guarantee Period in cash on the Second Distribution Day and there is no ceiling to such compensation from the Vendor.

The Call Option Consideration Shares

In the event that the Purchaser exercises the Call Option in full, upon completion of the Call Option Agreement, the Company will allot and issue, credited as fully paid, an aggregate of 3,164,800,000 Call Option Consideration Shares at an issue price of HK$0.20 per Call Option Consideration Share to the Vendor (or its nominee) as partial settlement of the Call Option Consideration. The 3,164,800,000 Call Option Consideration Shares represent approximately 13.39% of the existing issued share capital of the Company and approximately 10.03% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares and the Call Option Consideration Shares (assuming that there is no change in the issued share capital of

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the Company from the Latest Practicable Date to the date of the completion of the Call Option Agreement other than the issue of the Consideration Shares upon the Acquisition Completion and disregarding any Shares issuable upon exercise of any conversion rights under the Convertible Bonds).

The 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds

In the event that the Purchaser exercises the Call Option in full, upon completion of the Call Option Agreement, the Company will issue to the Vendor the 3rd Tranche Convertible Bonds as partial settlement of the Call Option Consideration. On the First Distribution Day and the Second Distribution Day (as the case may be), the Company will issue to the Vendor the 4th Tranche Convertible Bonds.

Assuming that the Purchaser exercises the Call Option in full, all the 4th Tranche Convertible Bonds are issued to the Vendor and no adjustment is required to be made to the Call Option Consideration, upon exercise of the conversion rights attached to the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds in full, the Company will allot and issue 1,176,400,000 3rd Tranche Conversion Shares and 3,238,000,000 4th Tranche Conversion Shares, which in aggregate represents (i) approximately 18.68% of the existing issued share capital of the Company; and (ii) approximately 10.37% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares, the Call Option Consideration Shares, the 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares, the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares upon the exercise of the conversion rights attached to the 1st Tranche Convertible Bonds, the 2nd Tranche Convertible Bonds, the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds in full (assuming that there is no change in the issued share capital of the Company from the Latest Practicable Date to the date of completion of the Call Option Agreement other than the issue of the Consideration Shares, the Call Option Consideration Shares, the 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares, the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares and assuming all the 2nd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds are issued). The aggregate nominal value of the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares will be HK$44,144,000 assuming the conversion rights attached to the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds are exercised in full and assuming all the 4th Tranche Convertible Bonds are issued.

The principal terms of the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds are summarised as below:

Principal amount:

— The 3rd Tranche Convertible Bonds — HK$247,044,000

— The 4th Tranche Convertible Bonds — HK$679,980,000 (subject to adjustments as set out in the sub-paragraph headed ‘‘Adjustments to the Call Option Consideration’’ above)

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LETTER FROM THE BOARD

Interest:

Maturity date:

Conversion price:

The 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds will not bear any interest.

The date immediately preceding the fifth anniversary of the issue of the 1st Tranche Convertible Bonds or, if that is not a Business Day, the first Business Day thereafter.

HK$0.21 per 3rd Tranche Conversion Share and 4th Tranche Conversion Share (subject to adjustments for share consolidation and share sub-division only).

The conversion price of HK$0.21 was arrived at after arm’s length negotiations between the Company, the Purchaser and the Vendor taking into account the recent prices of the Shares before the date of the Call Option Agreement. Such conversion price represents:

a discount of approximately 10.26% to the closing price of HK$0.2340 per Share as quoted on the Stock Exchange on the Last Trading Day;
a discount of approximately 5.83% to the average closing price of HK$0.2230 per Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including the Last Trading Day;
a discount of approximately 3.14% to the average closing price of HK$0.2168 per Share as quoted on the Stock Exchange for the last 10 consecutive trading days up to and including the Last Trading Day;
a premium of approximately 13.51% over the closing price of HK$0.185 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and
a premium of approximately 14.07% over the average closing price of HK$0.1841 per Share as quoted on the Stock Exchange between the period from the date of the Framework Agreement (i.e. 9 June 2010) up to the Last Trading Day (both days are exclusive).

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LETTER FROM THE BOARD

Redemption:

Conversion periods:

Conversion:

Upon the maturity date, the Company shall redeem the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds at the redemption amount which is 100% of the respective principal amounts of the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds then outstanding which the Company may elect to satisfy the sum payable on redemption in cash or by the issue of the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares at the conversion price of HK$0.21 each or a combination of both.

The periods will commence on the respective dates of the issue of the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds to the maturity date.

Bondholder(s) shall have the right at any time during the conversion period to require the Company to convert the whole or any part (in HK$210,000 or in integral multiples thereof or if the aggregate holding of the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds by the Bondholder in question is less than the amount of HK$210,000, in the whole of that aggregate holding) of the principal amount outstanding under the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds into the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares at the conversion price of HK$0.21 each.

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LETTER FROM THE BOARD

No conversion right may be exercised by the Bondholder (i) if the issue of the 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares, the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares pursuant to such conversion will cause the issued Shares in the hands of the ‘‘public’’ (as defined in Rule 8.24 of the Listing Rules) to fall below 25% or such other minimum percentage of the total issued share capital of a listed company as prescribed under the Listing Rules that must remain in public hands; or (ii) if upon conversion, all the Shares (including the 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares, the 3rd Tranche Conversion Shares and/or the 4th Tranche Conversion Shares issued or to be issued) held by the Bondholder, its associates and persons acting in concert (as defined under the Takeovers Code) on the relevant date of conversion will reach such amount of the issued share capital of the Company which will trigger a mandatory offer under Rule 26 of the Takeovers Code and in this connection, prior written confirmation shall be given by the Bondholder to the Company confirming that all the Shares (including the 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares, the 3rd Tranche Conversion Shares and/or the 4th Tranche Conversion Shares issued or to be issued) held by the Bondholder, its associates and persons acting in concert (as defined under the Takeovers Code) immediately upon conversion will not reach 30% or more of the voting rights of the Company or trigger a mandatory offer under Rule 26 of the Takeovers Code.

Ranking of the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares:

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LETTER FROM THE BOARD

Transferability:

The 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds (or any part thereof) may not be assigned or transferred to a connected person of the Company without the prior written consent of the Company. Without prejudice to the aforesaid any assignment and/or transfer of the 3rd Tranche Convertible Bonds and/or the 4th Tranche Convertible Bonds is subject to (i) compliance with to the Listing Rules for so long as the Shares are listed on the Stock Exchange (and the rules of any other stock exchange on which the Shares may be listed at the relevant time) and all applicable laws and regulations; and (ii) the approval of the Shareholders in a general meeting if so required under, and in compliance with, the Listing Rules if such assignment and/or transfer is proposed to be made to a connected person of the Company.

Any assignment or transfer of the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds shall be of the whole or any part (being HK$210,000 or in integral multiples thereof) of the outstanding principal amount of the relevant tranche(s) of the Convertible Bonds.

Voting rights:

Bondholder(s) will not be entitled to receive notices of, attend or vote at any meetings of the Company by reason only of being Bondholder(s).

Application for listing:

No application will be made for the listing of the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds on the Stock Exchange or any other stock exchange(s).

Status:

The obligations of the Company arising under the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds will constitute general, unsubordinated, direct, unconditional and unsecured obligations of the Company and shall at all times rank equally among themselves and pari passu with all other present and future unsecured and unsubordinated obligations of the Company except for obligations accorded preference by mandatory provisions of applicable law.

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Conditions precedent to the Call Option Agreement

Completion of the Call Option Agreement is conditional upon the satisfaction of the following conditions:

(a) the Acquisition Completion;
(b) the passing of the requisite resolution at the EGM by the Shareholders to approve the Call Option Agreement and the issue of the Call Option Consideration Shares, the 3rd Tranche Convertible Bonds, the 4th Tranche Convertible Bonds, the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares; and
(c) the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the Call Option Consideration Shares, the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares.

Completion of the Call Option Agreement shall take place at 3:00 p.m. on the third Business Day immediately following the date of the Call Option Notice or such other date as the parties thereto may agree.

4. INFORMATION ON THE VENDOR

The Vendor is a company incorporated in the BVI with limited liability and is wholly and beneficially owned by Mr. Liu Yong. Save for the holding of the entire issued share capital of the Target Company, the Vendor has not carried out any business or operation since its incorporation. To the best of the Directors’ knowledge, information and belief, and having made all reasonable enquiries, the Vendor and its ultimate beneficial owner are third parties independent of the Company and its connected persons.

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5. INFORMATION ON THE TARGET GROUP

Corporate structure

Set out below is a corporate chart of the Target Group and the Target Coal Mines as at the date on which the reorganisation and consolidation of the Target Group is completed so that the Vendor would, through its indirect and non wholly-owned interests in Shaoyaohua and Youyi, be beneficially interested in approximately 95% and approximately 100% of Coal Mine A and Coal Mine B, respectively, and the background information on the members of the Target Group:

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Background information

The Target Company

The Target Company was incorporated in the Cayman Islands as an exempted company with limited liability on 16 June 2009 and is wholly-owned by the Vendor. It is an investment holding company that does not have any business other than its investment in its subsidiaries. The Target Company, through its wholly-owned subsidiary namely Hengming, currently holds 99% of the equity interest in Lvhai, which in turn is interested in approximately 99% in Haimei.

Hengming

Hengming was established in the PRC as a wholly foreign owned enterprise with limited liability on 11 August 2009 with registered capital of US$99.8 million, of which US$25.6 million has been paid up. Hengming is an investment holding company and is wholly-owned by the Target Company. The principal activities of Hengming are development of coal-related clean energy technology; the wholesale of coal products, refined coal products, minerals, chemical products and construction materials; and the holding of investment in Lvhai.

Lvhai

Lvhai was established in the PRC with limited liability on 13 October 1997 with registered and paid-up capital of RMB10 million. Lvhai is owned as to 99% by Hengming and 1% by an independent third party. The principal activities of Lvhai are biotechnology research and development and production of iron, steel, refractory materials, coal products, ferroalloy and pig iron. As at the Latest Practicable Date, Lvhai had not engaged in any operation other than the holding of investment in Haimei since being acquired by Hengming.

Haimei

Haimei was established in the PRC with limited liability on 23 January 2006 with registered and paid-up capital of RMB50 million. Haimei is owned as to 99% by Lvhai and 1% by an independent third party. The principal activities of Haimei are sales of coal products, pig iron, iron ore, industrial and mining equipment, construction material, commodity and subsidiary agricultural products. The Target Group has commenced a reorganisation. The reorganisation with respect to Shaoyaohua was completed on 2 December 2010 and as a result, Haimei is directly interested in 95% of the equity interest in Shaoyaohua. The reorganisation with respect to Youyi is in the process and upon completion of such reorganisation, Haimei will be directly interested in 100% of the equity interest in Youyi.

Shaoyaohua

Shaoyaohua was a collective-owned enterprise established in the PRC on 31 October 2000 and was subsequently reformed as a limited liability company in 2007 with registered and paid-up capital of RMB30 million. As at the Latest Practicable Date, Shaoyaohua was owned as to 95% by Haimei and 5% by Mr. Li Yubao, who is a third party independent of the Company and its connected persons.

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The principal activity of Shaoyaohua is production of raw coal and the principal assets of Shaoyaohua are the mining permit covering Coal Mine A located in Shanyin County, Shuozhou City, Shanxi Province, the PRC and it primarily produces long flame coal and gas coal which can be used for power generation and coking, respectively.

Youyi

In accordance with 山西省煤礦企業兼併重組整合工作領導組辦公室出具之《晉煤重組辦發[2009]35號》批覆 (the approval document of Jin Mei Chong Zu Ban Fa [2009] No. 35 issued by Shanxi Province Coal Enterprise Annexation and Integration Office*) on 14 September 2009, Youyi was approved to be reformed as a limited liability company in the PRC with registered capital of RMB200 million. As at the Latest Practicable Date, Youyi was owned as to 33% by Mr. Zhu Jinfeng, 25% by Mr. Zhao Zhishi, 22% by Mr. Xu Wenhua and 20% by Mr. Zhang Bao and is in the course of applying for its business licence.

The principal assets of Youyi are the mining permit covering Coal Mine B located in Shanyin County, Shuozhou City, Shanxi Province, the PRC and it primarily produces long flame coal and gas coal which can be used for power generation and coking, respectively.

Save for Youyi which is now in the course of establishment and those disclosed in the paragraph headed ‘‘Risk factors’’ in the section headed ‘‘Letter from the Board’’, the PRC legal advisers to the Company advised that each of the members of the Target Group in the PRC has, since establishment, be in material compliance with the laws, regulations and permits and payments made to the relevant government bodies in respect of tax, royalties and other significant payments in the PRC.

Reorganisation of the Target Group

The Target Group has commenced a reorganisation. The reorganisation with respect to Shaoyaohua was completed on 2 December 2010 and as a result, Haimei is, through its equity interest in Shaoyaohua, beneficially interested in 95% of Coal Mine A. The reorganisation with respect to Youyi is in the process and upon completion of such reorganisation, Haimei will be, through its equity interest in Youyi, beneficially interested in 100% of Coal Mine B. To facilitate such reorganisation, Haimei had entered into two equity transfer agreements with the then equity owners of Shaoyaohua and the existing owners of Youyi of which details are summarized as follows:

On 8 April 2010, Haimei, Mr. Yan Changli and Mr. Li Yubao entered into an equity transfer agreement pursuant to which Haimei agreed to acquire and Mr. Yan Changli and Mr. Li Yubao agreed to sell an aggregate of 95% equity interest in Shaoyaohua with a consideration of approximately RMB1,830 million.

On 23 April 2010, Haimei, Mr. Zhu Jinfeng, Mr. Zhao Zhishi, Mr. Xu Wenhua and Mr. Zhang Bao entered into an equity transfer agreement pursuant to which Haimei agreed to acquire and Mr. Zhu Jinfeng, Mr. Zhao Zhishi, Mr. Xu Wenhua and Mr. Zhang Bao agreed to sell 100% equity interest in Youyi with a consideration of approximately RMB1,290 million.

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To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiry, each of the vendors of the said two equity transfer agreements are third party independent of and not connected with the Company and its connected persons.

The Directors are aware of the considerable premium when comparing the aggregate of the Consideration and the Call Option Consideration with the original cost paid by the Vendor in relation to the acquisitions of the Target Coal Mines as stated above. However, the Directors consider that the Consideration and the Call Option Consideration are fair and reasonable given the facts below:

(i) the respective valuations of 100% equity interests in Shaoyaohua and Youyi as at 1 December 2010 of approximately RMB3,762 million (equivalent to approximately HK$4,374 million) and RMB2,055 million (equivalent to approximately HK$2,390 million);
(ii) the Profit Guarantee of HK$1,700 million as guaranteed by the Vendor and the corresponding adjustment mechanisms to the Consideration and the Call Option Consideration as mentioned above;
(iii) the revelation of additional 40 Mt of resources/reserves under categories 111b and 122b (equivalent to measured and indicated resources under the JORC Code) based on the additional exploration work performed on the Target Coal Mines after the entering into of the equity transfer agreements between the Vendor and the respective then/existing equity owners of Shaoyaohua and Youyi as supported by 《井田補充勘探地質報告》 (Jingtian Supplemental Geology Exploration Report) issued by 山西省第三地質工程勘察院 (Shanxi Province No. 3 Geology Engineering & Exploration Council);
(iv) the consideration to be paid by the Vendor pursuant to the two equity transfer agreements mentioned above would be in cash only while a substantial part of the Acquisition Consideration and the Call Option Consideration pursuant to the Acquisition Agreement and the Call Option Agreement would be settled by way of issue of the Convertible Bonds, which are non-interest bearing and would not require immediate cash outlays of the Group; and
(v) the management expertise and technical knowhow of the management team and workforce of the Target Coal Mines.

In performing the said valuations of Shaoyaohua and Youyi, the valuer has adopted the income-based approach which focuses on the economic benefits due to the income producing capability of the business entity and the underlying theory of this approach is that the value of the business entity can be measured by the present worth of the economic benefits to be received over the useful lives of the Target Coal Mines.

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Financial information

The Target Company, Hengming, Lvhai and Haimei are companies without a principal business other than investment holding. Set out below is a summary of the financial information of (i) Shaoyaohua for the two years ended 31 December 2009 and for the nine months ended 30 September 2010; and (ii) Youyi for the period from 14 September 2009 (being the date of approval to be reformed as a limited liability company) to 31 December 2009 and for the nine months ended 30 September 2010, respectively, prepared according to Hong Kong Financial Reporting Standards, as extracted from the financial information of the Target Group set out in Appendix II to this circular:

Shaoyaohua

	For the nine	For the year	For the year
	months ended	ended	ended
	30 September	31 December	31 December
	2010	2009	2008
	(RMB’000)	(RMB’000)	(RMB’000)
Revenue	443,140	270,226	412,378
Profit before taxation	255,113	130,282	248,782
Profit after taxation	190,610	97,393	186,324

Youyi

		From
		14 September
	For the nine	2009
	months ended	to
	30 September	31 December
	2010	2009
		(Note)
	(RMB’000)	(RMB’000)
Revenue	—	—
Net loss before and after taxation	(6,747)	(1,194)

Note: According to 山西省煤礦企業兼併重組整合工作領導組辦公室出具《晉煤重組辦發[2009]35號》之批覆 (the approval document of Jin Mei Chong Zu Ban Fa [2009] No. 35 issued by Shanxi Province Coal Enterprise Annexation and Integration Office*) on 14 September 2009, Youyi was approved to be reformed as a limited liability company in the PRC with limited liability and was still in its pre-operating period as at 30 September 2010.

As at 30 September 2010, the net assets of Shaoyaohua were approximately RMB420,472,000 and the net liabilities of Youyi were approximately RMB7,941,000, respectively.

Further financial information of the Target Group is included in Appendix II to this circular.

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The management team of the Target Group

Mr. Sun Chuntian (孫春田), aged 51, joined the Target Group in 2009 and assumes the role of managing director of Haimei and Shaoyaohua. He is responsible for the supervision of the whole operation at management level. He has extensive management experience in public and private sectors in the PRC. From 2004 to 2009, Mr. Sun was the general manager supervising the mining operations of 山西恆利煤業有限公司 (Shanxi Hengli Coal Mining Co., Ltd.), a company principally engaged in mining and production of thermal coal for power generation. Mr. Sun graduated from Peking University with a bachelor’s degree in law.

Mr. Li Yubao* (李玉寳), aged 58, joined the Target Group in 2005 as the general manager of Shaoyaohua. He is mainly responsible for the supervision and management of the operations of Shaoyaohua. He has over 38 years of experience in the coal mining industry. Mr. Li started his career in a coking plant in Shanyin County as a worker. In 1989 and 1996, respectively, he became the assistant general manager and general manager of a state-owned coal mine in Shanyin County. In 2001, he assumed duty as managing director of another sizeable coal mining company in Shanyin County.

Mr. Yan Jianguo (閆建國), aged 42, joined the Target Group in 2009 as the head of Coal Mine A. He is mainly responsible for supervising the production operations of Coal Mine A. He has over 20 years of experience in the coal mining industry. Mr. Yan started his career as a technician supervisor of a state-owned coal mine in Shanxi. From 1996 to 2009, he headed 大同煤炭職業技術學院成人教育處 (Datong Coal Vocational and Technology Institute — Adult School Division) which provides intensive coal mining education to coal mine employees. Mr. Yan graduated from 中國礦業大學 (China Mining University*) with a bachelor’s degree in mining engineering.

Mr. Bai Gaoxiang (白高祥), aged 50, joined the Target Group in 2006 as the chief engineer of Shaoyaohua. He is mainly responsible for designing mine infrastructure and monitoring production, repair and maintenance of Coal Mine A. He has over 22 years of experience in the coal mining industry. Mr. Bai started his career as a worker at a state-owned coal mine in Shanxi in 1979 and was subsequently promoted to various positions with the latest position held as the head of technician. In 1986, Mr. Bai joined another state-owned coal mine as the head of production and technician. From 1993 to 2002, he was engaged in coal transportation business. From 2003 to 2005, Mr. Bai was a chief engineer of another state-owned coal mine in Shanxi Province. Mr. Bai is now studying mining engineering at 大同煤炭職業技術學院 (Datong Coal Vocational and Technology Institute).

Mr. Wang Yexun (王業勛), aged 60, joined the Target Group in 2006 as the assistant head of Coal Mine A. His main responsibility is to support Mr. Yan Jianguo in supervising the production operation of Coal Mine A. He has over 36 years of experience in the coal mining industry. Mr. Wang started his career as worker at a sizeable state-owned coal mine in Shanxi in 1974 and was promoted to various supervisory positions in mine tunneling division with the latest position held as division supervisor before his departure and joined the Target Group in 2006. Mr. Wang pursued various academic qualifications in several mining education institutes throughout his career. Mr. Wang is now studying mining engineering at 大同煤炭職業技術學院 (Datong Coal Vocational and Technology Institute).

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It is the intention of the Company to retain the key management of the Target Group for the purpose of ensuring operation stability. The Company plans to renew and sign long-term employment contracts with the key management, who will remain in their existing roles and responsibilities. The Company will delegate sufficient authority to the key management which they should entitle in order to fulfill their duties. The Company has started negotiations with management team since the Acquisition Agreement was executed. The Company has reached agreement with the management that they will be hired on a continuous basis and the management has indicated that they plan to stay with the Target Group. In the event that any of the senior management leaves the Target Group after completion of the Acquisition, the Company will either relocate the internal human resources from existing operation in Inner Mongolia or recruit new candidates in open market in order to make sure the operation of Target Group is not materially affected.

6. INFORMATION ON THE TARGET COAL MINES

Overview of Coal Mine A

Location and transportation

Coal Mine A is located approximately 30 km north of Shanyin County, Shanxi Province, the PRC and has a licence area of approximately 5.31 sq. km. It is approximately 20 km from the Dayun highway (Datong to Yuncheng) and approximately 80 km from Datong City. It has close access to established roads and rail infrastructure which provide convenient transport of coal which is trucked from the mine. The mine road connects to a local highway, namely Maying Town Road. Maying Town is approximately 20 km from Beizhouzhuang Railway Station and approximately 35 km to Shanyin Railway Station on the Beitongpu railway line.

The coal is transported from the Coal Mine A using highway trucks. The point of sale is the mine’s product coal stockpile. Customers purchase the coal and arrange transport of the coal from the stockpile.

Mining rights

The mining permit of Coal Mine A numbered C1400002009101220038759 was granted to Shaoyaohua with an area of mine field of approximately 5.3132 sq. km and an approved yearly production capacity of approximately 1.2 Mt, which will be expired by 14 October 2011.

The PRC legal advisers to the Company have advised on whether there will be any legal impediments for the Target Group to extend the mining permit for the future operation and production of the Coal Mine A. Pursuant to 礦產資源開採登記管理辦法 (the Administrative Measures on Registration of Mineral Resources Mining*) promulgated by the State Council, where residual reserves remain after the term of a mining permit expires, the holder of such mining permit has a legal right to apply for renewal in respect of the relevant mine and only such holder is entitled to do so before the expiry of the mining permit. Under PRC laws and regulations the holder is required to apply for renewal of a mining permit within 30 days before the expiry date, but such laws or regulations do not specify conditions under which the holder of a mining permit will be granted an additional term. In particular, having actual production capacity exceeding the

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approved level (as in the case of Coal Mine A, please see sub-paragraph headed ‘‘Production capacity’’ below) or lack of proper land use rights certificates and property ownership certificates (as in the case of Coal Mine A, please see sub-paragraph headed ‘‘Land and property’’ below) is not set out in the laws and regulations as grounds for refusing a mining permit renewal application. In practice, the government authority granting the renewal of mining permit is the department of land and resources, which is different from the government authorities which supervise the coal production capacity and property rights. In addition, Shaoyaohua has obtained confirmation letters from both 朔州市煤炭工業局 (‘‘Shuozhou Coal Industry Bureau’’) and 朔州市煤礦安全監察局 (‘‘Shuozhou Coal Mine Safety Supervision Bureau’’), which jointly have full authorities in monitoring the production capacity of Shaoyaohua in the city of Shuozhou and are the proper authorities to give confirmation to Shaoyaohua for not imposing any punishment on it because of its actual production capacity exceeding the permitted capacity under the production permit and have confirmed that Shaoyaohua had been in material compliance with all the requirements regarding coal mine production capacity and would not be subject to any form of punishment. Shaoyaohua is in the process of renewing its land use rights certificates and obtaining the property ownership certificates that it does not currently hold. The Target Group, after consulting with the local government authorities, believes such certificates will be renewed or obtained before the expiry dates of the mining permit.

In view of the foregoing, the PRC legal advisers to the Company advised that there is a relatively low possibility that the Target Group will encounter legal obstacle for renewing the mining permit in respect of Coal Mine A provided that it complies with the legal requirements and such other requirements as deemed necessary by the government authorities. Moreover, according to the PRC legal advisers, the rights of the Target Group to carry on the coal mining business in the PRC will not be affected by the Acquisition or the exercise of the Call Option and they are not aware of any legal claims or proceedings which may affect the mining rights of the Target Group.

Resources and reserves

According to the geology report《山西山陰芍藥花煤業有限公司井田補充勘探地質報告》(Shanxi Shanyin Shaoyaohua Coal Co., Ltd. Jingtian Supplemental Geology Exploration Report) issued by 山西省第三地質工程勘察院 (Shanxi Province No. 3 Geology Engineering & Exploration Council) in July 2010, Coal Mine A has resources/reserves under categories 111b and 122b of approximately 140.36 Mt and resources/reserves under category 333 of approximately 7.68 Mt under the PRC code DZ/T0215-2002《煤、泥炭地質勘查規範》(Coal & Peat Geology Exploration Regulation) published by 中國國土資源部 (Ministry of Land and Resources of the PRC) in 2002.

Coal Resources and Coal Reserves for Shaoyaohua have been independently estimated by Minarco-MineConsult in accordance with the Recommendations of the JORC Code. Coal Resources for Shaoyaohua are 97 Mt, which consist of 45 Mt Measured, 45 Mt Indicated and 7 Mt Inferred. Coal Reserves for Shaoyouhua are 52 Mt, which consist of 26 Mt Proven and 26 Mt Probable.

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Product and production

Coal Mine A predominately produces long flame coal as well as some gas coal. Both coal types are suitable for use as a thermal coal and some gas coal may be saleable as a blending coking coal.

Coal Mine A is based on conventional underground coal mine designs. Standard underground coal longwall and development techniques will be utilised; in thicker seams a modified longwall mining method known as Longwall Top Coal Caving (‘‘LTCC’’) will be applied. The use of LTCC will result in increased resource recovery in thicker seams. The mining methods currently applied at Shaoyaohua are commonly used throughout the PRC and are considered to be suitable to the characteristics of the deposit.

The planned development methods are also commonly used. The development methods will utilise drill and blast techniques as well as specialised mechanised equipment (‘‘road headers’’) designed for tunneling and underground coal mining.

Boreholes have been drilled over the mine area. Samples have been taken from each coal seam intersected by these boreholes and the samples have been analysed for quality. These tests report the ash, sulphur, moisture, volatile matter content of the coal, along with specific energy and relative density. There have also been some underground samples taken from test sites (from seam #4 at Shaoyaohua). These tests identify the high and low quality regions of the mine.

Mining horizons (or mining working sections) are located in the basal section of the seam. Longwall Top Coal Caving techniques, where applicable, recover a certain portion of the upper (roof) section of coal. Top coal caving techniques are time based depending on the thickness of the upper coal section. This limits the amount of stone dilution that would fall as part of the top coal caving process.

Run of Mine (‘‘ROM’’) coal currently passes through a coal screening process. Coal screening results in three products:

Fine coal (<50mm) — 70%,
Particle coal (50–80mm) — 20%, and
Lump coal (>80mm) — 10%.

Fine coal may undergo further processing (washing) to clean and produce a high quality product. The washing process reduces the ash and stone content, increasing potential sale price of final product but also reduces the volume of the final product. Lump coal consists of approximately 7–8% kaolin, 2–3% stone and 90% lump coal. A coal washing plant is currently under construction at the Coal Mine A and is expected to commence operation by first half 2011.

Mining operations in Coal Mine A are conducted 24 hours per day with four shifts (six hours per shift). Workers and technicians of the first shift are responsible for the repair and maintenance of the mining equipment and monitoring system on a daily basis. Coal Mine A is only operated

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330 days per year and is suspended for 25 days per year for comprehensive repair and maintenance. Coal Mine A has strictly followed the instructions from relevant governing bodies for any regular or ad hoc mine inspection.

The rate of coal production and sales had increased significantly since 2007. Product coal tonnes were 445 kt, 1,367 kt, and 1,212 kt in 2007, 2008 and 2009 respectively. The 2007 production and sales rate is lower as the mine underwent a production expansion in 2008. Also, the lower coal production and sales of 2007 is typical of a production ‘ramp up’ phase; that is when a new mine is only producing development tonnes (mining from roadways) with longwall production commencing in 2008 and 2009. The early stages of longwall operations tend to have lower production rates as new systems are being implemented and the longwall equipment is not operated at its full capacity.

Coal production and sales in 2010 appears to be higher than in 2008 and 2009, with ROM coal production estimated to be 2.1 Mt. This is due to the longwall equipment being utilised at its full capacity.

Future production is expected to continue at a similar production rate as what has been achieved in 2010 for the existing longwall unit. As with all longwall coal mines, the achieved production rate is dependent on various factors including (amongst others) the timing of longwall moves and geological conditions.

Pending the successful completion of additional mine planning studies and the granting of a higher mine production capacity, additional mine development will be required prior to the implementation of a second long wall unit. The technical expert estimates that if a second wall unit is implemented in 2014, full production is expected to take place in 2016, or earlier if conditions are suitable.

Quality control

The following quality control processes are implemented at Coal Mine A:

Stone dilution is minimised by controlling the LTCC process. When the rear Armoured Face Conveyor (‘‘AFC’’) chutes are opened they allows free roof coal to fall in and be extracted. Stone dilution is controlled manually via visual inspections of the caving coal. Once stone dilution is observed the chutes are closed. This is a normal quality control process carried out in most LTCC operations.
All material on the ROM stockpile is screened. Any material greater than 50 mm is separated and stone from this is manually handpicked. Material under 50 mm is mixed with the fine coal and sent to the Coal Handling and Preparation Plant (‘‘CHPP’’) for further processing. Clean coal from the CHPP is stored in silos to prevent contamination from external sources.
Coal is periodically tested by local qualified laboratories. Coal which shows variations in quality is target-mined and the flow of this coal is controlled. This enables the coal to be handled independently from the better quality coals. Customers are advised in advance if there are variations in the coal quality.

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Production capacity

Shaoyaohua is currently operating above its licensed production capacity.

The actual production capacity of Shaoyaohua has exceeded the approved production capacity of 1.2 Mtpa as stipulated under its coal production permit and safety production permit. Shaoyaohua has obtained confirmation letters dated 11 November 2010 and 12 November 2010 from Shuozhou Coal Mine Safety Supervision Bureau and Shuozhou Coal Industry Bureau respectively, pursuant to which Shuozhou Coal Mine Safety Supervision Bureau and Shuozhou Coal Industry Bureau confirmed that Shaoyaohua would not be subject to any form of punishment including but not limited to penalty, suspension of production, temporary or permanent revocation of its production permit and safety production permit solely by virtue of the fact that its actual production volumes are not identical to the permitted production as set out in the coal production permit and safety production permit.

According to the Rules on 煤礦生產能力管理辦法 (Administration of the Production Capacity of Coal Mines) (the ‘‘Production Capacity Rules’’) promulgated jointly by 國家發展與改革委員會 (National Development and Reform Commission) (‘‘NDRC’’), 國家安全生產監督管理總局 (State Administration of Work Safety) and 國家煤礦安全監察局 (State Administration of Coal Mine Safety) in 2006, the coal industry administrative departments of the local governments at and above the county level supervise the production capacities of coal mines (excluding those owned by the central government) located in their respective administrative regions. In 2006, implementation rules for the Production Capacity Rules were issued in Shanxi Province, pursuant to which, in Shanxi Province, the coal industry bureau and the coal mine safety supervision bureau are the coal industry administrative departments of the local governments. Nevertheless, under the current administrative system of China, the administrative department of the government at a higher level has authority to revoke any administration behavior of the administrative department of the government at a lower level at its discretion, if such behavior is improper in its view.

As advised by the PRC legal advisers to the Company, there is a relatively low possibility that Shaoyaohua would be penalized by virtue of the fact that Shaoyaohua is operating above its licensed production capacity given that (i) Shaoyaohua has obtained confirmation letters from both Shuozhou Coal Mine Safety Supervision Bureau and Shuozhou Coal Industry Bureau, which jointly have full authorities in monitoring the production capacity of Shaoyaohua in the city of Shuozhou and are the proper authorities to give confirmation to Shaoyaohua for not imposing any punishment on it because of its actual production capacity exceeding the permitted capacity under the production permit; (ii) each of the said bureaus issued the confirmation letter within the scope of power delegated to it; and (iii) the two confirmation letters issued by the above bureaus are both valid and legally enforceable unless they are revoked by the administrative departments of higher authorities.

Despite the limited likelihood of Shaoyaohua being penalized, the PRC legal advisers to the Company advised that according to relevant PRC rules and regulations, if the actual production capacity of a coal mine exceeds the approved production capacity as stipulated under its coal production permit, such coal mine may receive punishment. Such punishment may include suspension of production and correction of relevant activities, penalty ranging from RMB0.5 million to RMB2 million, or even revocation of the coal production permit. The local coal industry

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administrative departments have discretions in imposing penalty. In addition, as advised by the PRC legal advisers to the Company, having the actual production capacity of the coal mines above the approved level may also have some impact on Shaoyaohua’s compliance with the Environmental Impact Assessment Law, pursuant to which where the scale of a construction project (as in the case of Coal Mine A, its mining project) changed, the environmental protection bureau may order the project owner (as in the case of Coal Mine A, Shaoyaohua) to renew the environmental impact assessment report regarding its project and apply for approval for the renewed environmental impact assessment report. If the project owner renews the environmental impact assessment report as required by the environmental protection bureau and applies for approval for the renewed environmental impact assessment report, no penalty or other punishment would be imposed on it. If the project owner refuses to renew and apply for approval for the renewed environmental impact assessment report, the environment protection bureau may impose a penalty ranging from RMB50,000 to RMB200,000 at its discretion. As advised by the PRC legal advisers to the Company, there are no additional authorities who have authority to penalize Shaoyaohua because of the existing production capacity of Shaoyaohua having exceeded the permitted capacity other than the NDRC, the coal industry bureaus, the coal mine safety supervision bureaus and the environmental protection bureaus as disclosed in the circular.

Expansion plan and capital commitment

Coal Mine A is an individual retained coal mine after the resources consolidation carried out in Shanxi Province with an authorised capacity of 1.2 Mtpa. As stated in the independent technical review and competent person’s report in Appendix IV to this circular, Coal Mine A was reformed through a mechanized upgrading in 2008 and 2009 with aggregate capital expenditure of approximately RMB219.4 million. Coal Mine A currently has an approved ROM coal production capacity of 1.2 Mtpa. The estimated ROM coal production (provided by Shaoyaohua) for 2010 is approximately 2.1 Mtpa. An increase in the production capacity to approximately 4 Mtpa is dependent on the application and granting of updated licences and approvals supporting a higher production capacity.

The PRC legal advisers to the Company have advised on whether there will be any legal impediments for Coal Mine A to upgrade its production capacity to 4Mtpa. According to the PRC legal advisers, the rules and regulations mainly applicable to the upgrade of production capacity of coal mines are 煤炭生產能力管理辦法 (Rules on Administration of the Production Capacity of Coal Mines), 煤礦生產能力核定標準 (Standard for Verification of the Production Capacity of Coal Mines), both of which were jointly promulgated by the NDRC, the State Administration of Work Safety and the State Administration of Coal Mine Safety, and 煤礦生產能力核定的若干規定 (Relevant Provisions on Verification of the Production Capacity of Coal Mines) which was issued by the NDRC. Besides, Shanxi Province has issued an implementation rule in 2006 regarding this matter, namely, 關於辦理煤炭生產能力核定審批的規定(試行) (the Interim Provisions on Examining and Approving the Verifications of the Production Capacity of Coal Mines), which shall also be applicable to coal mines located in Shanxi, as in the case of Coal Mine A.

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

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

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

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

The majority of the current coal production is generated from a single longwall unit. With the addition of a second mechanised development machine, roadway production will be increased, allowing for the utilisation of a second longwall unit which will be operated in parallel with the existing longwall unit. The technical expert estimates that the total ROM coal production achieved

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from the current mining fleet and an additional development machine and longwall unit will be approximately 3.5 Mtpa. As set out in the estimated mining schedule in the Competent Person’s Report, this production rate is estimated to take place from 2014.

An internal planning document has been completed for Coal Mine A. The planning document estimates that the total capital expenditure required to increase coal production is approximately RMB104 million.

Item Underground Equipment Mining and Development Underground Total	2011 (RMB million) 25.00 56.90 38.50 18.40 81.90	2012 (RMB million) 8.21 14.30 13.22 1.08 22.50	Total (RMB million) 33.21 71.20 51.72 19.48
			104.41

The current capital cost estimate is considered to be a high level estimate only. A Preliminary Design Report is required to gain a better understanding of the expansion projects required to achieve a production rate of up to 4 Mtpa as well as the capital costs associated with the expansion. The estimated capital costs may increase significantly following a more detailed study.

In order to achieve a higher coal production capacity, the Group contemplates to submit an updated preliminary design to the relevant bureau in the PRC in 2011 and it is expected that the new mining permit with an increased capacity (i.e. 4 Mtpa) would be received by the Target Group in 2013, which is 5 years following the receipt of the existing mining permit.

Land and property

As advised by the PRC legal advisers to the Company, 2 land use rights certificates numbered 1206050148 and 1206050149 were issued to 山陰縣地方國營芍藥溝煤礦 (Shanyin County Local State Operated Shaoyaogou Coal Mine*), being the predecessor of Shaoyaohua before its reform in 2007, in relation to 2 pieces of land located at Shaoyaogou Village, Maying Township, Shanyin County with areas of 65,055.4 square metres and 1,746.5 square metres, respectively (the ‘‘Land’’). Accordingly, Shaoyaohua is entitled to use the Land and is required to apply for an alteration registration for the change of name of the owner of the land use rights certificates. Immediately after Shaoyaohua was established as a limited liability company, registration of the predecessor was cancelled. Therefore no cost is required or necessary to be paid to the predecessor at all. The PRC legal advisers consider that such alteration registration is a procedural matter and there should be no legal impediment to completion of such registration by Shaoyaohua.

However, none of the houses and buildings erected on the Land has a property ownership certificate. Given that (i) none of the houses and buildings erected on the Land are used for coal production but served as the office buildings and other facilities of auxiliary utility, such as dormitories of employees and garages; (ii) all of the houses and buildings are erected on the Land

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over which Shaoyaohua will hold land use rights certificates despite the fact that such certificates are yet to be renewed as a matter of procedures; and (iii) the production and operation of Shaoyaohua and Coal Mine A was not affected in the past despite the absence of the property ownership certificates, the PRC legal advisers consider that daily production and operation of Shaoyaohua and Coal Mine A would not be materially affected in the absence of the property ownership certificate(s).

Shaoyaohua will use its best efforts to complete the alteration registration for the land use rights of the Land and to obtain the property ownership certificates for properties erected on the Land in due course. It is expected that such registrations would not be completed before the Acquisition Completion and would be completed by end of 2011. Nevertheless, absence of the land use rights certificates and property ownership certificates will not materially affect the daily production and operation of Shaoyaohua and Coal Mine A for the reasons stated above.

Under the PRC law, production and operation of coal mine in PRC requires five certificates, namely, mining permit, coal production permit, safety production permit, coal mine manager qualification certificate and safety qualification certificate. It is a procedural matter for Shaoyaohua to apply for land use rights certificates and property ownership certificates. The land use rights certificates in respect of Coal Mine A were issued to the predecessor of Shaoyaohua, namely, Shanyin County Local State Operated Shaoyaogou Coal Mine, which was reformed into a limited liability company in 2007 and then changed its name into Shanxi Shanyin Shaoyaohua Coal Co., Ltd., namely Shaoyaohua. It is a matter of procedure for Shaoyaohua to apply to change the name of the land owner as stated in the land use rights certificates from Shanyin County Local State Operated Shaoyaogou Coal Mine to Shaoyaohua. Shaoyaohua is applying for the change of name in respect of the land use rights certificates and for the property ownership certificates and there should be no material legal impediment for Shaoyaohua to obtain the same. Absence of such certificates will not materially affect the production and operation of Shaoyaohua. In any event, the Vendor has undertaken to the Purchaser and the Company that it will procure Shaoyaohua to obtain the land use rights certificates and property ownership certificates as soon as possible. In view of the above, the Company may consider waiving the conditions precedent (b)(4) regarding Shaoyaohua if and when appropriate.

Notwithstanding that the daily production and operation of Shaoyaohua and Coal Mine A would not be materially affected in the absence of the property ownership certificate(s), however, Shaoyaohua is required under the PRC law to obtain the property ownership certificates for the houses and buildings erected on the Land. If Shaoyaohua fails to obtain such property ownership certificates, the government authority may dismantle such houses or buildings depending on whether they are in compliance with the general construction plans. Shaoyaohua may also receive a penalty from the government authority with a cap of 10% of the construction cost of the houses or buildings under the PRC law.

On 12 January 2011, the Vendor has given an irrevocable undertaking to the Company whereby the Vendor has undertaken the Company that it will endeavour to procure Shaoyaohua to complete the alteration registration for the land use rights of the Lands and to obtain the property ownership certificates for properties erected on the Land in due course; Shaoyaohua is in the course of applying for the property ownership certificates. However, in case of any worst impact

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that may occur on the houses and buildings, Shaoyaohua will consider lease a property nearby and appropriately certificated from a third party to accommodate the employees and store equipment and inventories. Cost for such accommodation will be not more than RMB2 million per annum.

Customers and suppliers

Major customers of Shaoyaohua are mainly coal distributors and coal logistics companies located in Shuozhou City and Datong City, Shanxi Province, the PRC. For the year ended 31 December 2007, the sales of Shaoyaohua to its top four customers accounted for approximately 94% of the total sales of that year while the remaining approximately 6% was the cash sales to a number of fragmented purchasers. For the two years ended 31 December 2008 and 2009 and the nine months ended 30 September 2010, the sales of Shaoyaohua to its top five customers accounted for approximately 90%, approximately 77% and approximately 89% of the total sales of the year/period, respectively.

Major suppliers of Shaoyaohua are mainly suppliers and manufacturers of mining equipment in the PRC. For the three years ended 31 December 2007, 2008 and 2009 and the nine months ended 30 September 2010, the purchases of Shaoyaohua from its top five suppliers accounted for approximately 40.18%, approximately 23.30%, approximately 54.10% and approximately 34.41% of the total purchases of the year/period, respectively.

None of the Directors or their respective associates, or any of the substantial Shareholders, to the best of the knowledge of the Directors, had any interest in any of the Target Group’s top five customers and suppliers.

Sales and marketing

Shaoyaohua has an independent sales and marketing department which is responsible for sales, contract execution and marketing promotion. Shaoyaohua has established long-term relationships with its major customers. Pricing is made with reference to the market spot price and the terms of sales contracts usually range from one month to three months. Transaction volume is fixed at the time when the sales contract is executed while transaction price is adjustable in accordance with the market spot price. Settlements are mainly made in advance on cash basis with credit period granted to limited reputable and large-scale customers. Coal is delivered to stockpiles located within the surface facilities of coal mine, where it is sold and transported via trucks supplied by the customers. According to the information posted on the website of China Coal Resource (http://en.sxcoal.com), the market spot price of long flame coal in Shanxi as at 10 January 2011 was RMB425 per tonne. There are significant ups and downs of thermal coal price during a year because of seasonal factor. The highest, the lowest and the average selling prices of Shaoyaohua for the nine-month period ended 30 September 2010 were RMB321 per tonne, RMB216 per tonne and RMB282 per tonne, respectively. Coal is a commodity which is subject to commodity cycles driven by the forces of supply and demand. The supply and demand cycle of coal in different seasons throughout the year is the driving force behind the seasonal fluctuation of coal price. Cold weather results in rising power demand and coal consumptions, either as a direct heat source or for electricity generation. The cold weather can also hamper the exploitation and transportation by train and ship from coal reserves and thus have a direct effect on the global

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supply as well as the price of coal. Due to the extreme cold weather in the fourth quarter in 2010 across the whole China, which drove up the demand for, and the market spot price of, thermal coal, the latest selling price of Shaoyaohua has also increased.

The sales of Shaoyaohua for the three years ended 31 December 2007, 31 December 2008 and 31 December 2009 and for the nine months ended 30 September 2010 were approximately 445 kt, approximately 1,367 kt, approximately 1,212 kt and approximately 1,605 kt, respectively.

As the coal washing plant of Coal Mine A is currently under construction, all sales generated by Shaoyaohua refer to sales of raw coal and no coal washing process is currently undertaken by Shaoyaohua.

Competitive strength and business strategies

The Directors consider the potential for future growth of Shaoyaohua can be attributed to a combination of the competitive strengths, including the following:

. Coal Mine A has close access to established roads and rail infrastructure which provide convenient transport of coal trucked from the mine and is strategically located in area which is in proximity to its major customers, which enables the Target Group to reduce transportation costs substantially.
. The numerous resources and reserves of Coal Mine A and the use of large scale longwall mechanized production facilities enable the Target Group to operate efficiently and achieve economies of scale.
. Most of the coal mines in Shuozhou City are still under reconstruction since the resource consolidation in the Shanxi Province, which enables the Target Group to boost its sales in the short-run.

The Group’s vision is to become one of the leading coal suppliers in Shanxi Province, the PRC. To achieve this, the Group plans to accomplish its goal through the following strategies of the Target Group:

. Establishing strategic partnership with major customers through entering into long-term contracts
. Expanding production capacities of the Target Coal Mines
. Utilizing rail transportation to improve profit margin
. Continuing to invest in coal mining infrastructure and equipment
. Continuing to focus on production safety, environmental protection, operational excellence and community relations

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Overview of Coal Mine B

Location and transportation

Coal Mine B is located approximately 25 km northwest of Shanyin County, Shuozhou City, Shanxi Province, the PRC and to the east of Dangjiagou Village, Yujing Town with a licence area of approximately 8.51 sq. km. The mine is located in the administrative region of the jurisdiction of Yujing Town and is about 30 km from Dayun Highway in the east and is well connected to local highways.

Mining rights

The mining permit of Coal Mine B numbered C1400002009111220042845 was granted to Youyi with an area of mine field of approximately 8.5079 sq. km and an approved yearly production capacity of approximately 1.2 million tonnes, which will be expired by 3 November 2011.

The PRC legal advisers to the Company have advised on whether there will be any legal impediments for the Target Group to extend the mining permit for the future operation and production of the Coal Mine B. Based on the fact that the mining permit was granted to Youyi, the PRC legal advisers to the Company advised that there is no foreseeable legal obstacle for Youyi to renew the mining permit provided that it complies with the legal requirements and such other requirements as deemed necessary by the government authorities. Moreover, according to the PRC legal advisers, the rights of the Target Group to carry on the coal mining business in the PRC will not be affected by the Acquisition or the exercise of the Call Option and they are not aware of any legal claims or proceedings which may affect the mining rights of the Target Group. On 12 January 2011, the Vendor has given an irrevocable undertaking to the Company whereby the Vendor has undertaken the Company that it will endeavour to procure Youyi to obtain all necessary licences and permits (including but not limited to the business licence, the coal production permit and the safety production permit).

Land and property

As advised by the PRC legal advisers, Youyi will be formed from the integration of two enterprises according to the approval document of Jin Mei Chong Zu Ban Fa [2009] No. 35 issued by Shanxi Province Coal Enterprise Annexation and Integration Office dated 14 September 2009 and is currently in the course of establishment. Accordingly, Youyi is not able to obtain land use rights or other property rights before it obtains a business license. As advised by the PRC legal advisers to the Company, there should be no material legal impediment for Youyi to obtain such rights after its due incorporation provided that Youyi duly carries out the registration procedures and complies with the legal requirements imposed by the government authorities. Youyi will obtain a business license before the Acquisition Completion and will use its best efforts to obtain land use rights and other property rights after the issuance of its business license. On 12 January 2011, the Vendor has given an irrevocable undertaking to the Company whereby the Vendor has undertaken the Company that it will endeavour to procure Youyi to obtain all necessary land use rights and the property ownership certificates. Furthermore, the Vendor, who has issued an undertaking to the Purchaser and the Company, undertakes to assume any liabilities of the two

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enterprises and hold Youyi immunity from any liabilities of the two enterprises. To the best of the knowledge of the Directors, there shall be no liabilities that will be inherited by Youyi from the integration of the two enterprises.

Under the PRC law, production and operation of coal mine in the PRC requires five certificates, namely, mining permit, coal production permit, safety production permit, coal mine manager qualification certificate and safety qualification certificate. Youyi will apply for the land use rights certificates and property ownership certificates after the issuance of its business licence. As Youyi has been issued with the mining permit, provided that Youyi complies with the relevant application procedures, the risk of Youyi of not being issued with the land use rights certificates and property ownership certificates is relatively low. In any event, the Vendor has undertaken to the Purchaser and the Company that it will procure Youyi to obtain the land use rights certificates and property ownership certificates as soon as possible. In view of the above, the Company may consider waiving the conditions precedent (b)(4) regarding Youyi if and when appropriate.

Resources and reserves

According to the geology report《山西朔州山陰酉宜煤業有限公司井田補充勘探地質報告》(Shanxi Shuozhou Shanyin Youyi Coal Co., Ltd. Jingtian Supplemental Geology Exploration Report) issued by Shanxi Province No. 3 Geology Engineering & Exploration Council in September 2010, Coal Mine B has resources/reserves under categories 111b and 122b of approximately 74.54 Mt and resources/reserves under category 333 of approximately 15.94 Mt under the PRC code DZ/T0215-2002 (Coal & Peat Geology Exploration Regulation) published by Ministry of Land and Resources of the PRC in 2002.

Coal Resources and Coal Reserves for Youyi have been independently estimated by MinarcoMineConsult in accordance with the Recommendations of the JORC Code. Coal Resources for Youyi are 105 Mt, which consists of 52 Mt Measured, 47 Mt Indicated and 6 Mt Inferred. Coal Reserves for Youyi are 37 Mt, which consist of 25 Mt Proven and 12 Mt Probable.

Proposed plan for Youyi covering the size of the workforce, production plan, mining facilities and equipment

The Youyi project is a planned underground coal mine and has a current mining licence capacity of 1.2 Mtpa. Youyi is a combination of two smaller mines, currently not operating and awaiting a licence to upgrade to mechanised production. A Preliminary Design (2010) report has been completed and outlines the upgrades required to achieve a ROM coal production of 3 Mtpa. The Preliminary Design report and other associated approvals and licences have not yet been granted. Youyi is forecast to produce both long flame and gas coal. Both coal types are suitable for use as a thermal coal and some gas coal may be saleable as a blending coking coal.

The PRC legal advisers to the Company have advised on whether there will be any legal impediments for Coal Mine B to upgrade its production capacity to 3Mtpa. According to the PRC legal advisers, the rules and regulations mainly applicable to the upgrade of production capacity of coal mines are Rules on Administration of the Production Capacity of Coal Mines, Standard for Verification of the Production Capacity of Coal Mines, both of which were jointly promulgated by the NDRC, the State Administration of Work Safety and the State Administration of Coal Mine

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Safety, and Relevant Provisions on Verification of the Production Capacity of Coal Mines which was issued by the NDRC. Besides, Shanxi Province has issued an implementation rule in 2006 regarding this matter, namely, Interim Provisions on Examining and Approving the Verifications of the Production Capacity of Coal Mines, which shall also be applicable to coal mines located in Shanxi, as in the case of Coal Mine B.

According to the relevant applicable rules and regulations, a coal mine shall meet several basic requirements without which the application of it for upgrading the production capacity will not be granted. Such basic requirements for the coal mine include the following: (i) possession of a valid mining permit, safety production permit, coal production permit and business license; (ii) equipment of well-found production, technology and safety management organizations and systems; (iii) employment of essential technical personnel; (iv) normal running of all production systems and safety monitoring systems; (v) compliance with the provincial coal industry policy; and (vi) maintaining of adequate mine reserves to enable the increase in production capacity. Further, a coal mine is typically required to operate for at least five years prior to receiving an increase in production capacity pursuant to a recently enacted document, namely, Notice for Further Strengthening the Safety Management of Coal Mine Construction Project.

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

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

The mining methods to be implemented at Youyi are two underground high production mining methods to match the deposit characteristics, namely longwall and longwall top coal caving. These methods have been successfully implemented in China and are considered appropriate for Youyi.

Throughout 2010, a Geology Report, Preliminary Mine Design (3.0 Mtpa), Safety Report and Environmental Report were completed for Youyi. These are currently awaiting approval from the relevant authorities and are preconditions for the issue of a 3.0 Mtpa mining licence. The Preliminary Design estimates a mine construction period of 24 months prior to trial production. The mine plan proposes to use a significant amount of existing site infrastructure. It is estimated that, pending timely approval of the required project approvals and licences, ROM coal production will be near the full production rate of 3 Mtpa in 2015. Based on the Code for Mine Design of Coal Industry, it is estimated that the mine will employ over 1,200 people.

The former Baofeng mine industrial area has been chosen as the new industrial area for the Youyi mine as it is relatively wide and flat, the inclined shafts are well supported and shallow and limited new shaft length is required to be sunk to access the lower seam No. 11. The industrial area will include (amongst others) a mine equipment maintenance workshop, longwall equipment store and a timber workshop. Other site infrastructure includes a 35 kilovolts transformer station (which will be connected to two separate local transformer substations 10 km away), twin surface ventilation fans and a weightometer to measure the tonnages of coal leaving site.

The Youyi Preliminary Design report’s forecast operating costs (including direct and indirect costs) is RMB132/ROM tonne. An increase in operating costs compared to Shaoyaohua is expected due to the greater amount of mine development required per tonne of coal produced at Youyi as well as the more complex mine layout.

The forecast Youyi direct capital costs for the mine development are RMB587 million. Additional indirect capital costs of RMB36 million for interest and working capital have also been estimated.

Full scale operation of Coal Mine B is expected to commence in 2013 after Youyi has fully complied with the relevant rules and regulations including, among others, the obtaining of all necessary permits and approvals.

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7. RISK FACTORS

Set out below are the principal risk factors which may be associated with the Acquisition:

Dependence of mining business

The business of the Target Group is dependent on the Target Coal Mines as the major source of coal supply for its processing operations. If there is any disruption for a sustained period to the continued operation of the Target Coal Mines or supporting infrastructure, the financial condition and results of operations of the Target Group may be materially and adversely affected.

Uncertainties associated with Coal Resources

The estimated amount of Coal Resources stated in the independent technical review and competent person’s report prepared by the technical adviser in respect of the Target Coal Mines is based on a number of assumptions on principal factors and variables, which may prove to deviate from the actual conditions of the Target Coal Mines, and which will be beyond the Company’s control. Consequently, the actual amounts of Coal Resources and Coal Reserves derived from the Target Coal Mines may deviate materially from the amounts estimated by the technical adviser.

Risk relating to evaluation of the Target Group’s business prospects due to short operating history

Due to the limited operating history of Shaoyaohua, there may not be an adequate basis on which to evaluate the future operating results and prospects of the Target Group. As the Shaoyaohua’s historical results may not be indicative of the Target Group’s results in the future, investors may have difficulties evaluating the Target Group’s business and prospects.

Significant and continuous capital investment in mining business

The mining business requires significant and continuous capital investment. The major mine exploration and production projects may exceed their original budgets, may not be completed as planned or may not achieve the intended economic results or commercial viability. Actual capital expenditures of Shaoyaohua and Youyi may significantly exceed the Group’s budgets because of various factors beyond the Group’s control, which in turn may affect the Group’s financial condition.

Risk relating to inclement weather

Inclement weather conditions may require the Target Group to evacuate personnel or curtail operations and may cause damages to the mining cites, equipment or facilities, which could result in the temporary suspension of operations or generally reduce productivity. There can be no assurance that severe weather will not occur. Any damages to the Target Group’s projects or delays in its operations caused by prolonged periods of inclement weather could materially and adversely affect its business and results of operations.

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Risk relating to reliance of major customers

The sales of Shaoyaohua depends on a small number of major customers. For the year ended 31 December 2007, the sales of Shaoyaohua to its top four customers accounted for approximately 94% of the total sales of that year while the remaining approximately 6% was the cash sales to a number of fragmented purchasers. For the two years ended 31 December 2008 and 2009 and the nine months ended 30 September 2010, the sales of Shaoyaohua to its top five customers accounted for approximately 90%, approximately 77% and approximately 89% of the total sales of the year/period, respectively. The relatively brief history of coal sales of the Target Group makes it difficult to evaluate the strength of its relationships with current customers and its ability to attract additional customers. Accordingly, inability to attract additional customers or the loss of, or a significant reduction in, purchases by any of the limited number of potential customers could materially and adversely affect the Target Group’s future revenue and the economic viability of its exploration and development projects.

Risk relating to reliance of major suppliers

For the three years ended 31 December 2007, 2008 and 2009 and the nine months ended 30 September 2010, the purchases of Shaoyaohua from its top five suppliers accounted for approximately 40.18%, approximately 23.30%, approximately 54.10% and approximately 34.41% of the total purchases of the year/period, respectively.

There is no assurance that Shaoyaohua’s suppliers will continue to be able to supply at prices and terms and conditions acceptable to it in the future. There is also no assurance that new sources of supply will be available in a timely manner in the event that any of its suppliers cease supplying to it for any reason and no suitable replacement of suppliers can be identified within a short period of time, its business, operations and financial conditions may be adversely affected.

Shaoyaohua has records of non-compliance in respect of production above its licensed production capacity

According to Production Capacity Rules promulgated jointly by the NDRC, the State Administration of Work Safety and State Administration of Coal Mine Safety in 2006, the coal industry administrative departments of the local governments at and above the county level supervise the production capacities of coal mines (excluding those owned by the central government) located in their respective administrative regions. In the same year, namely 2006, implementation rules for the Production Capacity Rules were issued in Shanxi Province, pursuant

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to which, in Shanxi Province, the coal industry bureau and the coal mine safety supervision bureau are the coal industry administrative departments of the local governments. Nevertheless, under the current administrative system of China, the administrative department of the government at a higher level has authority to revoke any administration behavior of the administrative department of the government at a lower level at its discretion, if such behavior is improper in its view.

Notwithstanding that the PRC legal advisers consider that there is a relatively low possibility that Shaoyaohua would be penalized by virtue of the fact that Shaoyaohua is operating above its licensed production capacity, however, according to relevant PRC rules and regulations, if the actual production capacity of a coal mine exceeds the approved production capacity as stipulated under its coal production permit and the competent coal industry administrative departments decide to impose penalty on it, such coal mine will receive punishment. Such punishment may include suspension of production and correction of relevant activities, penalty ranging from RMB0.5 million to RMB2 million, or even revocation of the coal production permit. The local coal industry administrative departments have discretions in imposing penalty. It is estimated by the Company that the possible maximum amount of penalty for Shaoyaohua’s production in excess of licensed production capacity as at Latest Practicable Date would not exceed RMB2 million.

The Target Group may fail to obtain the land use rights certificates and property ownership certificates for some of its properties

The land use rights certificates in respect of the Coal Mine A were issued to the predecessor of Shaoyaohua but Shaoyaohua has not applied for renewal of the land use rights certificates, namely to change the currently stipulated land owner’s name of Shanyin County Local State Operated Shaoyaogou Coal Mine to the name of Shaoyaohua. Shaoyaohua is required to apply for renewal registration to replace the predecessor’s name with its own name on each of the land use rights certificates under PRC laws and regulations. Failing to do so will result in Shaoyaohua being urged by the government authority to register, however, no penalty will be imposed on Shaoyaohua under the PRC law as confirmed by our PRC legal advisers, In addition, Shaoyaohua has not obtained the property ownership certificates for the houses and buildings erected on the said land. Shaoyaohua is in the process of obtaining such property ownership certificates. However, if Shaoyaohua fails to obtain such property ownership certificates, the government authority may dismantle such houses or buildings depending on whether they are in compliance with the general construction plans. Shaoyaohua may also receive a penalty from the government authority with a cap of 10% of the construction cost of the houses or buildings under the PRC law.

Youyi is in the course of establishment and thus has not obtained any land use rights and property ownership rights. Steps will be taken to obtain land use rights and property ownership rights for Youyi upon its establishment. However, there is no assurance that Youyi will be able to obtain such certificates. As stipulated in relevant PRC laws, the legal consequences for any land users occupying and using land without land use right certificates include being ordered to return the occupied land and in the case where any houses or buildings have been erected thereon, the government authority may either confiscate or dismantle such houses or buildings depending on whether they are in compliance with the general construction plans. In addition, such land users may also receive a penalty from the government authority with a cap of 10% of the construction cost of the houses or buildings under the PRC law.

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Risk relating to limited insurance coverage

Exploration, development and production operations on mineral properties involve numerous risks and hazards, including:

. rock bursts, slides, fires, earthquakes or other adverse environmental occurrences;
. industrial accidents;
. labor disputes;
. political and social instability;
. technical difficulties due to unusual or unexpected geological formations;
. failures of pit walls; and
. flooding and periodic interruptions due to inclement or hazardous weather condition.

These risks can result in, among other things:

. damage to, and destruction of, mineral properties or production facilities;
. personal injury;
. environmental damage;
. delays in mining;
. monetary losses; and
. legal liability.

The current insurance industry in the PRC offers the Target Group limited insurance coverage. As a result, The Target Group may have to pay out of its funds for financial and other losses, damages and liabilities, including those caused by fire, weather, disease, civil strife, industrial strikes, breakdowns of equipment, difficulties or delays in obtaining raw materials and equipment, natural disasters, terrorist incidents, industrial accidents or other causes. The Target Group also does not have any business interruption insurance or third party liability insurance other than motor vehicle insurance. Any business disruption or natural disaster may result in substantial costs and diversion of resources. Losses incurred or payments the Target Group may be required to make may have a material adverse effect on its business, prospects, financial condition and results of operations to the extent such losses or payments are not insured or the insured amount is not adequate.

In addition, Shaoyaohua has failed to pay relevant portion of the social insurances for its employees, which would incur a daily surcharge of 0.2% of the outstanding portion. It is estimated by the Company that the possible maximum amount of penalty for overdue payment of social insurances as at Latest Practicable Date was approximately RMB8 million. Pursuant to the

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Acquisition Agreement, the Vendor has indemnified the Company that all salaries and employee’s benefits (including but not limited to the social insurance) of the employees and the ex-employees of the Target Group were duly settled. Accordingly, the Vendor is liable to compensate for all fines and penalty which may be imposed to the Target Group for its historical non-compliance. However, there is no assurance that the Vendor will honour its obligations under the Acquisition Agreement. Should the employees of Shaoyaohua bring claims against it regarding payment of social insurance the Group is obliged to pay the fines and penalty first and can subsequently make claims against the Vendor, which may or may not be successfully. Moreover, Shaoyaohua also failed to purchase accidental death and injury insurances for its miners working in the pit as required by PRC law. As confirmed by the PRC legal adviser, the prevailing PRC laws have kept silent on whether there shall be any penalty or other liability imposed on Shaoyaohua for its failure to purchase accidental death and injury insurance for such miners. The Target Group will ascertain the outstanding amount with the relevant governmental bodies and will settle such outstanding amount in due course.

Risk relating to disruption on transportation

Inadequate transportation infrastructure is likely to affect the pricing terms on which the Group can sell the coal to customers and the willingness and ability of such customers to purchase coal from the Target Group. Potential customers are likely to factor in any delays and the costs and availability of transportation in determining the price they are prepared to pay to purchase the coal of the Target Group.

In the PRC, rail and road infrastructure and capacity have in the past been affected by extreme weather conditions, earthquakes, delays caused by major rail accidents, the diversion of rolling stock needed to deliver emergency food relief and seasonal congestion during public holidays. There can be no assurance that these problems will not recur or that new problems will not occur. In any of these circumstances, the customers may not be able to take delivery of the coal of the Target Group, which may lead to delays in payment, or refusal to pay, for the coal of the Target Group and, as a result, the Target Group’s business and results of operations could be materially and adversely affected.

Risk relating to delay or failure to expand as scheduled

The future success of the Target Group depends in large part on its ability to successfully implement its expansion and development plans as scheduled, which in turn depends on a number of factors including, among others, the particular attributes of the deposit, such as size, grade and proximity to infrastructure; commodity prices, which are highly cyclical; and government regulations including regulations relating to prices, taxes, royalties, land use, importing and exporting of mineral resources and environmental protection. The forecast mining operations are contingent on Coal Mine A being granted an increase to their current approved mining capacity and Coal Mine B being granted the relevant licences and approvals to commence construction of the planned mining operation. Delay or failure to expand as scheduled may materially and adversely affect the financial position and results of operations of the Target Group.

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Risk relating to insufficient capital generated for the Target Group’s expansion

The Target Group has relied on numerous sources of funding, including but not limited to cash generated from its operations, to finance its expansion plan. The Target Group’s ability to generate sufficient cash from its operations depends on a number of factors, including but not limited to general economic conditions, the performance of its operations and the ability of its customers to settle their payments. Deterioration of the general economic conditions, the performance of the Target Group’s operations or the ability of the Target Group’s customers to settle their payments may materially and adversely affect the Target Group’s ability to generate sufficient cash from its operations and consequently, may affect its ability to finance its expansion plan.

Risk relating to shortages in electricity, water and gasoline supply or increases in electricity and water prices

The Target Group consumes a substantial amount of electricity, water and gasoline in connection with the production of raw coal. It is expected that the demand for electricity, water and gasoline would increase as the production capabilities of the Target Group increase. Although the Target Group has not experienced any major shortage or disruption in electricity, water and gasoline supply in the past, there can be no assurance that sufficient supply of electricity, water and gasoline will be available to the Target Group in the future. Any shortages or disruption in electricity, water and gasoline supply could lead to lengthy production shutdowns and increased costs related to recommencement of operations. Insufficient electricity, water and gasoline supply may force the Target Group to limit or delay its production, which could have a material adverse effect on the Target Group’s business or results of operations. Any significant increase in electricity, water and gasoline prices will increase the production costs and may adversely affect the Target Group’s results of operations if the Target Group is not able to pass the increased costs on to its customers.

Fluctuation in coal demands and prices

The business of the Target Group will be sensitive to movements in the market prices for coal. Most of the revenue of the Target Group is expected to be derived from the sale of coal and coal product and such sale is expected to continue to account for a large percentage of the Group’s revenue in the future. The demand for coal is subject to numerous factors, including, but not limited to, economic conditions in the PRC, global economic conditions and fluctuations in industries with high demand for coal, such as the power and steel industries, which in turn affect the price of coal. Fluctuations in both prices and demand for the coal are beyond the control of the Target Group. In the absence of any offsetting factors, a significant and sustained adverse movement in the market prices of or demands for coal may materially and adversely affect the financial condition and results of operations of the Group. A significant reduction in the market prices of or demands for coal for a prolonged period may lead to a material deterioration in the financial performance of the Group.

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Risk relating to the oversupply of coal

During the past 20 years, a growing world coal market and increased demand for coal worldwide have attracted new investors to the coal industry, spurred the development of new mines and expansion of existing mines in various countries, including China, Mongolia, Indonesia, Australia and Colombia, and resulted in added production capacity throughout the world. Increases in coal prices since early 2003 could encourage new or existing international coal producers to expand their production capacity. Any oversupply of coal in the world markets could reduce world coal prices in the future and the prices the Target Group will receive in the future, which could materially and adversely affect its business, prospects, financial condition and results of operations.

Risk relating to competition in the coal industry

A majority of the coal that the Target Group produces will be sold in the PRC. Competition in the PRC coal industry is based on many factors, including, among others, price, production capacity, coal quality and characteristics, transportation capability and costs, blending capability and brand name. The PRC coal market is highly fragmented and the Target Group faces price competition from some small local coal producers that produce coal for lower costs than the Target Group. Some of the domestic or international competitors may have greater coal production capacity as well as greater financial, marketing, distribution and other resources than the Target Group does, and may benefit from more established band names in international markets. The Target Group’s future success will depend on its ability to respond in an effective and timely manner to competitive pressure.

The operations of the Target Group is subject to operational risks, hazards and unexpected disruptions

The operations of the Target Group are subject to a number of operational risks and hazards, some of which are beyond its control, which could delay the production and delivery of its coal, increase its cost of mining or result in accidents in its mines. These risks and hazards include unexpected maintenance or technical problems, periodic interruptions due to inclement or hazardous weather conditions, natural disasters, industrial accidents, power or fuel supply interruptions, critical equipment failure, malfunction and breakdowns of information management systems, fires, and usual or unexpected variations in mineralization, geological or mining conditions. These risks and hazards may result in personal injury, damage to or destruction of properties or production facilities, environmental damage, business interruption, possible legal liability, damage to its business reputation and corporate image and, in severe cases, fatalities. Up to the Latest Practicable Date, the Target Group confirmed that there were no such accidents, disasters or interruptions historically.

Reliance on senior management and technical staff

If a significant number of members of senior management or technical staff cease to serve the Group in the future or fail to perform their duties as expected, or the Group is unable to recruit and train key personnel and management personnel and technical staff, the financial condition and results of operations of the Group may be materially and adversely affected.

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Possible effects of adverse PRC economic or legal developments

The operations of the Target Coal Mines are carried out in the PRC and the Target Group’s revenue is derived from the operations of the Target Coal Mines in the PRC. Any adverse economic or legal developments in the PRC may affect the revenue generated which in turn may affect the Group’s financial results or condition.

Changes to the PRC laws, regulations and policies on the coal industry

The coal industry in the PRC is subject to extensive regulations by the PRC government. The operations of the Target Coal Mines may be materially and adversely affected by any future changes in the government regulations and policies. Any policy or regulatory changes in the PRC may cause the Target Group to incur significant compliance costs, increase the capital requirements of the Target Group or adversely affect the business operations and prospects of the Target Group. The Target Group, like other coal producers located in the PRC, is subject to extensive national, provincial and local government regulations, policies and controls, which govern many aspects of the coal industry in the PRC, including, among other things, (i) granting and renewal of mining rights; (ii) granting of production licences; (iii) production safety and casualty rates; (iv) pricing of coal transport services; (v) adoption of temporary measures to limit increases in coal prices; (vi) taxes and fees; and (vii) environmental, health and safety standards.

Environmental protection laws and regulations in the PRC

As a producer of coal and coal-related products, the Target Group is subject to significant, extensive and increasingly stringent environmental protection laws and regulations in the PRC. These laws and regulations:

. impose fees for the discharge of waste substances;
. require the establishment of reserves for reclamation and rehabilitation;
. require the payment of fines for serious environmental offences; and
. allow the PRC government to close down any entity that fails to comply with orders requiring it to correct or stop operations causing environmental damage.

Coal mining operations produce significant amounts of waste water, gas and solid waste materials. In recent years, the PRC government has been moving toward more rigorous enforcement of applicable laws and regulations, as well as the adoption and enforcement of more stringent environmental standards. The budgeted amounts of capital expenditures for environmental regulatory compliance of the Target Group may not be sufficient and the Target Group may need to allocate additional funds for such purpose. There is no assurance that compliance with environmental laws or regulations adopted or amended in the future or measures to be taken to tackle unanticipated environmental effects from the operations of the Target Group will not materially increase the operating and other expenses of the Target Group. Further, the operations of the Target Group are subject to the environmental risks inherent in the mining and processing industry, such as risks of accidental spills, leakages or other unforeseen circumstances, that could subject the Target Group to extensive liability. If the Target Group fails to comply with or if it violates current or future environmental protection laws and regulations, it may be required to pay

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penalties or fines or take corrective actions or even be shut down, any of which may have a material adverse effect on the business operations and financial condition of the Target Group. The Target Group may be required to obtain approval from the relevant authorities before it can undertake activities which are likely to have an impact on the environment. Failure to obtain such approval will prevent the Target Group from undertaking its desired activities.

Health and production safety and the occurrence of accidents or natural disasters

Being engaged in mining business in the PRC, the Target Group is subject to extensive laws, rules and regulations imposed by the PRC government regarding health and production safety. The PRC government continues to strengthen the enforcement of health and safety regulations in relation to the mining industry. No assurance can be given that more stringent laws, regulations or policies regarding health and production safety will not be implemented or that the existing laws, regulations and policies will not be more stringently enforced. The Target Group may not be able to comply with all existing or future laws, regulations and policies in relation to health and production safety economically or at all. Should it fail to comply with any health and production safety laws or regulations, the Target Group would be required to rectify the production safety problems or pay remedial cost or penalties within a limited period, failing which suspension of operations may be required. In addition to rectification or operation suspension, fines may also be imposed according to the PRC laws relating to production safety.

The Target Group or third party contractors may encounter accidents, technical difficulties, mechanical failure or breakdown in the mining processes, as well as possible localised mud-slides, instability of the slopes and subsidence of the working areas and the like due to natural disasters. There can be no assurance that accidents will not occur in the future or that more serious corrective measures or penalties will not be imposed by the PRC regulatory authorities. The occurrence of accidents may disrupt or result in a suspension of the operations of the Target Group, increase production costs, result in liability to the Target Group and/or harm its reputation. Such incidents may also result in a breach of the conditions of its mining licences, or any other consents, approvals or authorisations, with consequent exposure to enforcement procedures or even possible revocation of its mining licences. Any one or a combination of the factors above may materially and adversely affect the financial condition and results of operations of the Group.

Uncertainty associated with renewal of mining rights

Under the Mineral Resources Law of the PRC, all mineral resources in the PRC are owned by the State. 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 mining rights will be renewed on favourable terms, or at all, once such rights expire. Since the business of the Target Group can only be conducted under mining rights granted by the PRC government, if such rights cannot be renewed, the financial condition and results of operations of the Group may be materially and adversely affected.

Shaoyaohua is entitled to continue its mining business operation in relation to Coal Mine A in accordance with the current mining permit numbered C1400002009101220038759 which will expire on 14 October 2011 and Youyi is entitled to operate its mining business in relation to Coal Mine B in accordance with the current mining permit numbered C1400002009111220042845 which will expire on 3 November 2011. As advised by the PRC legal advisers of the Company, provided that

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the Target Group complies with the legal requirements and such other requirements as deemed necessary by the competent government authorities, there shall be no material legal impediment to each of Shaoyaohua and Youyi obtaining the renewal of the licences.

In addition, the existing production capacity of Shaoyaohua has exceeded the approved production capacity of 1.2 Mtpa as stipulated under its coal production permit and safety production permit. Shaoyaohua has obtained confirmation letters dated 11 November 2010 and 12 November 2010 from Shuozhou Coal Mine Safety Supervision Bureau and Shuozhou Coal Industry Bureau respectively, the competent authorities supervising Shaoyaohua on production capacity matters. Pursuant to the said confirmation letters, Shuozhou Coal Industry Bureau and Shuozhou Coal Mine Safety Supervision Bureau confirmed that, up to the respective dates of the said letters, Shaoyaohua had been in material compliance with all the requirements regarding coal mine production capacity and will not be subject to any form of punishment including, but not limited to penalty, suspension of production, temporary or permanent revocation of its coal production permit and safety production permit, solely by virtue of the fact that its actual production volumes are not identical to the permitted production capacity as set out in the coal production permit and safety production permit. Accordingly, the PRC legal advisers are of the opinion that the risk of Shaoyaohua being punished solely because its actual production volume exceeds the permitted production capacity as set out in the coal production permit and the safety production permit is remote.

8. CHANGE IN SHAREHOLDING STRUCTURE

The Directors confirm that there will be no change in control of the Company as a result of the Acquisition.

The following table sets out the shareholding structure of the Company as at the Latest Practicable Date and the changes thereto as a result of (i) the allotment and issue of the Consideration Shares; and (for illustration only) (ii) the issue of the Consideration Shares and the 1st Tranche Conversion Shares upon exercise of the conversion rights attached to the 1st Tranche Convertible Bonds at the conversion price of HK$0.21 in full; (iii) the issue of the Consideration Shares, the 1st Tranche Conversion Shares and the 2nd Tranche Conversion Shares upon exercise of the conversion rights attached to the 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds at the conversion price of HK$0.21, respectively, in full and all of the 2nd Tranche Convertible Bonds are issued; (iv) the issue of the Consideration Shares, the Call Option Consideration Shares, the 1st Tranche Conversion Shares and the 2nd Tranche Conversion Shares assuming full conversion of the 1st Tranche Convertible Bonds and full issue and conversion of the 2nd Tranche Convertible Bonds; (v) the issue of the Consideration Shares, the Call Option Consideration Shares, the 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares and the 3rd Tranche Conversion Shares assuming full conversion of the 1st Tranche Convertible Bonds, the 2nd Tranche Convertible Bonds and the 3rd Tranche Convertible Bonds; and (vi) the issue of the Consideration Shares, the Call Option Consideration Shares, the 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares, the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares assuming full issue and conversion of the 1st Tranche Convertible Bonds, the 2nd Tranche Convertible Bonds, the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds, assuming that there is no other change in the issued share capital of the Company from the Latest Practicable Date to the date of the Acquisition Completion or completion of the Call Option Agreement (as the case may be):

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Shareholders As at Latest Practicable Date Immediately after allotment and issue of Consideration Shares Immediately after issue of Consideration Shares and 1st Tranche Conversion Shares upon exercise of conversion rights attached to 1st Tranche Convertible Bonds at conversion price of HK$0.21 in full and no price adjustment (for illustration only) Immediately after issue of Consideration Shares, 1st Tranche Conversion Shares and 2nd Tranche Conversion Shares upon exercise of conversion rights attached to 1st Tranche Convertible Bonds and 2nd Tranche Convertible Bonds at conversion price of HK$0.21, respectively, in full and no price adjustment (for illustration only) Immediately after issue of Consideration Shares, Call Option Consideration Shares, 1st Tranche Conversion Shares and 2nd Tranche Conversion Shares assuming conversion of 1st Tranche Convertible Bonds and 2nd Tranche Convertible Bonds in full and no price adjustment (for illustration only) Immediately after issue of Consideration Shares, Call Option Consideration Shares, 1st Tranche Conversion Shares, 2nd Tranche Conversion Shares and 3rd Tranche Conversion Shares assuming conversion of 1st Tranche Convertible Bonds, 2nd Tranche Convertible Bonds and 3rd Tranche Convertible Bonds in full and no price adjustment (for illustration only) Immediately after issue of Consideration Shares, Call Option Consideration Shares, 1st Tranche Conversion Shares, 2nd Tranche Conversion Shares, 3rd Tranche Conversion Shares and 4th Tranche Conversion Shares assuming conversion of 1st Tranche Convertible Bonds, 2nd Tranche Convertible Bonds, 3rd Tranche Convertible Bonds and 4th Tranche Convertible Bonds in full and no price adjustment (for illustration only) (Note 1) (Note 1) (Note 1) (Note 1) No. of Shares % No. of Shares % No. of Shares % No. of Shares % No. of Shares % No. of Shares % No. of Shares % Mr. Zhao Ming 3,506,535,195 14.84 3,506,535,195 12.36 3,506,535,195 11.63 3,506,535,195 10.02 3,506,535,195 9.19 3,506,535,195 8.92 3,506,535,195 8.24 Future Wise Limited (Note 2) 1,150,000,000 4.87 1,150,000,000 4.05 1,150,000,000 3.82 1,150,000,000 3.28 1,150,000,000 3.01 1,150,000,000 2.92 1,150,000,000 2.70	Subtotal 4,656,535,195 19.71 4,656,535,195 16.41 4,656,535,195 15.45 4,656,535,195 13.30 4,656,535,195 12.20 4,656,535,195 11.84 4,656,535,195 10.94	China Coal and Coke Investment Holding Company Limited (Note 3) 1,800,000,000 7.62 1,800,000,000 6.34 1,800,000,000 5.97 1,800,000,000 5.14 1,800,000,000 4.72 1,800,000,000 4.58 1,800,000,000 4.23 Central Huijin Investment Limited (Note 4) 1,688,000,000 7.14 1,688,000,000 5.95 1,688,000,000 5.60 1,688,000,000 4.82 1,688,000,000 4.42 1,688,000,000 4.29 1,688,000,000 3.96 Vendor — — 4,747,200,000 16.73 6,511,800,000 21.60 11,368,800,000 32.48 14,533,600,000 38.08 15,710,000,000 39.93 18,948,000,000 44.50 Public Shareholders 15,485,208,175 65.53 15,485,208,175 54.57 15,485,208,175 51.38 15,485,208,175 44.25 15,485,208,175 40.58 15,485,208,175 39.36 15,485,208,175 36.37 Total 23,629,743,370 100.00 28,376,943,370 100.00 30,141,543,370 100.00 34,998,543,370 100.00 38,163,343,370 100.00 39,339,743,370 100.00 42,577,743,370 100.00	100.00

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Notes:

(1) Pursuant to the Acquisition Agreement, the Vendor and its parties acting in concert shall at no time hold more than 30% or more voting rights of the Company and shall not carry out any action such that a mandatory general offer obligation under the Takeovers Code will be triggered on the part of the Vendor and its parties acting in concert. Accordingly, the above scenarios upon full conversion of different tranches of the Convertible Bonds are presented for illustration purpose only and may not happen in the light of the restrictions imposed under the terms of the Acquisition Agreement.
(2) Future Wise Limited is a wholly owned by Mr. Zhao Ming. On 14 October 2010, 150,000,000 Shares were lent to Merrill Lynch International under the securities lending agreement dated 24 September 2010.
(3) China Coal and Coke Investment Holding Company Limited is a company incorporated in the Cayman Islands with limited liability. It is wholly-owned by Sino Bridge Investments Limited, a company wholly-owned by Mr. Wang Da Yong, the Chairman and an executive Director.
(4) CCB International Asset Management Limited is the beneficial owner of 1,688,000,000 Shares. Central Huijin Investment Limited is deemed to be interested in the 1,688,000,000 Shares held by CCB International Asset Management Limited by virtue of its 57.09% interest in China Construction Bank Corporation which owns 100% interest in CCB International Group Holdings Limited. CCB International Group Holdings Limited holds 100% interest in CCB Financial Holdings Limited which in turn owns 100% interest in CCB International (Holdings) Limited. CCB International (Holdings) Limited holds 100% interest in CCB International Assets Management (Cayman) Limited which in turn owns 100% interest in CCB International Asset Management Limited.

9. INDUSTRY OVERVIEW

Overview of long flame coal and gas coal

Coal is one of the most abundant fossil fuels worldwide with various uses, including but not limited to, electricity generation, steel making, and industrial uses such as cement manufacturing. According to the BP Statistical Review of World Energy June 2010 (www.bp.com), the PRC, being the world’s largest coal producer, recorded higher total coal production than total coal consumption in 2009.

Long flame coal is a type of bituminous coal and bears the characteristics of thermal coal, which is primarily used for, among others, electricity generation.

Gas coal is a type of bituminous coal and bears the characteristics of both thermal coal and coking coal, which is primarily used for, among others, electricity generation and coke production.

As the market information of long flame coal and gas coal are not available on the public domains, in view of their similar uses to thermal coal and coking coal respectively, it is considered to be justifiable to use the market information of thermal coal and coking coal regarding, including but not limited to sale price, supply and demand, and import and export.

Long flame coal is mainly used for power generation whereas gas coal is widely used for power generation and coke making because of its high caking index and high volatility characteristics. It is generally accepted that long flame coal is classified as thermal coal and gas coal can be classified as either thermal coal or blending coking coal. The trend of historical price, supply, demand, import and export of long flame coal and gas coal will generally follow that of thermal coal and coking coal. The Board therefore consider that the information of thermal coal and coking coal is relevant for the Shareholders to assess the Acquisition.

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Price of thermal coal and coking coal

There are three commonly adopted mechanisms for coal price quotation: mine mouth price, free-on-board (‘‘FOB’’) price and free-on-rail (‘‘FOR’’) price. Mine mouth price refers to the sale price of coal sold at the producing mine. FOB price refers to the sale price of coal being transported by ship, which comprises, among others, mine mouth price, freight charges and relevant costs. FOR price refers to the sale price of coal being transported by train, which comprises, similar to that of FOB price, mine mouth price, freight charges and relevant costs.

Price of thermal coal

The price of thermal coal is primarily determined by its energy content and affected by its level of sulphur content and volatile matter.

The chart below shows the historical price trend of (i) global thermal coal price based on the benchmark Australia thermal coal’s FOB price; and (ii) PRC thermal coal average price for the period from April 2009 to December 2010.

Thermal coal price from April 2009 to December 2010

==> picture [417 x 240] intentionally omitted <==

Source: China Coal Resource (‘‘CCR’’, http://en.sxcoal.com)

The global price of thermal coal in December 2010 was approximately RMB910 per tonne, increased by approximately 10.6% from approximately RMB823 per tonne in December 2009. The price of thermal coal in the PRC in December 2010 was approximately RMB627 per tonne, increased by approximately 13.8% from approximately RMB551 per tonne in December 2009.

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Price of coking coal

The price of coking coal is dependent on coking characteristics including ash, sulphur, volatile matter contents and coke strength.

The chart below shows the historical price trend of (i) global coking coal price based on the benchmark Australia coking coal’s FOR price; and (ii) PRC coking coal average price for the period from July 2009 to December 2010.

Coking coal price from July 2009 to December 2010

==> picture [417 x 248] intentionally omitted <==

Source: CCR (http://en.sxcoal.com)

The global price of coking coal in December 2010 was approximately RMB1,688 per tonne, increased by approximately 31.9% from approximately RMB1,280 per tonne in December 2009. The price of thermal coal in the PRC in December 2010 was approximately RMB1,393 per tonne, increased by approximately 22.9% from approximately RMB1,133 per tonne in December 2009.

Competition in Shanxi province

The coal mining industry in Shanxi province is principally dominated by a limited number of big enterprises. Based on the information provided by CCR, the top five largest companies recorded an aggregate coal output of approximately 283.2 Mt in 2009, accounting for approximately 46.0% of the total coal output in Shanxi province of approximately 615.3 Mt during the same period. The remaining coal output are contributed by a large number of fragmented small coal mining companies. The aggregate designed capacities of each of these major competitors in 2009 ranged from approximately 21.9 Mt to approximately 63.7 Mt.

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Supply and demand of thermal coal and coking coal

According to the BP Statistical Review of World Energy June 2010, the PRC, being the world’s largest coal producer, had a total coal production of approximately 3,050.0 Mt in 2009, which accounts for approximately 43.9% of the global coal production of approximately 6,940.6 Mt. The total coal production of the PRC has been growing from approximately 1,992.3 Mt in 2004, representing a CAGR of approximately 8.9%. The global coal reserves were approximately 826,001 Mt at the end of 2009 whereas coal reserves in the PRC were approximately 114,500 Mt at the end of 2009, representing approximately 13.9% of the total global reserves.

Coal production in the PRC is concentrated in four key producing provinces, namely Shanxi, Inner Mongolia, Shaanxi and Henan. Shanxi is the largest coal production province, representing approximately 20.2% of the total coal production of the PRC in 2009. Inner Mongolia is another key coal producing region, accounting for approximately 19.8% of the total coal production of the PRC in 2009.

China total coal production by province in 2009

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Source: CCR (http://en.sxcoal.com)

Coal consumption in the PRC has been growing during the same period, from approximately 1,870 Mt in 2004 to approximately 3,020 million tones in 2009, representing a CAGR of approximately 10.1%, according to the National Bureau of Statistics of China.

Thermal coal demand in the PRC is largely driven by electricity from coal fired power plants. According to information released by the U.S. Energy Information Administration, the total electricity net generation of the PRC in 2009 was approximately 3,446.0 billion kilowatthours, increased from approximately 2,103.3 billion kilowatthours in 2004, representing a CAGR of approximately 10.4%. Conventional thermal electricity, which is generated by an electric power plant using coal, petroleum or gas as its source of energy, accounted for over 80% of the total electricity net generation of the PRC during these years.

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Total electricity net generation and conventional thermal electricity net generation in the PRC from 2004 to 2009

							CAGR
							2004–
	2004	2005	2006	2007	2008	2009	2009
Total electricity net
generation (billion
kilowatthours)	2,103.3	2,369.8	2,717.4	3,039.6	3,221.2	3,446.0	10.4%
Total conventional
thermal electricity net
generation (billion
kilowatthours)	1,701.8	1,922.1	2,225.1	2,539.2	2,618.6	2,802.5	10.5%
Percentage of total
conventional thermal
electricity net
generation over total
electricity net
generation	80.9%	81.1%	81.9%	83.5%	81.3%	81.3%	—

Source: U.S. Energy Information Administration (www.eia.doe.gov)

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The steel industry will continue to be the main driver for coking coal consumption. According to the information released by World Steel Association, the production of steel in the PRC increased from approximately 283 million metric tonnes in 2004 to approximately 568 million metric tonnes in 2009, representing a CAGR of approximately 15.0%. This has supported a significant growth in the consumption of coking coal in the PRC which increased from approximately 291 Mt in 2004 to approximately 455 Mt in 2009, with a CAGR of approximately 9.4%.

Coking coal consumption and steel production in the PRC from 2004 to 2009

							CAGR
							2004–
	2004	2005	2006	2007	2008	2009	2009
Coking coal consumption
(Mt)	291	331	387	433	413	455	9.4%
Steel production (Mt)	283	356	423	489	500	568	15.0%

Source: CCR (http://en.sxcoal.com)

Import and export of thermal coal and coking coal

In view of the remarkable growth of the coal consumption in the PRC, the PRC government has been encouraging international imports of natural resources and limiting exports by lowering the customs duty on coal imports and implemented coal export quotas. This has resulted in a significant increase in international coal imports and decrease in international coal exports of both thermal coal and coking coal. The import of thermal coal in 2009 was approximately 38.0 Mt, increasing from approximately 3.8 Mt in 2004, representing a CAGR of approximately 58.6%. The imports of coking coal in 2009 was approximately 34.4 Mt, increasing from approximately 6.8 Mt in 2004, representing a CAGR of approximately 38.5%. On the other hand, the exports of thermal coal in 2009 was approximately 18.5 Mt, decreasing from approximately 74.6 Mt in 2004, representing a CAGR of approximately -24.3%. The exports of coking coal in 2009 was approximately 0.6 Mt, decreasing from approximately 5.7 Mt in 2004, representing a CAGR of approximately -35.5%.

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PRC thermal coal import and export from 2004 to 2009

==> picture [369 x 204] intentionally omitted <==

Source: CCR (http://en.sxcoal.com)

PRC coking coal import and export from 2004 to 2009

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Source: CCR (http://en.sxcoal.com)

Coal transportation infrastructure in the PRC

Rail is the main method for long distance coal transportation within the PRC. Chinese coal production is mainly concentrated in Shanxi, Shaanxi and Inner Mongolia which are in the northern part of China, while consumption has been relatively concentrated in the industrialized eastern and southern provinces. This defines the general movement of coal in the PRC, which follows the west to east coal distribution routes.

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The 652 km Datong-Qinhuangdao railway in northern China is one of the main coal railways in the PRC, with the coal transportation volume of 330 Mt in 2009, contributing 25% of national coal transportation volume. The railway links coal production regions in Datong and Shanxi to the Qinhuangdao port in Hebei and plays a pivotal role in meeting the coal demand of power generators in the PRC’s eastern and southern provinces. Qinhuangdao is one of the main ports for international and domestic coal imports and exports in The PRC.

Numerous new rail lines and expansions of existing lines are under development that would affect the coal transport capacity. The PRC government has significantly increased spending on railway development projects and has undertaken to develop the construction of special coal transportation railways in the future to increase coal transportation capacity.

Railway transportation costs vary depending on insurance fees and construction fund fees, and on whether it is a coal dedicated and electrified railway. For example, the DatongQinhuangdao railway, which is a coal dedicated and fully electrified railway, currently charges an all inclusive rate of approximately RMB0.12 per km for every tonne of coal transported.

Major laws and regulations governing the operations of the Target Group in the PRC

(1) The Mineral Resources Law of the PRC

中華人民共和國礦產資源法 (Mineral Resources Law of the PRC) (‘‘Mineral Resources Law’’) was adopted by 全國人民代表大會常務委員會 (Standing Committee of the National People’s Congress), became effective on 1 October 1986, and was amended on 29 August 1996. Mineral Resources Law provides: (i) that all mineral resources of the PRC are owned by the state; and (ii) that enterprises engaged in the mining of mineral resources shall obtain mining permits.

山西省礦產資源管理條例 (Regulation of Shanxi Province on Mineral Resources) promulgated by 山西省人民代表大會常務委員會 (Standing Committee of Shanxi Province People’s Congress) came into force on 29 September 1998 and is applicable to the mining of the mineral resources within Shanxi Province. The Regulation of Shanxi Province on Mineral Resources provides: that the geology and mineral resources departments of Shanxi province, cities and counties are responsible for the supervision and administration of the mining of mineral resources in their own administrative regions.

(2) Law of the People’s Republic of China on the Coal Industry

中華人民共和國煤炭法 (Law of the People’s Republic of China on the Coal Industry*) (‘‘Coal Industry Law’’) was adopted by the Standing Committee of the National People’s Congress, became effective on 1 December 1996. Coal Industry Law provides: (i) that the coal resources of the PRC are owned by the state; (ii) that the department in charge of the coal industry under the State Council shall be responsible for the supervision and administration of the coal industry throughout the state, the departments in charge of the coal industry under the local people’s governments at or above county level shall be responsible for the supervision and administration of the coal industry in their own administrative regions; and (iii) that any coal mine shall apply for a coal production permit before it is put into production.

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山西省煤炭管理條例 (The Regulation of Shanxi Province on Coal Industry*) promulgated by the Standing Committee of Shanxi Province People’s Congress came into force on 1 March 2001 and is applicable to the production and marketing of coal within Shanxi Province. The Regulation of Shanxi Province on Coal Industry provides: the departments in charge of the coal industry under the people’s governments of Shanxi province is responsible for the registration, examination, granting, annual inspection, supervision and administration of coal production permits to the coal mining enterprises. The departments in charge of the coal industry of the cities and counties are responsible for the supervision and administration of coal production permits to the coal mining enterprises within the cities and counties according to the authorization by the departments in charge of the coal industry under the people’s governments of Shanxi province. The departments in charge of the coal industry of the counties government and government above county level are responsible for the supervision and administration of coal industry in their own administrative regions.

(3) The Measures of Coal Operation Supervision

煤炭經營監管辦法 (Measures of Coal Operation Supervision*) was adopted by the NDRC and became effective on 26 January 2005. The Measures of Coal Operation Supervision provides: that the State adopts the coal business operation qualification examination system. The establishment of a coal business operation enterprise shall be subject to a coal business operation qualification examination. With regard to a coal mining enterprise with a coal production permit, a coal operation qualification examination shall not be required for its sale of coal products produced or processed by itself. Where a coal mining enterprise with a coal production permit sells coal products that are not produced or processed by itself, it shall file an application with the department in charge of the coal business operation qualification examination for obtaining the coal operation qualification.

(4) The Rules on Administration of the Production Capacity of Coal Mines

Rules on Administration of the Production Capacity of Coal Mines was jointly promulgated by the NDRC, State Administration of Work Safety and the State Administration of Coal Mine Safety on 30 April 2006 and became effective since promulgation. Administrative Measures on Coal Mine Production Capacity provides: that the coal mine production capacity set out in the coal production permit is the maximum annual volume of the coal mine production approved by the department in charge of granting and administration of coal production permit. The department in charge of the coal industry under the State Council shall be responsible for guiding the supervision and administration of the coal mine production capacity throughout the country, and be directly responsible for the supervision and administration of the production capacity of the coal enterprises owned by the central government. The departments in charge of the coal industry under the local people’s governments at or above county level shall be responsible for the supervision and administration of the coal mine production capacity in their own administrative regions except the central state owned coal enterprises. If the actual production capacity of a coal mine is greater than the permitted capacity, the departments in charge of the coal industry have discretion to impose punishment on the coal mine. Such punishment may include suspension of production and correction of relevant activities, a penalty with an amount ranging from RMB0.5 million to RMB2 million, or even revocation of the coal production permit.

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(5) The PRC Law on Mine Safety

中華人民共和國礦山安全法 (PRC Law on Mine Safety) was adopted by the Standing Committee of the National People’s Congress on 7 November 1992 and became effective on 1 May 1993. The law is aimed at securing mines safety during their production, preventing mine accidents, protecting mine workers’ personal safety and improving the development of the mineral resources mining industry. 安全生產許可證條例 (Regulations on the Safety Production Permit) was promulgated by the State Council on 13 January 2004 and became effective since promulgation. Pursuant to Regulations on the Safety Production Permit, no mining enterprise may engage in production activities without holding a safety production permit.

(6) The Regulation on the Coal Mine Safety Supervision

煤礦安全監察條例 (The Regulation on the Coal Mine Safety Supervision) was adopted by 國務院 (State Council) on 7 November 2000 and became effective on 1 December 2000. The Regulation on the Coal Mine Safety Supervision provides: that the State implements supervision system on the coal mine safety. The coal mine safety supervision institutions are responsible for implementing emphases supervision, special supervision and periodical supervision on coal mine safety, making decisions or imposing administrative penalty on the mining enterprise that violates any laws or regulations, inspecting and guiding the local coal mine safety supervision institutions, granting the safety production permits, design examination and completion checking of the coal mine construction engineering safety facilities, organizing the investigation and disposition of accidents in mines. The local coal mine safety supervision institutions are responsible for making daily supervision and inspecting on the coal mine safety in their own administrative regions, making decisions or imposing administrative penalty on the mining enterprise that violates any laws or regulations, supervising rectification of the hidden dangers of accidents that jeopardize safety and organizing countercheck, organizing the closure of mines without complying with the safety production conditions according to laws, participating in the investigation and disposition of accidents in mines.

(7) The Environmental Protection Law of the PRC

中華人民共和國環境保護法 (Environmental Protection Law of the PRC*) was adopted by the Standing Committee of the National People’s Congress and became effective on 26 December 1989. The Law is aimed at protecting and improving the living environment and the ecological environment, preventing and controlling pollution and other public hazards, protecting people’s health, and facilitating the development of socialist modernization.

(8) Provisional Regulations on Resources Tax of the PRC

中華人民共和國資源稅暫行條例 (Provisional Regulations on Resources Tax of the PRC*) was promulgated by the State Council on 25 December 1993 and became effective on 1 January 1994. Enterprises or individuals engaged in the mining of mineral resources within the territory of the PRC are resources tax payers and must pay resources taxes.

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(9) Administrative Rules on the Levy of Mineral Resources Compensation

礦產資源補償費徵收管理規定 (Administrative Rules on the Levy of Mineral Resources Compensation*) was promulgated by the State Council on 27 February 1994 and came into force on 1 April 1994. On 3 July 1997, the State Council amended the Rules. Pursuant to the amended Rules, unless otherwise provided in relevant regulations, anyone who engaged in the mining of mineral resources within the territory of the PRC or other marine areas under the PRC’s jurisdictions shall pay mineral resources compensation levy.

(10) Mining resource consolidation in Shanxi Province

Shanxi provincial government is in the process of consolidating mining resources with the aim of creating large coal mining enterprises, enhancing the concentricity and industry level of coal industry and promoting and optimizing the coal industry system. According to the 山西省人民政府關於加快推進煤礦企業兼併重組的實施意見 (Shanxi Provincial Government’s Implementation Opinion on Accelerating and Promoting of Merger and Reorganization of Coal Mining Enterprises) issued on 2 August 2008 and 山西省人民政府關於進一步加快推進煤礦企業兼併重組整合有關問題的通知 (Shanxi Provincial Government’s Notice on Relevant Issues Concerning Further Accelerating and Promoting of Merger, Reorganization and Consolidation of Coal Mining Enterprises) issued on 15 April 2009, Shanxi province intends to reduce the number of coal mines in Shanxi province to 1,000 at the end of 2010 to realize wholly mechanized exploitation major in comprehensive exploitation. The consolidation shall be implemented by the consolidating enterprise, through merging or reorganizing the smaller coal mines or other manners approved by the provincial government. Any local coal mining enterprise with one portal of mine of 0.9 Mtpa or more is eligible to be nominated as the consolidating enterprise by the municipal government if the mining enterprises after the consolidation have at least one portal of mine of 1.2 Mtpa. The consolidating enterprise and mining areas shall be rationally decided and approved under the principle that one mining area exploited by one enterprise and one enterprise may exploit more than one mining areas. As a general target but subject to special cases, after the consolidation, the annual production scale of a coal enterprises group shall not be lower than 3 Mt and the annual production scale of each portal of a coal mine shall not be lower than 0.9 Mt.

Main regulators governing the operations of the Target Group in the PRC

(1) The Target Coal Mine companies’ establishment and modification are governed by 山西省工商局 (Shanxi Provincial Administration of Industry & Commerce*).
(2) 山西省國土資源廳 (Shanxi Provincial Land and Resource Bureau) is responsible for granting and renewing the Mining Permits to the Target Coal Mines, and supervising and inspecting the Target Coal Mines’ rational development and utilization of mineral resources, environmental protection and the fulfillment of other legal obligations. In addition, the Target Coal Mines are regulated and supervised directly by 朔州市國土資源局 (Shouzhou Land and Resource Bureau) in respect of the administration of mineral resources.
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(3) 山西省煤炭工業廳 (Shanxi Provincial Coal Industry Bureau) is responsible for the registration, examination, granting, annual inspection, supervision and administration of the Coal Production Permits to the Target Coal Mines. In addition, the Target Coal Mines are regulated and supervised directly by 朔州煤炭工業局 (Shouzhou Coal Industry Bureau) in respect of the production of coal.
(4) 山西省煤礦安全監察局 (Shanxi Provincial Coal Mine Safety Supervision Bureau) is responsible for granting the Safety Production Permits to the Target Coal Mines. In addition, the Target Coal Mines are regulated and supervised directly by 朔州煤礦安全監察局 (Shouzhou Coal Mine Safety Supervision Bureau) in respect of the administration of coal mine safety.
(5) The Target Coal Mines are governed by 山西省環境保護廳 (Shanxi Provincial Environmental Protection Bureau) and 朔州市環境保護局 (Shouzhou Environmental Protection Bureau) on environmental protection.
(6) The Target Coal Mines are governed by 山陰縣國土資源局 (Shanyin County Land and Resource Bureau*) on using the state-owned land.
(7) The Target Coal Mines are governed by 山陰縣建設局 (Shanyin County Construction Bureau*) on projects construction.
(8) The Target Coal Mines are governed by 山陰縣國家稅務局 (State Taxation Bureau of Shanyin County) and 山陰縣地方稅務局 (Shanyin County Local Taxation Bureau) in respect of taxation.
(9) The Target Coal Mines are governed by 山陰縣勞動和社會保障局 (Labour and Social Security Bureau of Shanyin County*) on labor and social insurance.

10. REASONS FOR THE ACQUISITION OF THE TARGET COAL MINES

The Group is currently engaged in the trading of phosphorus products, trading of optical products and mining and selling of coal.

In light of the growing domestic demand for both power and steel as highlighted under paragraph headed ‘‘Industry overview’’ above, the Directors are optimistic about the prospects of the long flame coal and gas coal mining business and it is expected that the Acquisition would bring positive impacts to the earnings of the Group. As stated in the annual report of the Company for the year ended 31 December 2009, the Board considers that with the steady development of China’s economy, domestic demand for coal would increase continuously in the next few years and coal prices will be maintained at a high level, thereby providing various opportunities for the Group’s development in the coal industry. The Company can benefit from the national policy to carry out structure adjustments in the coal industry by weeding out the weak players and tightening the coal supplies. Moreover, the market’s increasing demand for stable supplies of high quality coal are also favourable to the Group’s future development.

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With the acquisition of Triumph Fund A Limited, which beneficially owns thermal coal mines located in Ordos City, Inner Mongolia, the PRC, on 21 December 2009, the Group commenced its coal mining business which has made significant contribution to the Group’s profit and cash flows during the first half of 2010. For the six months ended 30 June 2010, the Group recorded revenue of approximately HK$374 million, representing a year-on-year growth of approximately 834% as compared to that of the corresponding period in 2009. Loss attributable to owners of the Company for the six months ended 30 June 2010 was approximately HK$522 million. However, excluding the fair value loss of convertible notes of approximately HK$622 million, the Group recorded a profit attributable to owners of the Company of approximately HK$100 million for the six months ended 30 June 2010.

China’s coal reserves are concentrated in Shanxi, Inner Mongolia and Shaanxi. Thermal coal reserves are mainly concentrated in the North China region, with Inner Mongolia, Shanxi and Shaanxi accounting for over 70% of total reserves. The Target Coal Mines are located in Shanxi which enjoy a strategic location advantage in addressing customers and market demand.

In light of the numerous coal resources in the PRC and in view of the expected continued growth in demand for coal in the world, it is expected that the Group’s further expansion in the coal mining business will provide significant opportunities for the Group’s business growth and revenue potential. Leveraged on the extensive experience of coal mining business of the management of the Group, the Directors are of the view that the acquisition of the Target Coal Mines will further create strategic values to the Group by increasing the amount of its coal resources, broadening the variety of its coal resources and enhancing the market position of its coal mining business. The Directors expect that the Target Group will make remarkable contribution to the cash flows, revenue and net profit of the Group upon the acquisition of the Sale Shares and the Call Option Shares. The Directors will from time to time assess the financial position of the Company and, if appropriate, consider the feasibility of fund raising methods, including but not limited to debt financing and equity financing, to support future capital expenditures and operating costs of the Group. The aggregate net cash proceeds from the two fund raising exercises of approximately HK$411.0 million as announced by the Company on 28 December 2010 and 30 December 2010, respectively will be utilized to settle part of the Consideration. It is contemplated that the cash portion of the Consideration and the Call Option Consideration will be financed by way of bank borrowings and/or issue of securities or convertible bonds.

The Board is of the opinion that the terms of the Acquisition Agreement and the Call Option Agreement are fair and reasonable and that the Acquisition and the Call Option are in the interests of the Company and the Shareholders as a whole.

11. FINANCIAL IMPACT OF THE ACQUISITION

Upon Acquisition Completion, the financial position and results of the Target Group will be consolidated into the financial statements of the Group.

Assets and liabilities

As stated in the interim report of the Company for the six months ended 30 June 2010, the unaudited consolidated total assets and total liabilities of the Group as at 30 June 2010 were approximately HK$4,518.3 million and approximately HK$4,481.8 million, respectively.

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According to adjustment 10(iii) of the unaudited pro forma financial information on the Enlarged Group as contained in Appendix III to this circular, as at 30 September 2010, the total liabilities (excluding intra-group payables) of the Target Group was approximately HK$2,112,878,000, which mainly comprised loans of approximately RMB1,328,221,000 (equivalent to approximately HK$1,514,172,000, as translated at an exchange rate of RMB100 = HK$114) in the book of Haimei and approximately RMB39,660,000 (equivalent to approximately HK$45,214,000, as translated at an exchange rate of RMB100 = HK$114) in the book of Lvhai, borrowed by these entities from other parties for the financing of the acquisitions of the Target Coal Mines by the Target Group. Such loans will be settled by and/or assigned to the Vendor or its other controlled entities before the Acquisition Completion. It is a condition precedent that, as of the date of the Acquisition Completion, the total amount of all liabilities and capital commitments of the Target Group shall not exceed RMB300 million (equivalent to approximately HK$342 million, as translated at an exchange rate of RMB100 = HK$114).

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 would be approximately HK$10,852.0 million and approximately HK$7,347.8 million, respectively upon the Acquisition Completion, as calculated based on the applicable assumptions.

Earnings

In light of the potential future prospects of the Target Coal Mines, the Directors consider that it would be highly probable that the Acquisition would be able to have a positive impact on the future earnings of the Enlarged Group.

Gearing and working capital

According to the interim report of the Company for the six months ended 30 June 2010, the gearing ratio of the Group (measured as net debt, which represents total debt excluding tax payable, deferred tax liabilities and convertible notes, less cash and cash equivalents to the capital, which represents convertible notes and equity attributable to owners of the Company) was 0.77 as at 30 June 2010.

Upon the Acquisition Completion, the gearing ratios of the Enlarged Group (measured as net debt, which represents total debt excluding tax payable, derivative liabilities, contingent consideration payables, deferred tax liabilities and convertible notes, less cash and cash equivalents to the capital, which represents contingent consideration payables, convertible notes and equity attributable to owners of the Company) as calculated based on the unaudited pro forma financial information of the Enlarged Group as contained in Appendix III to this circular, will be approximately 0.42.

As the Directors will from time to time assess the financial position of the Group and, if appropriate, consider the feasibility of fund raising methods, including but not limited to debt financing and equity financing, to support future capital expenditures and operating costs of the Group and it is contemplated that the cash portion of the Consideration will be financed by way of bank borrowings and/or issue of securities or convertible bonds, the Directors consider that there

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will be no negative impact on the working capital of the Group due to the Acquisition. However, the gearing ratio of the Enlarged Group would be affected by such bank borrowings and/or issue of securities or convertible bonds.

12. FINANCIAL AND TRADING PROSPECTS OF THE ENLAREGD GROUP

Principal activities of the Group

The Group is currently engaged in the trading of phosphorus products, trading of optical products and mining and selling of coal.

Financial and trading prospects of the Group

Coal mining business

As stated in the interim report of the Company for the six months ended 30 June 2010, coal prices are expected to remain at a high level with the support of the steady development of China’s economy. 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. Such an initiative would create a more favourable investment environment for the Group. The Group will continue to carry out acquisition plans of 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 perk up its production volume and broaden its product mix to include products such as coke and anthracite, with an aim to establish the Group as a leading and diversified coal enterprise. The Group will continue to expand its customer network so as to establish long-term partnerships with more customers and increase its supply to large-scale companies and will actively seek strategic partners to secure stable income for the Group. Notwithstanding policy-related factors such as the potential resources tax reform may affect cost control of coal enterprises, the Group could still create room for long-term development through its highly efficient consolidating capacity and the synergies among its various mining projects.

Phosphorus business

In view of the loss-making position of the phosphorus business, it has been the Group’s intention to rationalize and implement costs saving measures for its phosphorus business. Due to unfavourable factors including, but not limited to, the increase in raw material prices, the increase in energy cost and the decrease in market demand, the revenue and the gross profit generated from the phosphorus trading business for the year ended 31 December 2009 decreased significantly as compared with that for the previous year. On 17 June 2010, the Company entered into a sale and purchase agreement with an independent third party, pursuant to which the Company had conditionally agreed to sell to the purchaser the entire issued share capital of Anchorage Trading Limited, a then wholly-owned subsidiary of the Company, for a consideration of HK$1 million. The aforesaid transaction was approved by the Shareholders on 10 August 2010 and was completed in August 2010. The Board will continue to monitor closely the performance of its phosphorus business.

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Optical business

The trading of optical business which was commenced in the second half of 2008 has been generating steady incomes to the Group. However, such business was affected by the global economic slowdown and its performance was not desirable for the year ended 31 December 2009. In view of the insignificant improvement in the optical business, the Group will continue to monitor the operation of the optical business cautiously so as to take any possible business opportunities when appropriate.

13. LISTING RULES IMPLICATION

Since some of the applicable percentage ratios as defined under Rule 14.07 of the Listing Rules are more than 100%, the Acquisition contemplated under the Acquisition Agreement and the exercise of the Call Option contemplated under the Call Option Agreement constitute a very substantial acquisition for the Company under Chapter 14 of the Listing Rules and are therefore subject to the reporting, announcement and shareholders’ approval requirements of the Listing Rules.

To the best of the knowledge, information and belief of the Directors, after having made all reasonable enquiry, none of the Shareholders has a material interest in the Acquisition Agreement and the Call Option Agreement or is required to abstain from voting on the resolutions in respect of the Acquisition and the Call Option.

In compliance with the requirements of Chapter 18 of the Listing Rules, the Company has appointed (i) a technical adviser to issue a competent person’s report (the text of which is set out in Appendix IV to this circular) to provide the estimated amounts of resources (by clearly distinguishing them between measured, indicated and inferred) and reserves (by clearly distinguishing them between proven and probable) in respect of the Target Coal Mines in accordance with the JORC Code; and (ii) a qualified valuer to issue valuation report on Shaoyaohua and Youyi prepared under Chapter 18 of the Listing Rules (the text of which is set out to Appendix V of this circular).

To the best of the Directors knowledge, information and belief, having made all reasonable enquiries, both of the said technical adviser and the valuer, and their respective ultimate beneficial owners and associates are third parties independent of the Company and its connected persons.

The Directors and the technical adviser confirm that no material changes have occurred since the date of the independent review and competent person’s report.

14. GENERAL

The EGM will be convened to consider and, if thought fit, to approve the Acquisition Agreement, the Call Option Agreement and the transactions contemplated thereunder.

An application will be made to the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares, the Call Option Consideration Shares, the 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares, the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares.

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Shareholders and potential investors should note that each of the Acquisition Completion and/or completion of the Call Option Agreement is subject to the fulfillment of the conditions precedent under the Acquisition Agreement and the Call Option Agreement. As the transaction contemplated under the Acquisition Agreement and the Call Option Agreement may or may not proceed, Shareholders and potential investors are reminded to exercise caution when dealing in the Shares.

15. EGM

Set out on pages EGM-1 to EGM-2 of this circular is a notice convening the EGM to be held at Room 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong at 12:00 noon, on Friday, 25 February 2011 at which the ordinary resolution will be proposed to approve the Acquisition Agreement, the Call Option Agreement and the transactions contemplated thereunder. There is a form of proxy for use at the EGM accompanying this circular. If you are unable to attend and vote at the EGM in person, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the branch share register of the Company, Tricor Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, as soon as possible, but in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.

16. RECOMMENDATION

The Board considers that the terms of the Acquisition Agreement and the Call Option Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, the Board recommends the Shareholders to vote in favour of the ordinary resolution as set out in the notice of the EGM.

17. ADDITIONAL INFORMATION

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

Yours faithfully, By order of the Board King Stone Energy Group Limited Wang Da Yong Chairman

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. THREE-YEAR FINANCIAL INFORMATION

Financial information of the Group for each of the three years ended 31 December 2007, 2008 and 2009 and for the six months ended 30 June 2010 are disclosed in the annual and the interim reports of the Company for the years ended 31 December 2007 (pages 26 to 86), 2008 (pages 22 to 74), 2009 (pages 32 to 95) and for the six months ended 30 June 2010 (pages 7 to 40), respectively, which are published on both the website of the Stock Exchange (http://www.hkex.com.hk) and the website of the Company (http://www.663hk.com).

2. INDEBTEDNESS

Borrowings

At the close of business on 31 December 2010, being the latest practicable date prior to the printing of this circular for the purpose of this statement of indebtedness, the Enlarged Group had secured bank loans of approximately HK$885 million which were secured by:

(i) guarantees given by Mr. Zhao Ming (former shareholder of Triumph Fund A Limited) and Mr. Hao Shenhai (director of Eerduosi Hengtai Coal Company Limited (‘‘Hengtai’’, a subsidiary of the Company)); and
(ii) pledges over mining rights with an unaudited carrying amount of approximately HK$2,364 million held by the Enlarged Group as at that date.

In addition, at the close of business on 31 December 2010, the Enlarged Group had unsecured bank and other loans of approximately HK$413 million and approximately HK$4,030.4 million, respectively, outstanding zero coupon redeemable convertible notes with aggregate principal amount of HK$602.5 million and 2% one-year redeemable convertible bonds with aggregate principal amount of HK$159 million. The unsecured bank loans were guaranteed by certain related parties and certain independent third parties. The zero coupon convertible notes, which have a 5 year term from 21 December 2009, are redeemable in whole or in part at face value by the Company at any time after 3 years of the issuance date.

Contingent liabilities

At the close of business on 31 December 2010, the Enlarged Group did not have any significant contingent liabilities.

Save as aforesaid or as otherwise disclosed herein and apart from intra-group liabilities, the Enlarged Group did not have, at the close of business on 31 December 2010, any mortgages, charges, debentures, loan capital, bank overdrafts, loans, liabilities under acceptance (other than under normal trade bills) or other similar indebtedness, hire purchase or finance lease obligations or any guarantees or other material contingent liabilities.

For the purpose of the above statement of indebtedness, amounts denominated in RMB have been translated into Hong Kong dollars at an exchange rate of RMB100 = HK$118.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. WORKING CAPITAL STATEMENT

The Directors are of the opinion that, after taking into account the financial resources and banking facilities available to the Enlarged Group and its internal generated funds, the Enlarged Group has sufficient working capital to satisfy its requirements for at least 12 months from the date of publication of this circular in the absence of unforeseen circumstances.

4. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Enlarged Group since 31 December 2009 (being the date to which the latest published audited consolidated financial statements of the Group were made up).

5. MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP

Set out below is the management discussion and analysis on the Group for each of the three financial years ended 31 December 2007, 2008 and 2009:

Business review

For the financial year ended 31 December 2007

For the financial year ended 31 December 2007, the Group recorded a total revenue of approximately HK$373.0 million (2006: approximately HK$119.6 million) for its continuing operational business, representing a substantial increase of approximately 211.9% compared with that of the same period in 2006. The increase was primarily due to the introduction of the new businesses of yellow phosphorus and PVC during the year and due to the fact that the Group’s phosphoric acid business had shown a full year’s operation compared with the half year’s operation when it was firstly launched in the middle of 2006. As a result, the PRC domestic sales network was substantially extended during the year. Gross profit had increased substantially from approximately HK$29.1 million for the financial year ended 31 December 2006 to approximately HK$109.0 million, representing an increase of approximately 274.6%. Such increase was primarily due to the fact that the Group had shifted its emphasis to the more profitable PRC domestic markets especially in the sale of phosphoric acid.

For the financial year ended 31 December 2008

For the financial year ended 31 December 2008, the Group recorded a total revenue of approximately HK$627.1 million (2007: approximately HK$373.0 million) for its continuing operational business, representing an increase of approximately 68.1% compared with that of the same period in 2007. The increase mainly took place in the first half of year 2008. However, the financial tsunami had caused the decrease in demand for phosphorus products in the second half of the year that affected the profitability of the phosphorus business. Overall gross profit decreased from approximately HK$109.0 million for the financial year ended 31 December 2007 to approximately HK$28.8 million, representing a decrease of approximately 73.6%. Such decrease was primarily due to the significant increase in the raw materials costs as compared with that of the same period in 2007.

– I-2 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

For the financial year ended 31 December 2009

For the financial year ended 31 December 2009, the Group recorded a total revenue of approximately HK$88.7 million (2008: approximately HK$627.1 million) for its continuing operational business, representing a decrease of approximately 85.9% compared with that of the same period in 2008. Overall gross profit decreased from approximately HK$28.8 million for the financial year ended 31 December 2008 to approximately HK$6.3 million, representing a decrease of approximately 78.1%. Such decreases in revenue and gross profit were mainly attributable to decline of phosphorus business as a result of weak market demand and the unremarkable performance of the trading of optical products during the year.

Following completion of the acquisition of Triumph Fund A Limited and its subsidiaries which owns thermal coal mine located in Ordos City, Inner Mongolia, the PRC on 21 December 2009, the Group has since then started the coal mining business. The said business contributed approximately HK$2.6 million to the revenue of the Group during the year.

Financial performance of continuing operations

Revenue

For the financial year ended 31 December 2007, the Group recorded revenue of approximately HK$373.0 million from the manufacturing and trading of phosphorus products.

For the financial year ended 31 December 2008, the Group recorded revenue of approximately HK$627.1 million, of which HK$593.1 million was attributed to the manufacturing and trading of phosphorus products and HK$34.0 million was attributed to the trading of optical products.

For the financial year ended 31 December 2009, the Group recorded revenue of approximately HK$88.7 million, of which HK$61.3 million was attributed to the trading of optical products, HK$24.8 million was attributed to the manufacturing and trading of phosphorus products and HK$2.6 million was attributed to the mining and selling of coal.

Cost of sales

For the three financial years ended 31 December 2007, 2008 and 2009, the Group recorded cost of sales of approximately HK$264.1 million, approximately HK$598.2 million and approximately HK$82.5 million respectively.

Other income and gains

For the three financial years ended 31 December 2007, 2008 and 2009, the Group recorded bank interest income of approximately HK$72,000, approximately HK$0.36 million and approximately HK$0.55 million respectively.

For the financial year ended 31 December 2008, the Group recorded government grants of approximately HK$0.85 million. For the financial years ended 31 December 2007 and 2009, the Group recorded no government grants.

– I-3 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

For the financial year ended 31 December 2007, the Group recorded commission income received from a related company of approximately HK$1.3 million. For the financial years ended 31 December 2008 and 2009, the Group recorded no commission income received from a related company.

For the financial year ended 31 December 2007, the Group recorded net exchange gain of approximately HK$0.51 million. For the financial years ended 31 December 2008 and 2009, the Group recorded no net exchange gain.

For the financial year ended 31 December 2009, the Group recorded gain on disposals of subsidiaries and other gains/income of approximately HK$10.8 million. For the financial years ended 31 December 2007 and 2008, the Group recorded no gain on disposals of subsidiaries and other gains/income of approximately HK$2,000 and approximately HK$0.2 million respectively.

Selling and distribution costs

For the three financial years ended 31 December 2007, 2008 and 2009, the Group recorded selling and distribution costs of approximately HK$12.0 million, approximately HK$17.8 million and approximately HK$5.7 million respectively.

Administrative expenses

For the three financial years ended 31 December 2007, 2008 and 2009, the Group recorded administrative expenses of approximately HK$14.2 million, approximately HK$19.5 million and approximately HK$20.4 million respectively.

Impairment of goodwill

For the financial year ended 31 December 2009, the Group recorded impairment of goodwill of approximately HK$14.9 million. For the financial years ended 31 December 2007 and 2008, the Group recorded no impairment of goodwill.

Fair value loss of convertible notes

For the financial year ended 31 December 2009, the Group recorded fair value loss of convertible notes of approximately HK$1,053.8 million. For the financial years ended 31 December 2007 and 2008, the Group recorded no fair value loss of convertible notes.

Write-down of inventories to net realisable value

For the financial year ended 31 December 2008, the Group recorded write-down of inventories to net realisable value of approximately HK$13.3 million. For the financial years ended 31 December 2007 and 2009, the Group recorded no write-down of inventories to net realisable value.

– I-4 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Finance costs

For the financial year ended 31 December 2009, the Group recorded finance costs of approximately HK$1.5 million. For the financial years ended 31 December 2007 and 2008, the Group recorded no finance costs.

Income tax expenses/credit

For the financial year ended 31 December 2009, the Group recorded deferred tax credit of approximately HK$0.16 million. For the financial years ended 31 December 2007 and 2008, the Group recorded no deferred tax credit.

For the financial year ended 31 December 2009, the Group recorded income tax expenses of approximately HK$5,000. For the financial years ended 31 December 2007 and 2008, the Group recorded no income tax expenses.

Profit/loss from continuing operations

For the financial year ended 31 December 2007, the Group recorded profit from continuing operations of approximately HK$84.7 million. For the financial years ended 31 December 2008 and 2009, the Group recorded loss from continuing operations of approximately HK$20.5 million and approximately HK$1,078.7 million respectively.

Financial position

Liquidity and financial resources

During the financial years ended 31 December 2007 and 2008, the principal source of liquidity of the Group was mainly internally generated cash flow. During the financial year ended 31 December 2009, the principal source of liquidity of the Group was mainly internally generated cash flow, banking facilities and equity financing.

As at 31 December 2009, the Group had outstanding interest-bearing bank borrowings of approximately HK$908.6 million, of which HK$874.6 million were interest-bearing with floating interest rates and HK$34.1 million were charged at a rate of 7.97% per annum. All bank loans were denominated in RMB. As at 31 December 2007 and 2008, the Group had no bank loans.

As at 31 December 2007, 2008 and 2009, the cash and cash equivalents of the Group were approximately HK$30.3 million, approximately HK$84.4 million and approximately HK$143.0 million respectively.

Charges on assets

As at 31 December 2009, the bank loans of approximately HK$908.6 million were secured by the Group’s mining rights and equity interests in Eerduosi Hengtai Coal Co., Ltd. (‘‘Hengtai’’) (an indirect wholly-owned subsidiary of the Company), and guarantees given by an independent third party, the then shareholder of Triumph Fund A Limited and a director of Hengtai.

– I-5 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Save for the abovementioned, as at 31 December 2007, 2008 and 2009, the Group did not pledge any other assets respectively.

Net current assets/liabilities

As at 31 December 2007 and 2008, the Group had net current assets of approximately HK$121.9 million and approximately HK$49.6 million respectively. As at 31 December 2009, the Group had net current liabilities of approximately HK$117.3 million.

Gearing ratio

As at 31 December 2007, 2008 and 2009, the gearing ratios of the Group (calculated as a percentage on the Group’s net debt, being total debt excluding tax payable, deferred tax liabilities and convertible notes, less cash and cash equivalents, divided by capital, being convertible notes and equity attributable to owners of the Company) were 0.87, 1.05 and 0.62 respectively.

Material acquisitions and disposals of subsidiaries and associated companies

On 7 November 2007, the Company entered into a sale and purchase agreement with an independent third party by exercising a put option granted to the Company on 3 June 2005, pursuant to which the Company has conditionally agreed to sell to the purchaser 70% of the equity interest in Profitown Investment Corporation, a then non-wholly owned subsidiary of the Company, for a consideration of HK$1.0. The aforesaid transaction was completed in November 2007.

On 2 March 2009, Anchorage Trading Limited (a then wholly-owned subsidiary of the Company) entered into a sale and purchase agreement with an independent third party, pursuant to which Anchorage Trading Limited had conditionally agreed to sell to the purchaser the entire issued share capital of Fangcheng Huahai Chemicals Co., Ltd., a then indirect wholly-owned subsidiary of the Company, for a consideration of RMB29.5 million (equivalent to approximately HK$30 million). The aforesaid transaction was completed in May 2009.

On 15 September 2009, Magic Field International Limited (a direct wholly-owned subsidiary of the Company), the Company and Mr. Zhao Ming entered into a sale and purchase agreement, pursuant to which Mr. Zhao Ming had conditionally agreed to sell to Magic Field International Limited (‘‘Magic Field’’) the entire issued share capital of Triumph Fund A Limited for a consideration of HK$1,855 million, which was subsequently reduced by HK$50 million due to exercise of the right to terminate a put option by Magic Field. The aforesaid transaction was completed in December 2009.

On 31 December 2009, the Company disposed of the entire interest in Sharp Universe Limited for a cash consideration of HK$587,000.

Save for the abovementioned, the Group had not made any other material acquisition and disposal of subsidiaries and affiliated companies during the three financial years ended 31 December 2007, 2008 and 2009.

– I-6 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Future plans for material investments

As at 31 December 2009, the Group operated a coal mine in Ordos City, Inner Mongolia. No. 1 and No. 2 working faces with an aggregate designed capacity of 3.6 million tonnes had been put into operation since December 2009 and February 2010 respectively. No. 3 working face with designed capacity of 3.0 million tonnes commenced production in September 2010. In addition, the Group also planned to build a coal preparation plant in 2011.

Save for the abovementioned, the Group had no other solid plan for future investments.

Significant investment held

The Group had not made any significant investment during the three financial years ended 31 December 2007, 2008 and 2009.

Contingent liabilities

As at 31 December 2007, 2008 and 2009, the Group had no material contingent liabilities.

Capital structure

The capital structures of the Group as at 31 December 2007, 2008 and 2009 consisted of equity attributable to owners of the Company of approximately HK$122.6 million, approximately HK$52.1 million and approximately HK$(577.6) million respectively.

Capital commitment

As at 31 December 2007 and 2009, the capital commitments of the Group in relation to the construction of new plant and machinery and purchase of machineries were approximately HK$1.7 million and approximately and HK$281.5 million respectively.

As at 31 December 2008, the Group had no capital commitment.

Exchange risk and hedging

As most of the Group’s transactions, assets and liabilities were denominated in RMB, USD and HKD, the operations of the Group were not subject to significant exchange risk. Accordingly, no financial instruments for hedging purposes were used by the Group during the three financial years ended 31 December 2007, 2008 and 2009.

Staff and remuneration policies

As at 31 December 2007, 2008 and 2009, the number of employees of the Group were 1,604, 628 and 660 respectively.

For the three financial years ended 31 December 2007, 2008 and 2009, total staff costs of the Group were approximately HK$15.1 million, approximately HK$27.6 million and approximately HK$17.1 million respectively.

For the three financial years ended 31 December 2007, 2008 and 2009, the Group’s remuneration policy was primarily based on the individual performance and experience of employees including directors, prevailing industry practice and market rates.

– I-7 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The following are the texts of the accountants’ reports on (i) Triumph Fund A1 Limited; (ii) Shanxi Lvhai Mining Co., Ltd.; (iii) Shanxi Haimei Mining Co., Ltd.; (iv) Shanxi Shanyin Shaoyaohua Coal Co., Ltd.; and (v) Shanxi Shuozhou Shanyin Youyi Coal Co., Ltd. prepared for the sole purpose of inclusion in this circular, received from the Company’s independent reporting accountants, Ernst & Young. Terms defined herein shall apply to these reports only.

1. ACCOUNTANTS’ REPORT ON TRIUMPH FUND A1 LIMITED

9 February 2011

The Directors

King Stone Energy Group Limited

Dear Sirs,

We set out below our report on the financial information relating to Triumph Fund A1 Limited (the ‘‘Company’’) and its subsidiaries (hereinafter collectively referred to as the ‘‘Triumph Group’’) for the period from 16 June 2009 (date of incorporation) to 31 December 2009 and the nine-month period ended 30 September 2010 (the ‘‘Relevant Periods’’) and the financial information of the Triumph Group for the period from 16 June 2009 (date of incorporation) to 30 September 2009 (the ‘‘30 September 2009 Financial Information’’), prepared on the basis set out in note 2 of Section II below, for inclusion in the circular of King Stone Energy Group Limited (‘‘King Stone’’) dated 9 February 2011 in connection with the proposed acquisition of a 60% equity interest in the Company by a subsidiary of King Stone.

The Company was incorporated as an exempted company with limited liability in the Cayman Islands on 16 June 2009. The principal activity of the Company is investment holding.

The Company was incorporated in the Cayman Islands, and its subsidiaries were established in the People’s Republic of China (the ‘‘PRC’’). Accordingly, no audited accounts under Hong Kong Financial Reporting Standards (‘‘HKFRSs’’) are available. For the purpose of this report, the management of the Company has prepared the consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cashflows of the Triumph Group for each of the Relevant Periods and the period from 16 June 2009 (date of incorporation) to 30 September 2009, the consolidated statements of financial position of the Triumph Group and the statements of financial position of the Company as at 31 December 2009 and 30 September 2010, together with the notes thereto, in accordance with HKFRSs (including all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (‘‘HKASs’’) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants (the ‘‘HKICPA’’) (collectively the ‘‘Financial Information’’). No adjustments were made to the Financial Information in preparing this report.

– II-1 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Respective Responsibilities of Management and Reporting Accountants

The management of the Company is responsible for the preparation and the true and fair presentation of the Financial Information in accordance with HKFRSs. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of the Financial Information that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

It is our responsibility to form an independent opinion on the Financial Information for the Relevant Periods and to report our opinion to you.

The 30 September 2009 Financial Information has been prepared solely for the purpose of this report. The management of the Company is responsible for preparing this comparative financial information. It is our responsibility to form an independent review conclusion, based on our review on the comparative financial information and to report our conclusion to you.

Procedures Performed in Respect of the Financial Information of the Relevant Periods

For the purpose of this report, we have carried out an independent audit on the consolidated financial information of the Triumph Group for each of the Relevant Periods and the statements of financial position of the Company as at 31 December 2009 and 30 September 2010, which have been prepared by the management of the Company in accordance with HKFRSs. We conducted our audit in accordance with Hong Kong Standards on Auditing (‘‘HKSAs’’) issued by the HKICPA and carried out such additional procedures as we consider necessary in accordance with Auditing Guideline 3.340 ‘‘Prospectuses and the Reporting Accountant’’ issued by the HKICPA.

Procedures Performed in Respect of the 30 September 2009 Financial Information

For the purpose of this report, we have also performed a review of the 30 September 2009 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 Company’s management 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 September 2009 Financial Information.

Opinion in Respect of the Financial Information of the Relevant Periods

In our opinion, the Financial Information for the Relevant Periods prepared on the basis set out in note 2 of Section II gives, for the purpose of this report, a true and fair view of the consolidated results and cash flows of the Triumph Group for each of the Relevant Periods and the state of affairs of the Triumph Group and the Company as at 31 December 2009 and 30 September 2010 in accordance with HKFRSs.

– II-2 –

APPENDIX II FINANCIAL INFORMATION ON THE TARGET GROUP

Review Conclusion in Respect of the 30 September 2009 Financial Information

Based on our review, nothing has come to our attention that causes us to believe that the 30 September 2009 Financial Information does not give a true and fair view of the results and cash flows of the Triumph Group for the period from 16 June 2009 (date of incorporation) to 30 September 2009 in accordance with HKFRSs.

– II-3 –

APPENDIX II FINANCIAL INFORMATION ON THE TARGET GROUP

I. FINANCIAL INFORMATION

Consolidated Statements of Comprehensive Income of the Triumph Group

The following is a summary of the consolidated statements of comprehensive income of the Triumph Group for each of the Relevant Periods and the period from 16 June 2009 (date of incorporation) to 30 September 2009, prepared on the basis set out in note 2 of Section II below:

Notes Bank interest income Administrative expenses LOSS AND TOTAL COMPREHENSIVE LOSS FOR THE PERIOD, NET OF TAX Attributable to: The sole owner of the Company 8 LOSS PER SHARE ATTRIBUTABLE TO EQUITY HOLDER OF THE COMPANY Basic and diluted (RMB) 9	The Triumph Group	The Triumph Group	Nine-month period ended 30 September 2010 RMB’000 4 (378) (374) (374) (7.48)
	From 16 June 2009 (date of incorporation) to 30 September 2009 RMB’000 (Unaudited) — (45) (45) (45) (0.9)	From 16 June 2009 (date of incorporation) to 31 December 2009 RMB’000 — (46) (46) (46) (0.92)

– II-4 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Statements of Financial Position of the Company and the Consolidated Statements of Financial Position of the Triumph Group

The following is a summary of the statements of financial position of the Company and the consolidated statements of financial position of the Triumph Group as at the end of each of the Relevant Periods, prepared on the basis set out in note 2 of Section II below:

Notes NON-CURRENT ASSETS Investment in subsidiaries 10 Prepayments for investments 11 Total non-current assets CURRENT ASSETS Other receivables 12 Due from a director 13 Cash and bank balances 14 Total current assets CURRENT LIABILITIES Other payables 15 Due to director 13 Total current liabilities NET CURRENT ASSETS/ (LIABILITIES) Net assets EQUITY Equity attributable to the sole owner of the Company Issued capital 16 Accumulated losses Non-controlling interests Total equity	The Company As at 31 December As at 30 September 2009 2010 RMB’000 RMB’000 — 174,467 — — — 174,467 — — 341 — — 60 341 60 — — — 174,188 — 174,188 341 (174,128) 341 339 341 341 — (2) 341 339 — — 341 339	The Triumph Group As at 31 December As at 30 September 2009 2010 RMB’000 RMB’000 — — — 1,090,115 — 1,090,115 — 462,000 295 — — 1,198 295 463,198 — 1,373,005 — 179,788 — 1,552,793 295 (1,089,595) 295 520 341 341 (46) (420) 295 (79) — 599 295 520
	As at 31 December 2009 RMB’000 — — — — 341 — 341 — — — 341 341 341 — 341 — 341	As at 31 December 2009 RMB’000 — — — — 295 — 295 — — — 295 295 341 (46) 295 — 295

– II-5 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Statements of Changes in Equity of the Company and the Consolidated Statements of Changes in Equity of the Triumph Group

The movements in the statements of changes in equity of the Company and the consolidated statements of changes in equity of the Triumph Group for each of the Relevant Periods and the period from 16 June 2009 (date of incorporation) to 30 September 2009, prepared on the basis set out in note 2 of Section II below, are as follows:

The Company

Notes At 16 June 2009 (date of incorporation) Issue of shares 16 At 31 December 2009 and at 1 January 2010 Total comprehensive loss for the period 8 At 30 September 2010 From 16 June 2009 (date of incorporation) to 30 September 2009 (Unaudited) At 16 June 2009 (date of incorporation) Issue of shares 16 Total comprehensive loss for the period 8 At 30 September 2009	Issued capital RMB’000 — 341 341 — 341 — 341 — 341	Accumulated losses RMB’000 — — — (2) (2) — — — —	Total equity RMB’000 — 341 341 (2) 339 — 341 — 341

– II-6 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The Triumph Group

Attributable to the sole owner

	Attributable to the sole	Attributable to the sole	owner
Notes At 16 June 2009 (date of incorporation) Issue of shares 16 Total comprehensive loss for the period At 31 December 2009 and at 1 January 2010 Total comprehensive loss for the period Acquisition of a subsidiary 17 At 30 September 2010 From 16 June 2009 (date of incorporation) to 30 September 2009 (Unaudited) At 16 June 2009 (date of incorporation) Issue of shares 16 Total comprehensive loss for the period At 30 September 2009	of the Company		Total RMB’000 — 341 (46) 295 (374) — (79) — 341 (45) 296	Non- controlling interests RMB’000 — — — — — 599 599 — — — —	Total equity RMB’000 — 341 (46
	Issued capital RMB’000 — 341 — 341 — — 341 — 341 — 341	Accumulated losses RMB’000 — — (46) (46) (374) — (420) — — (45) (45)
					295 (374 599
					520
					— 341 (45
					296

– II-7 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Consolidated Statements of Cash Flows of the Triumph Group

The consolidated statements of cash flows of the Triumph Group for each of the Relevant Periods and the period from 16 June 2009 (date of incorporation) to 30 September 2009, prepared on the basis set out in note 2 of Section II below, are as follows:

Note CASH FLOWS FROM OPERATING ACTIVITIES Loss before tax Adjustment for: Bank interest income Decrease in due from director Increase in other payables Net cash flows used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES Interest received Acquisition of subsidiaries 17 Increase in prepayments for investments Increase in other receivables Net cash flows used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Increase in due to director Increase in other payables Net cash flows from financing activities	The Triumph Group	The Triumph Group	Nine-month period ended 30 September 2010 RMB’000 (374) (4) (378) 295 63 (20) 4 (9,242) (1,090,000) (462,000) (1,561,238) 179,788 1,382,668 1,562,456
	From 16 June 2009 (date of incorporation) to 30 September 2009 RMB’000 (Unaudited) (45) — (45) 45 — — — — — — — — — —	From 16 June 2009 (date of incorporation) to 31 December 2009 RMB’000 (46) — (46) 46 — — — — — — — — — —

– II-8 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The Triumph Group	The Triumph Group
From 16 June 2009 (date of incorporation) to 30 September 2009 RMB’000 (Unaudited) — — — —	From 16 June 2009 (date of incorporation) to 31 December 2009 RMB’000 — — — —	Nine-month period ended 30 September 2010 RMB’000 1,198 —
		1,198
		1,198

– II-9 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

II. NOTES TO THE FINANCIAL INFORMATION

1. CORPORATE INFORMATION AND THE REORGANISATION

The Company was incorporated as an exempted company with limited liability in the Cayman Islands on 16 June 2009 and is wholly owned by All Aces Investments Limited as at 30 September 2010.

On 11 August 2009, the Company set up a wholly-owned subsidiary in the PRC named Shanxi Hengming Mining Company Limited (‘‘Hengming’’). The principal activities of Hengming are the development and promotion of coal-related environmentally friendly energy technology, purchase and sale of coal products, mineral products, chemical products, and construction materials and the selection and washing of refined coal. As at the date of this report, Hengming has not commenced any business since its establishment.

In order to rationalise the group structure of the Triumph Group for the proposed acquisition by King Stone, on 26 May 2010, Hengming completed the acquisition of a 99% equity interest in Shanxi Lvhai Mining Company Limited (‘‘Lvhai’’) and thereafter, both Lvhai and its subsidiary (Shanxi Haimei Mining Company Limited, ‘‘Haimei’’) became subsidiaries of the Company. Further details of which are set out in note 17 to the Financial Information.

In addition, subsequent to the end of the Relevant Periods, on 2 December 2010, Haimei completed the acquisition of the 95% equity interests in Shanxi Shanyin Shaoyaohua Coal Company Limited (‘‘Shaoyaohua’’). Further details of which are set out in notes 11 and 23 to the Financial Information.

2. BASIS OF PREPARATION AND CONSOLIDATION

As at 30 September 2010, the Company’s and the Triumph Group’s current liabilities exceeded their current assets by approximately RMB174 million and RMB1,090 million, respectively, and the Triumph Group had contracted capital commitment of RMB2,030 million in respect of the acquisition of equity interest in Shanxi Shuozhou Shanyin Youyi Coal Company Limited (‘‘Youyi’’) and Shaoyaohua. However, the management of the Company has prepared the Financial Information on a going concern basis because, as further set out in notes 15, 22 and 23(i) to the Financial Information, subsequent to 30 September 2010:

(i) In November 2010, various creditors have agreed to extend the repayment dates of the balances due to them by the Triumph Group, which aggregated to RMB1,365 million as at 30 September 2010, to 1 July 2012.
(ii) In October 2010, the Triumph Group has obtained loans aggregating to RMB1,887 million from various creditors which were used in further settlement of the consideration for the acquisition of equity interests in Youyi and Shaoyaohua as mentioned in note 19 to the Financial Information, and such creditors have agreed with the Triumph Group to extend the repayment dates of such loans of RMB1,887 million to 1 July 2012.
(iii) In December 2010, Hengming has advanced RMB174 million to the Company at a repayment date of 1 July 2012.

Accordingly, the management is of the opinion that the Company and the Triumph Group shall have adequate financial resources to meet their liabilities as and when they fall due in the foreseeable future.

The Financial Information has been prepared in conformity with HKFRSs and the disclosure requirements of the Hong Kong Companies Ordinance and on a historical cost convention. The Financial Information is presented in Renminbi (‘‘RMB’’), which is the Company’s and the Triumph Group’s functional and presentation currency. All values are rounded to the nearest thousand (RMB’000) except when otherwise indicated.

The Financial Information includes the consolidated financial statements of the Triumph Group for the Relevant Periods, which include the financial statements of the Company and its subsidiaries for such periods. The results of the subsidiaries are consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. All income, expenses and unrealised gains and losses resulting from intercompany transactions and intercompany balances within the Triumph Group are eliminated on consolidation in full.

– II-10 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

As further explained in notes 17 to the Financial Information, Lvhai and its subsidiary were not actively involved in any business operations at the date of acquisition by the Triumph Group except for the ownership of the assets and liabilities. Accordingly, in the opinion of the management, the acquisition of Lvhai in the Relevant Periods did not constitute a business combination but an acquisition of assets and liabilities of the Lvhai Group.

Non-controlling interests represent the interests of outside shareholders not held by the Triumph Group in the results and net assets of the Company’s subsidiary. Losses within a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance.

For the purpose of the Financial Information, the Company and the Triumph Group have adopted at the beginning of the Relevant Periods all the new, revised and amended HKFRSs applicable to the Relevant Periods.

The Company and the Triumph Group have not applied the following new, revised or amended HKFRSs, that have been issued but not yet effective, in the Financial Information:

HKFRS 1 Amendment	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial
	Reporting Standards — Limited Exemption from Comparative HKFRS 7
	Disclosures for First-time Adopters2
HKFRS 1 Amendment	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial
	Reporting Standards — Severe Hyperinflation and Removal of Fixed Dates
	for First-time Adopters4
HKFRS 7 Amendments	Amendments to HKFRS 7 Financial Instruments: Disclosures — Transfers of
	Financial Assets4
HKFRS 9	Financial Instruments6
Additions to HKFRS 9	Financial Instruments — Financial Liabilities6
HKAS 12 Amendment	Amendments to HKAS 12 Income Taxes — Deferred Tax: Recovery of
	Underlying Assets5
HKAS 24 (Revised)	Related Party Disclosures3
HKAS 32 Amendment	Amendment to HKAS 32 Financial Instruments: Presentation — Classification
	of Rights Issues1
HK(IFRIC)-Int 14 Amendments	Amendments to HK(IFRIC)-Int 14 Prepayments of a Minimum Funding
	Requirement3
HK(IFRIC)-Int 19	Extinguishing Financial Liabilities with Equity Instruments2
Improvement to HKFRSs	Amendments to a number of HKFRSs
(May 2010)
1 Effective for annual periods	beginning on or after 1 February 2010
2 Effective for annual periods	beginning on or after 1 July 2010
3 Effective for annual periods	beginning on or after 1 January 2011
4 Effective for annual periods	beginning on or after 1 July 2011
5 Effective for annual periods	beginning on or after 1 January 2012
6 Effective for annual periods	beginning on or after 1 January 2013

The Company and the Triumph Group are in the process of making assessments of the impact of these new, revised or amended HKFRSs upon initial application. So far, they have concluded that these new, revised or amended HKFRSs are unlikely to have a significant impact on the Company’s and the Triumph Group’s results of operations and financial positions.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been consistently applied throughout the Relevant Periods.

Subsidiaries

A subsidiary is an entity whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits from its activities.

The results of subsidiaries are included in the Company’s profit or loss to the extent of dividends received and receivable. The Company’s investment in a subsidiary is stated at cost less any impairment losses.

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APPENDIX II

Impairment of non-financial assets

The Triumph Group assesses at each reporting date whether there is an indication that an asset may be impaired. Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than financial assets), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to profit or loss in the period in which it arises in those expense categories consistent with the function of the impaired assets.

An assessment is made at the end of each reporting period as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation) had no impairment loss been recognised for the asset in prior accounting periods. A reversal of such an impairment loss is credited to profit or loss in the period in which it arises.

Related parties

A party is considered to be related to the Company or the Triumph Group, respectively, if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Company or the Triumph Group; (ii) has an interest in the Company or the Triumph Group that gives it significant influence over the Company or the Triumph Group; or (iii) has joint control over the Company or the Triumph Group;
(b) the party is an associate;
(c) the party is a jointly-controlled entity;
(d) the party is a member of the key management personnel of the Company or the Triumph Group;
(e) the party is a close member of the family of any individual referred to in (a) or (d); or
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e).

Investments and other financial assets

The Company’s and the Triumph Group’s financial assets within the scope of HKAS 39 include only loans and receivables, which are initially recognised and measured at fair value. When financial assets are recognised initially, they are measured at fair value plus directly attributable transaction costs. The Company and the Triumph Group determine the classification of their financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the end of the reporting period.

All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the Company and the Triumph Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

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FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The Company’s financial assets include cash and bank balances, loans to third parties and an amount due from the shareholder.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such assets are subsequently measured at amortised cost using the effective interest rate method less any allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and includes fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in ‘‘Finance income’’ in profit or loss. The loss arising from impairment is recognised in profit or loss as ‘‘Finance costs’’.

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

. the rights to receive cash flows from the asset have expired; or
. the Company or the Triumph Group has transferred their rights to receive cash flows from the asset, or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘‘pass-through’’ arrangement; and either (a) the Company or the Triumph Group has transferred substantially all the risks and rewards of the asset, or (b) the Company or the Triumph Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Company or the Triumph Group has transferred their rights to receive cash flows from an asset or has entered into a ‘‘pass-through’’ arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Company’s or the Triumph Group’s continuing involvement in the asset. In that case, the Company or the Triumph Group also recognise an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company or the Triumph Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company or the Triumph Group could be required to repay.

Impairment of financial assets

The Company and the Triumph Group assesses at the end of each of the reporting period whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘‘loss event’’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortised cost

For financial assets carried at amortised cost, the Company and the Triumph Group first assess individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company and the Triumph Group determine that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it

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FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.

The carrying amount of the asset is reduced either directly or through the use of an allowance account and the amount of the loss is recognised in profit or loss. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery.

If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to ‘‘Finance costs’’ in profit or loss.

Financial liabilities at amortised cost

The Company’s and the Triumph Group’s financial liabilities within the scope of HKAS 39 include only loans and borrowings. Loans and borrowings are recognised initially at fair value less directly attributable transaction costs. After initial recognition, loans and borrowings are subsequently measured at amortised cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the effective interest rate method amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in ‘‘Finance costs’’ in profit or loss.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or

expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in profit or loss.

Cash and cash equivalents

For the purpose of the statements of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, which are not restricted as to use.

Provisions

A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources embodying economic benefits will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

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FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

When the effect of discounting is material, the amount recognised for a provision is the present value at the end of the reporting period of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in ‘‘Finance costs’’ in profit or loss.

Income tax

Income tax comprises current and deferred tax. Income tax relating to items recognised outside profit or loss is recognised outside profit or loss, either in other comprehensive income or directly in equity.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period, taking into consideration interpretations and practices prevailing in the countries in which the Company and the Triumph Group operate.

Deferred tax is provided, using the liability method, on all temporary differences at the end of each of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

. where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilised, except:

. where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at the end of each of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at the end of the reporting period and are recognised to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

– II-15 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

4. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the Financial Information requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future.

Judgements

In the process of applying the Triumph Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the Financial Information:

Impairment of assets

Management of the Triumph Group has to exercise judgement in determining whether an asset is impaired or the event previously causing the asset impairment no longer exists, particularly in assessing: (1) whether an event has occurred that may affect the asset value or such event affecting the asset value has not been in existence; (2) whether the carrying value of an asset can be supported by the net present value of future cash flows which are estimated based upon the continued use of the asset or derecognition; and (3) the appropriate key assumptions to be applied in preparing cash flow projections including whether these cash flow projections are discounted using an appropriate rate. Changing the assumptions selected by management to determine the level of impairment, including the discount rates or the growth rate assumptions in the cash flow projections, could materially affect the net present value used in the impairment test.

Estimation uncertainties

The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Impairment of prepayments and receivables

Impairment of prepayments and receivables is made based on an assessment of the recoverability of prepayments and receivables. The identification of impairment requires management’s judgements and estimates. Where the actual outcome is different from the original estimate, such differences will impact the carrying values of the prepayments and receivables and impairment loss in the period in which such estimate has been changed. The net carrying amounts of prepayments for investments and other receivables in the consolidated statements of financial position of the Triumph Group as at 30 September 2010 were RMB1,090,115,000 (31 December 2009: Nil) and RMB462,000,000 (31 December 2009: Nil), respectively.

5. SEGMENT INFORMATION

The Triumph Group has not commenced any business since its incorporation, and no current and non-current assets and liabilities of the Triumph Group are located outside Mainland China. Accordingly, reportable segment information as required by HKFRS 8 Operating Segments is not presented.

– II-16 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

6. DIRECTOR’S AND EMPLOYEES’ REMUNERATION

(a) Details of the remuneration of the Company’s director, Mr. Chai Wei, during the Relevant Periods and the period from 16 June 2009 (date of incorporation) to 30 September 2009 are as follows:

Fees Other emoluments: Salaries, allowances and benefits in kind Retirement benefit contributions Total	The Triumph Group	The Triumph Group
	From 16 June 2009 (date of incorporation) to 30 September 2009 RMB’000 (Unaudited) — — — —	From 16 June 2009 (date of incorporation) to 31 December 2009 RMB’000 — — — —	Nine-month period ended 30 September 2010 RMB’000 — 18 2
			20

(b) The Triumph Group did not have any non-director employee during the Relevant Periods, and hence no employee remuneration has been incurred for such periods.

7. INCOME TAX EXPENSES

Pursuant to the rules and regulations of the Cayman Islands, the Company is not subject to any income tax in the Cayman Islands. Under the relevant PRC Corporate Income Tax laws and regulations, the statutory enterprise income tax rate of 25% was applicable to the subsidiaries of the Company for the Relevant Periods and the period from 16 June 2009 (date of incorporation) to 30 September 2009.

No income tax has been incurred during the Relevant Periods and the period from 16 June 2009 (date of incorporation) to 30 September 2009 because the Company and the Triumph Group did not have any assessable income during such periods.

A reconciliation of income tax applicable to loss before tax at the statutory rate for the jurisdiction in which the Triumph Group is domiciled to the income tax at the effective tax rate, and a reconciliation of the statutory rate to the effective tax rate, are as follows:

Loss before tax Tax at the statutory tax rate Tax losses not recognised Income tax at the effective rate		The Triumph Group
	From 16 June 2009 (date of incorporation) to 30 September 2009 RMB’000 % (Unaudited) (45) (11) 25 11 (25) — —	From 16 June 2009 (date of incorporation) to 31 December 2009 RMB’000 % (46) (12) 25 12 (25) — —	Nine-month period ended 30 September 2010 RMB’000 % (374) (94) 25 94 (25 — —

As at 31 December 2009 and 30 September 2010, deferred tax assets have not been recognised by the Triumph Group in respect of unused tax losses amounting to RMB46,000 and RMB420,000, respectively. Deferred tax assets have not been recognised for such tax losses as it is considered not probable that taxable profit will be available against which such tax losses can be utilised.

– II-17 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

8. LOSS ATTRIBUTABLE TO THE SOLE OWNER OF THE COMPANY

The consolidated comprehensive loss attributable to the sole owner of the Company for the period from 16 June 2009 (date of incorporation) to 31 December 2009 and the nine-month period ended 30 September 2010 included a comprehensive loss of nil and RMB2,000 of the Company, which have been dealt with in the financial statements of the Company.

9. LOSS PER SHARE ATTRIBUTABLE TO EQUITY HOLDER OF THE COMPANY

The calculation of basic and diluted loss per share of the Triumph Group for the Relevant Periods is based on the total comprehensive loss for the Relevant Periods attributable to the sole owner of the Company, and the weighted average number of shares of 50,000 for the Relevant Periods.

No adjustment has been made to the basic loss per share amounts presented for the Relevant Periods in respect of a dilution as the Triumph Group had no potentially dilutive ordinary shares is issued during the Relevant Periods.

10. INVESTMENTS IN SUBSIDIARIES

Unlisted shares, at cost	The Company	The Company
	As at 31 December 2009 RMB’000 —	As at 30 September 2010 RMB’000 174,467

Particulars of the Company’s directly and indirectly owned subsidiaries as at 30 September 2010 are as follows:

	Place and date of		Percentage	of equity
	establishment and	Registered/	interest attributable
Name	operations	paid-up capital	to the Company		Principal activities
			Direct	Indirect
Hengming	PRC/Mainland China	US$99,800,000/	100%	—	Mining and sale of coal
	11 August 2009	US$25,600,000*
Lvhai	PRC/Mainland China	RMB10,000,000/	—	99%**	Biotechnology research
	13 October 1997	RMB10,000,000			and development
Haimei	PRC/Mainland China	RMB50,000,000/	—	99%***	Mining and sale of coal
	23 January 2006	RMB50,000,000

The registered capital of Hengming upon its establishment was US$35,000,000, and in accordance with the official approval of Jin Shang Zi Han [2010] No. 177 issued by Shanxi Province Department of Commerce, the registered capital of Hengming was increased to US$99,800,000. On 7 April 2010, the Company injected US$25,600,000 (approximately RMB174,467,000) into Hengming as its initial paid-up capital.
** As at 30 September 2010, Hengming owned a 99% equity interest in Lvhai.
*** As at 30 September 2010, Lvhai owned a 99% equity interest in Haimei.

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FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

11. PREPAYMENTS FOR INVESTMENTS

Youyi (Note (a)) Shaoyaohua (Note (b))	The Triumph Group	The Triumph Group
	As at 31 December 2009 RMB’000 — — —	As at 30 September 2010 RMB’000 213,115 877,000
		1,090,115

Notes:

(a) On 23 April 2010, Haimei entered into an agreement with Mr. Zhu Jinfeng, Mr. Zhao Zhishi, Mr. Xu Wenhua and Mr. Zhang Bao (four independent third parties) for the acquisition of, in aggregate, 100% equity interest in Youyi, an non-corporate entity engaging principally in mining and the sale of coal, at a cash consideration of RMB1,290 million. Youyi was under pre-operating period as at 30 September 2010.
(b) On 8 April 2010, Haimei entered into an agreement with Mr. Yan Changli and Mr. Li Yubao (two independent third parties) for the acquisition of a 95% equity interest in Shaoyaohua, a limited liability company engaging principally in mining and the sale of coal, at a cash consideration of RMB1,830 million.

Subsequent to the end of the Relevant Periods, on 2 December 2010, the acquisition was completed and Shaoyaohua became a subsidiary of the Triumph Group.

12. OTHER RECEIVABLES

As at 30 September 2010, other receivables are unsecured, interest-free and have no fixed terms of repayment.

The balances are neither past due nor impaired and are relate to debtors for which there was no recent history of default.

13. DUE FROM A DIRECTOR AND DUE TO A DIRECTOR

The balances with a director recorded in the Company’s statements of financial position and the Triumph Group’s consolidated statements of financial position represented an amount due from/due to Mr. Chai Wei, which are unsecured, interest-free and have no fixed terms of repayment.

14. CASH AND BANK BALANCES

At 30 September 2010, the cash and bank balances of the Triumph Group included RMB1,138,000, which is denominated in RMB. The RMB is not freely convertible into other currencies, however, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Triumph Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Company and the Triumph Group, respectively, and earn interest at the respective short term time deposit rates. The bank balances are deposited with creditworthy banks with no recent history of default.

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FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

15. OTHER PAYABLES

Loans payable (Note)	The Company As at 31 December As at 30 September 2009 2010 RMB’000 RMB’000 — —	The Triumph Group	The Triumph Group
	As at 31 December 2009 RMB’000 —	As at 31 December 2009 RMB’000 —	As at 30 September 2010 RMB’000 1,373,005

Other payables are unsecured, interest-free and have no fixed term of repayment.

Note: In November 2010, various creditors have agreed to extend the repayment dates of the balances due to them by the Triumph Group, which aggregated to RMB1,365 million as at 30 September 2010, to 1 July 2012.

16. SHARE CAPITAL

The authorised share capital of the Company is US$50,000, which is divided into 50,000 shares of US$1.00 each.

On incorporation, 50,000 shares of the Company issued and allotted to its sole shareholder for cash consideration of US$50,000 (equivalent to RMB341,000), to provide initial capital to the Company.

17. ACQUISITION OF SUBSIDIARIES

On 26 May 2010, the Triumph Group acquired a 99% equity interest in Lvhai at a cash consideration of RMB9,900,000. The principal activities of Lvhai are biotechnology research and development, and the production of iron, steel, refractory materials, coal products, ferroalloy and pig iron. As at the date of acquisition, Lvhai owned a 99% equity interest in Haimei. Lvhai and Haimei (hereinafter collectively referred to as the ‘‘Lvhai Group’’) have not commenced any operation since their respective establishment.

The Lvhai Group was not actively involved in any business operations at the date of the acquisition. Accordingly, in the opinion of the management of the Triumph Group, the acquisition did not constitute a business combination but an acquisition of assets and liabilities.

The assets and liabilities of the Lvhai Group acquired by the Triumph Group as at the date of acquisition, 26 May 2010, were as follows:

Assets and liabilities acquired: Prepayments for investments Other receivables Cash and bank balances Other payables Due to a related party Non-controlling interests Net assets Satisfied by: Cash	RMB’000 1,073,115 37,320 658 (1,100,394 (200 (599
	9,900
	9,900

18. CONTINGENT LIABILITIES

At the end of each of the Relevant Periods, the Company and the Triumph Group did not have any significant contingent liabilities.

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FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

19. COMMITMENTS

The Company and the Triumph Group had the following capital commitments at the end of each of the Relevant Periods:

Contracted, but not provided for: Capital contribution into Hengming Acquisition of Youyi Acquisition of Shaoyaohua	The Company As at 31 December As at 30 September 2009 2010 RMB’000 RMB’000 238,987 497,222 — — — — 238,987 497,222	The Triumph Group	The Triumph Group
	As at 31 December 2009 RMB’000 238,987 — — 238,987	As at 31 December 2009 RMB’000 — — — —	As at 30 September 2010 RMB’000 — 1,077,000 953,000
			2,030,000

20. RELATED PARTY DISCLOSURES

(a) Balances with related parties

Details of balances with the director are disclosed in note 13 to the Financial Information.

(b) In the opinion of the management, the director of the Company represented the key management personnel of the Company. Details of the director’s remuneration during the Relevant Periods are disclosed in note 6 to the Financial Information.

21. FINANCIAL INSTRUMENTS BY CATEGORY

As at the end of each of the Relevant Periods, the financial assets and financial liabilities of the Company and the Triumph Group were cash and bank balances, receivables and payables. The carrying amounts of financial assets as at the end of each of the Relevant Periods are as follows:

Other receivables Due from director Cash and bank balances	The Company As at 31 December As at 30 September 2009 2010 RMB’000 RMB’000 — — 341 — — 60 341 60	The Triumph Group	The Triumph Group
	As at 31 December 2009 RMB’000 — 341 — 341	As at 31 December 2009 RMB’000 — 295 — 295	As at 30 September 2010 RMB’000 462,000 — 1,198
			463,198

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FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The carrying amounts of financial liabilities at amortised cost as at the end of each of the Relevant Periods are as follows:

Other payables Due to director	The Company As at 31 December As at 30 September 2009 2010 RMB’000 RMB’000 — — — 174,188 — 174,188	The Triumph Group As at 31 December As at 30 September 2009 2010 RMB’000 RMB’000 — 1,373,005 — 179,788 — 1,552,793	The Triumph Group As at 31 December As at 30 September 2009 2010 RMB’000 RMB’000 — 1,373,005 — 179,788 — 1,552,793
			As at 30 September 2010 RMB’000 1,373,005 179,788
			1,552,793

22. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Company’s and the Triumph Group’s principal financial instruments comprise cash and bank balances. The main purpose of these financial instruments is to raise finance for the Company’s and the Triumph Group’s future operations. The Company and the Triumph Group have various other financial assets and liabilities such as other receivables and other payables, which arise directly from loans or advances.

The main risks arising from the Company’s and the Triumph Group’s financial instruments are interest rate risk, liquidity risk and credit risk. The management of the Company reviews and approves policies for managing each of these risks and they are summarised below:

Interest rate risk

The Company’s and the Triumph Group’s exposure to the risk of changes in market interest rates relates primarily to the Company’s and the Triumph Group’s bank balances with floating interest rates.

Since the Company’s and the Triumph Group’s bank balances was insignificant, fluctuations of the interest rates did not have significant effects on the Company’s and the Triumph Group’s profit or loss and equity during the Relevant Periods.

Liquidity risk

The Company’s and the Triumph Group’s objective is to maintain a balance between continuity of funding and flexibility through the loans from third parties. The Company’s and the Triumph Group’s financing activities are managed centrally by maintaining an adequate level of cash and bank balances to finance the Company’s and the Triumph Group’s operations.

The Company’s and the Triumph Group’s bank balances are placed with reputable financial institutions.

The Company and the Triumph Group had no financial liabilities as at 31 December 2009, the maturity profile of the Company’s and the Triumph Groups’ financial liabilities as at 30 September 2010, based on the contractual undiscounted payments, is as follows:

The Company Due to the director The Triumph Group Other payables Due to the director	On demand RMB’000 174,188 1,372,942 179,788 1,552,730	Within 1 year RMB’000 — 63 — 63	1 to 5 years RMB’000 — — — —	Total RMB’000 174,188
				1,373,005 179,788
				1,552,793

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FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

In November 2010, various creditors had agreed to extend the repayment dates of the balances due to them by the Triumph Group aggregating to RMB1,365 million as at 30 September 2010, to 1 July 2012.

Credit risk

The credit risk of the Company’s and the Triumph Group’s financial assets, which comprise cash and bank balances, loans to third parties and an amount due from a shareholder, arises from default of the counterparty, with a maximum exposure equal to the carrying amounts of these instruments.

Since the Company and the Triumph Group only provide loans to recognised and creditworthy parties, there is no requirement for collateral.

At the end of each of the Relevant Periods, there was no significant concentration of credit risk, except for the Triumph Group’s prepayments for investments and other receivables of RMB1,090,115,000 and RMB462,000,000 as at 30 September 2010, respectively.

Capital management

The primary objective of the Company’s and the Triumph Group’s capital management is to safeguard the Company’s and the Triumph Group’s ability to continue as a going concern and to maintain healthy capital ratios in order to support their business and maximise shareholders’ value. The Company and the Triumph Group manage capital structure and make adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Company and the Triumph Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods.

The Company and the Triumph Group monitor capital using a gearing ratio, which is net debt divided by equity plus net debt. Net debt is calculated as the sum of other payables and an amount due to the director, less cash and bank balances. Equity represents equity attributable to the owners of the Company and the Triumph Group.

The gearing ratios for the Company and the Triumph Group as at the end of each of the Relevant Periods are as follows:

The Company As at 31 December As at 30 September 2009 2010 RMB’000 RMB’000 — — — 174,188 — (60) — 174,128 341 339 341 174,467 N/A 99.8%	The Triumph Group	The Triumph Group
As at 31 December 2009 RMB’000 — — — — 341 341 N/A	As at 31 December 2009 RMB’000 — — — — 295 295 N/A	As at 30 September 2010 RMB’000 1,373,005 179,788 (1,198
		1,551,595 520
		1,552,115
		100%

– II-23 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

23. EVENTS AFTER THE REPORTING PERIOD

(i) In November 2010, various creditors had agreed to extend the repayment dates of the balances due to them by the Triumph Group aggregating to RMB1,365 million as at 30 September 2010, to 1 July 2012. In October 2010, the Triumph Group has obtained loans aggregating to RMB1,887 million from various creditors which was used in further settlement of the consideration for the acquisition of equity interests in Youyi and Shaoyaohua. Such creditors have also agreed with the Triumph Group to extend the repayment dates of such loans of RMB1,887 million to 1 July 2012. Further details of which is set out in notes 2, 15 and 22 to the Financial Information.
(ii) On 2 December 2010, Haimei, a subsidiary of the Company, completed the acquisition of a 95% equity interest in Shaoyaohua, at a consideration of RMB1,830 million, and thereafter, Shaoyaohua became a group entity of the Company. Further details of which are set out in note 11(b) to the Financial Information.

24. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Company and the Triumph Group in respect of any period subsequent to 30 September 2010.

Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong

– II-24 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

2. ACCOUNTANTS’ REPORT ON SHANXI LVHAI MINING COMPANY LIMITED

9 February 2011

The Directors King Stone Energy Group Limited

Dear Sirs,

We set out below our report on the financial information relating to Shanxi Lvhai Mining Company Limited (the ‘‘Company’’, formerly known as ‘‘Shanxi Long Hai Yuan Chemical Company Limited’’ and ‘‘Shanxi Lvhai Bioengineering Company Limited’’) and its subsidiary (hereinafter collectively referred to as the ‘‘Lvhai Group’’) for the nine-month period ended 30 September 2010, and the financial information of the Company for each of the three years ended 31 December 2007, 2008 and 2009 and the nine-month period ended 30 September 2010 (the ‘‘Relevant Periods’’) and the financial information of the Company for the nine-month period ended 30 September 2009 (the ‘‘30 September 2009 Financial Information’’), prepared on the basis set out in note 2 of Section II below, for inclusion in the circular of King Stone Energy Group Limited (‘‘King Stone’’) dated 9 February 2011 in connection with the proposed acquisition of a 60% equity interest in Triumph Fund A1 Limited (‘‘Triumph’’), a holding company of the Company, by a subsidiary of King Stone.

The Company was established as a limited liability company in the People’s Republic of China (the ‘‘PRC’’) on 13 October 1997. The principal activities of the Company are biotechnology research and development, and the production of iron, steel, refractory materials, coal products, ferroalloy and pig iron. As at the date of this report, the Company has not commenced any operation since its establishment.

As at the date of this report, the Company holds a 99% equity interest in Shanxi Haimei Mining Company Limited (‘‘Haimei’’). Haimei was established in the PRC on 23 January 2006, the principal activities of Haimei are the sale of coal products, pig iron, steel, iron ore, industrial and mining equipment and paves, construction materials and secondary agricultural products. As at the date of this report, the registered and paid-up capital of Haimei is RMB50,000,000.

The Company and its subsidiary have adopted 31 December as their financial year end date. The management accounts of the Company and its subsidiary were prepared in accordance with the PRC accounting standards and financial regulations. Accordingly, no audited accounts under Hong Kong Financial Reporting Standards (‘‘HKFRSs’’) are available. For the purpose of this report, the management of the Company has prepared the financial information of the Company, including statements of financial position of the Company as at the end of each of the Relevant Periods and the statements of comprehensive income, statements of changes in equity and statements of cash flows of the Company for each of the three years ended 31 December 2007, 2008 and 2009, and the nine-month period ended 30 September 2009 plus the consolidated statement of financial position of the Lvhai Group as at 30 September 2010, and the consolidated statements of comprehensive income, consolidated

– II-25 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

statements of changes in equity and consolidated statements of cash flows of the Lvhai Group for the nine-month period ended 30 September 2010, together with the notes thereto, in accordance with HKFRSs (including all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (‘‘HKASs’’) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants (the ‘‘HKICPA’’) (collectively the ‘‘Financial Information’’). The consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows of the Lvhai Group for each of the three years ended 31 December 2007, 2008 and 2009 and the nine-month period ended 30 September 2009 have not been prepared because the Company did not have any subsidiary for such financial years/period, and such statements of the Company for such financial years/ period have been prepared instead. The Company’s statement of comprehensive income and statement of cash flows for the nine-month period ended 30 September 2010 have not been presented in this report because such statements of the Lvhai Group on the consolidated basis have been presented in this report. No adjustments were made to the Financial Information in preparing this report.

Respective Responsibilities of Management and Reporting Accountants

It is our responsibility to form an independent opinion on the Financial Information for the Relevant Periods and to report our opinion to you.

Procedures Performed in Respect of the Financial Information of the Relevant Periods

For the purpose of this report, we have carried out an independent audit on the financial information of the Company for each of the three years ended 31 December 2007, 2008 and 2009 and the nine-month period ended 30 September 2010 and the consolidated financial information of the Lvhai Group for the nine-month period ended 30 September 2010, which has been prepared by the management of the Company in accordance with HKFRSs. We conducted our audit in accordance with Hong Kong Standards on Auditing (‘‘HKSAs’’) issued by the HKICPA and carried out such additional procedures as we consider necessary in accordance with Auditing Guideline 3.340 ‘‘Prospectuses and the Reporting Accountant’’ issued by the HKICPA.

– II-26 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Procedures Performed in Respect of the 30 September 2009 Financial Information

Opinion in Respect of the Financial Information of the Relevant Periods

In our opinion, the Financial Information for the Relevant Periods prepared on the basis set out in note 2 of Section II gives, for the purpose of this report, a true and fair view of the results and cash flows of the Company for each of the three years ended 31 December 2007, 2008 and 2009, the state of affairs of the Company as at 31 December 2007, 2008 and 2009, and 30 September 2010, the results and cash flows of the Lvhai Group for the nine-month period ended 30 September 2010 and the state of affairs of the Lvhai Group as at 30 September 2010 in accordance with HKFRSs.

Review Conclusion in Respect of the 30 September 2009 Financial Information

Based on our review, nothing has come to our attention that causes us to believe that the 30 September 2009 Financial Information does not give a true and fair view of the results and cash flows of the Company for the nine-month period ended 30 September 2009 in accordance with HKFRSs.

– II-27 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

I. FINANCIAL INFORMATION

Statements of Comprehensive Income of the Company and the Consolidated Statement of Comprehensive Income of The Lvhai Group

The following is a summary of statements of comprehensive income of the Company for each of the three years ended 31 December 2007, 2008 and 2009, and the nine-month period ended 30 September 2009 and the consolidated statement of comprehensive income of the Lvhai Group for the nine-month period ended 30 September 2010, prepared on the basis set out in note 2 of Section II below:

Bank interest income Administrative expenses LOSS AND TOTAL COMPREHENSIVE LOSS FOR THE YEAR/PERIOD, NET OF TAX Attributable to: Owners of the Company (Note 8)	The Company	Nine-month period ended 30 September 2009 RMB’000 (Unaudited) — (12) (12) (12)	The Lvhai Group
	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 — — — (2) — (14) (2) — (14) (2) — (14)		Nine-month period ended 30 September 2010 RMB’000 14 (78
			(64
			(64

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

– II-28 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Statements of Financial Position of The Company and The Consolidated Statement of Financial Position of The Lvhai Group

The following is a summary of the statements of financial position of the Company as at the end of each of the Relevant Periods and the consolidated statement of financial position of the Lvhai Group as at 30 September 2010, prepared on the basis set out in note 2 of Section II below:

Notes NON-CURRENT ASSETS Investment in a subsidiary 9 Prepayments for investments 10 Total non-current assets CURRENT ASSETS Other receivables 11 Due from an equity holder 12 Cash and bank balances 13 Total current assets CURRENT LIABILITIES Other payables 14 Due to a related party 15 Total current liabilities NET CURRENT ASSETS/ (LIABILITIES) Net assets EQUITY Equity attributable to owners of the Company Paid-up capital 16 Accumulated losses Non-controlling interests Total equity	The Company	As at 30 September 2010 RMB’000 49,500 — 49,500 — — 74 74 39,661 — 39,661 (39,587) 9,913 10,000 (87) 9,913 — 9,913	The Lvhai Group As at 30 September 2010 RMB’000 — 1,090,057 1,090,057 287,534 — 948 288,482 1,367,944 200 1,368,144 (1,079,662) 10,395 10,000 (105) 9,895 500 10,395
	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 — — — — — — — — — 1,000 1,000 967 — — 9,000 8 8 27 1,008 1,008 9,994 31 31 31 — — — 31 31 31 977 977 9,963 977 977 9,963 1,000 1,000 10,000 (23) (23) (37) 977 977 9,963 — — — 977 977 9,963

– II-29 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Statements of Changes in Equity of The Company and The Consolidated Statement of Changes in Equity of The Lvhai Group

The movements in the statements of changes in equity of the Company for each of the Relevant Periods and the nine-month period ended 30 September 2009 and the consolidated statement of changes in equity of the Lvhai Group for the nine-month period ended 30 September 2010, prepared on the basis set out in note 2 of Section II below:

The Company

Note At 1 January 2007 Total comprehensive loss for the year At 31 December 2007, 1 January 2008, 31 December 2008 and 1 January 2009 Increase in capital 16 Total comprehensive loss for the year At 31 December 2009 and at 1 January 2010 Total comprehensive loss for the period At 30 September 2010 Nine-month period ended 30 September 2009 (Unaudited) At 1 January 2009 Increase in capital 16 Total comprehensive loss for the period At 30 September 2009	Paid-up capital RMB’000 1,000 — 1,000 9,000 — 10,000 — 10,000 1,000 9,000 — 10,000	Accumulated losses RMB’000 (21) (2) (23) — (14) (37) (50) (87) (23) — (12) (35)	Total equity RMB’000 979 (2) 977 9,000 (14) 9,963 (50) 9,913 977 9,000 (12) 9,965

– II-30 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The Lvhai Group

Attributable to owners of the Company

Notes At 1 January 2010 Total comprehensive loss for the period Acquisition of a subsidiary 17(a) Acquisition of non-controlling interests 17(b) At 30 September 2010	Paid-up capital RMB’000 10,000 — — — 10,000	Accumulated losses RMB’000 (37) (64) — (4) (105)	Total RMB’000 9,963 (64) — (4) 9,895	Non- controlling interests RMB’000 — — 2,996 (2,496) 500	Total equity RMB’000 9,963 (64 2,996 (2,500
					10,395

– II-31 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Statements of Cash Flows of The Company and The Consolidated Statement of Cash Flows of The Lvhai Group

The statements of cash flows of the Company for each of the three years ended 31 December 2007, 2008 and 2009, and the nine-month period ended 30 September 2009 and consolidated statement of cash flows of the Lvhai Group for the nine-month period ended 30 September 2010, prepared on the basis set out in note 2 of Section II below:

CASH FLOWS FROM OPERATING ACTIVITIES Loss before tax Adjustment for: Bank interest income Increase in other payables Net cash flows from/(used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES Interest received Acquisition of a subsidiary (note 17(a)) Acquisition of non-controlling interests (note 17(b)) Increase in prepayments for investments Decrease/(increase) in other receivables Decrease/(increase) in an amount due from an equity holder Net cash flows from/(used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Increase in paid-up capital Increase in other payables Increase in due to a related party Net cash flows from financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year/period CASH AND CASH EQUIVALENTS AT END OF YEAR/PERIOD ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances	The Company	Nine-month period ended 30 September 2009 RMB’000 (Unaudited) (12) — (12) — (12) — — — — 32 — 32 9,000 — — 9,000 9,020 8 9,028 9,028	The Lvhai Group
	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 (2) — (14) — — — (2) — (14) 6 — — 4 — (14) — — — — — — — — — — — — — — 33 — — (9,000) — — (8,967) — — 9,000 — — — — — — — — 9,000 4 — 19 4 8 8 8 8 27 8 8 27		Nine-month period ended 30 September 2010 RMB’000 (64 (14
			(78 63
			(15
			14 (47,000 (2,500 (1,090,000 (286,567 9,000
			(1,417,053
			— 1,417,789 200
			1,417,989
			921 27
			948
			948

– II-32 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

II. NOTES TO THE FINANCIAL INFORMATION

1. CORPORATE INFORMATION AND THE REORGANISATION

The Company was established as a limited liability company in the PRC on 13 October 1997 with registered and paid-up capital of RMB1,000,000. Since then, Shanxi Zhong He Neng Hua Company Limited (‘‘Shanxi Zhong He’’) held a 90% equity interest in the Company, and Mr. Wei Yong held a 10% equity interest in the Company.

After two equity transfers transactions in August 2008 and July 2009, respectively, the Company was owned as to 90% and 10% by Shanxi Zhong He and Mr. Li Qi, respectively.

On 15 July 2009, the registered capital of the Company increased to RMB10,000,000 and Shanxi Zhong He further injected RMB9,000,000 into the Company. Thereafter, Shanxi Zhong He’s and Mr. Li Qi’s equity interest in the Company were 99% and 1%, respectively.

On 26 September 2009, Mr. Meng Haigui acquired, in aggregate, 55% equity interest in the Company from Shanxi Zhong He and Mr. Li Qi. Thereafter, Mr. Meng Haigui’s and Shanxi Zhong He’s equity interests in the Company changed to 55% and 45%, respectively.

In order to rationalise the group structure of Triumph for the proposed acquisition by King Stone, on 16 April 2010, the Company completed the acquisition of a 94% equity interest in Haimei at a cash consideration of RMB47,000,000. On the same day, the Company became the holding company of Haimei and the Lvhai Group was established.

On 24 May 2010, the Company further acquired a 5% equity interest in Haimei from a non-controlling equity holder of Haimei, at a cash consideration of RMB2,500,000, and thereafter, the Company’s equity interest in Haimei increased from 94% to 99%.

On 26 May 2010, Shanxi Hengming Mining Company Limited (‘‘Hengming’’), a subsidiary of Triumph, had completed the acquisition of a 99% equity interest in the Company and thereafter, both the Company and its subsidiary became subsidiaries of Hengming, and Triumph became an indirect holding company of the Company. Triumph was wholly owned by All Aces Investments Limited as at 30 September 2010.

In addition, subsequent to the end of the Relevant Periods, on 2 December 2010, Haimei completed the acquisition of 95% equity interests in Shanxi Shanyin Shaoyaohua Coal Company Limited (‘‘Shaoyaohua’’). Further details of which are set out in notes 9 and 23 to the Financial Information.

2. BASIS OF PREPARATION AND CONSOLIDATION

As at 30 September 2010, the Company’s and the Lvhai Group’s current liabilities exceeded its current assets by RMB40 million and RMB1,080 million, respectively and had contracted capital commitment of RMB2,030 million in respect of acquisition of equity interest in Shanxi Shuozhou Shanyin Youyi Coal Company Limited (‘‘Youyi’’) and Shaoyaohua. However, the management of the Company has prepared the Financial Information on a going concern basis because, as further detailed in notes 14, 22 and 23(i), in November 2010, various creditors have agreed to extend the repayment dates of the balances due to them by the Lvhai Group, which aggregated to RMB1,365 million as at 30 September 2010, to 1 July 2012. In addition, in October 2010, the Lvhai Group has obtained loans aggregating to RMB1,887 million from various creditors which were used in further settlement of the consideration for the acquisition of equity interests in Youyi and Shaoyaohua as mentioned in note 19 to the Financial information. Such creditors have also agreed with the Lvhai Group to extend the repayment dates of such loans of RMB1,887 million to 1 July 2012. Accordingly, the management is of the opinion that the Company and the Lvhai Group shall have adequate financial resources to meet its liabilities as and when they fall due in the foreseeable future.

The Financial Information has been prepared in accordance with HKFRSs and the disclosure requirements of the Hong Kong Companies Ordinance and on a historical cost convention. The Financial Information is presented in Renminbi (‘‘RMB’’), which is the functional and presentation currency of the Company. All values are rounded to the nearest thousand (RMB’000) except when otherwise indicated.

– II-33 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

As further explained in notes 9 and 17 to the Financial Information, on 16 April 2010, the Company completed the acquisition of a 94% equity interest in Haimei. Accordingly, consolidated financial statements were prepared for the Lvhai Group since the date of acquisition.

The Financial Information includes the consolidated financial statements of the Lvhai Group for the nine-month period ended 30 September 2010, which includes the financial statements of the Company and its subsidiary for such period. The results of the subsidiary are consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. All income, expenses and unrealised gains and losses resulting from intercompany transactions and intercompany balances within the Lvhai Group are eliminated on consolidation in full.

As detailed in note 17(a) to the Financial Information, Haimei was not actively involved in any business operations at the date of acquisition by the Company except for the ownership of its assets and liabilities. Accordingly, in the opinion of the management, the acquisition of Haimei did not constitute a business combination but an acquisition of assets and liabilities of Haimei.

Non-controlling interests represent the interests of outside equity holders not held by the Lvhai Group in the results and net assets of the Company’s subsidiary. Losses within a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance.

For the purpose of the Financial Information, the Company and the Lvhai Group have adopted at the beginning of the Relevant Periods all the new, revised or amended HKFRSs applicable to the Relevant Periods and nine-month period ended 30 September 2009.

The Company and the Lvhai Group have not applied the following new, revised or amended HKFRSs, that have been issued but not yet effective, in the Financial Information:

HKFRS 1 Amendment	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial
	Reporting Standards — Limited Exemption from Comparative HKFRS 7
	Disclosures for First-time Adopters2
HKFRS 1 Amendment	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial
	Reporting Standards — Severe Hyperinflation and Removal of Fixed Dates
	for First-time Adopters4
HKFRS 7 Amendments	Amendments to HKFRS 7 Financial Instruments: Disclosures — Transfers of
	Financial Assets4
HKFRS 9	Financial Instruments6
Additions to HKFRS 9	Financial Instruments — Financial Liabilities6
HKAS 12 Amendment	Amendments to HKAS 12 Income Taxes — Deferred Tax: Recovery of
	Underlying Assets5
HKAS 24 (Revised)	Related Party Disclosures3
HKAS 32 Amendment	Amendment to HKAS 32 Financial Instruments: Presentation — Classification
	of Rights Issues1
HK(IFRIC)-Int 14 Amendments	Amendments to HK(IFRIC)-Int 14 Prepayments of a Minimum Funding
	Requirement3
HK(IFRIC)-Int 19	Extinguishing Financial Liabilities with Equity Instruments2
Improvement to HKFRSs	Amendments to a number of HKFRSs
(May 2010)

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

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

3 Effective for annual periods beginning on or after 1 January 2011

4 Effective for annual periods beginning on or after 1 July 2011

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

6 Effective for annual periods beginning on or after 1 January 2013

The Company and the Lvhai Group are in the process of making assessments of the impact of these new, revised or amended HKFRSs upon initial application. So far, they have concluded that these new, revised or amended HKFRSs are unlikely to have a significant impact on the Company’s and the Lvhai Group’s results of operations and financial positions.

– II-34 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been consistently applied throughout the Relevant Periods.

Subsidiaries

A subsidiary is an entity whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits from its activities.

The results of a subsidiary are included in the Company’s profit or loss to the extent of dividends received and receivable. The Company’s investment in a subsidiary is stated at cost less any impairment losses.

Impairment of non-financial assets

The Company and the Lvhai Group assess at each reporting date whether there is an indication that an asset may be impaired. Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than financial assets), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Related parties

A party is considered to be related to the Company or the Lvhai Group respectively if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Company or the Lvhai Group; (ii) has an interest in the Company or the Lvhai Group that gives it significant influence over the Company or the Lvhai Group; or (iii) has joint control over the Company or the Lvhai Group;
(b) the party is an associate;
(c) the party is a jointly-controlled entity;
(d) the party is a member of the key management personnel of the Company or the Lvhai Group or its holding company;
(e) the party is a close member of the family of any individual referred to in (a) or (d); or
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e).

– II-35 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Investments and other financial assets

The Company’s and the Lvhai Group’s financial assets within the scope of HKAS 39 include only loans and receivables, which are initially recognised and measured at fair value. When financial assets are recognised initially, they are measured at fair value plus directly attributable transaction costs. The Company and the Lvhai Group determine the classification of their financial assets after initial recognition and, where allowed and appropriate, reevaluates this designation at the end of the reporting period.

All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the Company and the Lvhai Group commit to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

The Company’s financial assets include cash and bank balances, loans to third parties and an amount due from an equity holder. The Lvhai Group’s financial assets include cash and bank balances and loans to third parties.

Loans and receivables

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

. the rights to receive cash flows from the asset have expired; or
. the Company or the Lvhai Group has transferred their rights to receive cash flows from the asset, or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘‘pass-through’’ arrangement; and either (a) the Company or the Lvhai Group has transferred substantially all the risks and rewards of the asset, or (b) the Company or the Lvhai Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Company or the Lvhai Group has transferred their rights to receive cash flows from an asset or has entered into a ‘‘pass-through’’ arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Company’s or the Lvhai Group’s continuing involvement in the asset. In that case, the Company or the Lvhai Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company or the Lvhai Group has retained.

Impairment of financial assets

The Company and the Lvhai Group assesses at the end of the reporting period whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘‘loss event’’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing

– II-36 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortised cost

For financial assets carried at amortised cost, the Company and the Lvhai Group first assess individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company and the Lvhai Group determine that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to ‘‘Finance costs’’ in profit or loss.

Financial liabilities at amortised cost

The Company’s and the Lvhai Group’s financial liabilities within the scope of HKAS39 include only loans and borrowings. Loans and borrowings are recognised initially at fair value less directly attributable transaction costs. After initial recognition, loans and borrowings are subsequently measured at amortised cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the effective interest rate method amortisation process.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

– II-37 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Cash and cash equivalents

For the purpose of the statements of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, which are not restricted as to use.

Provisions

Income tax

Deferred tax liabilities are recognised for all taxable temporary differences, except:

. where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

. where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

– II-38 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The carrying amount of deferred tax assets is reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at the end of the reporting period and are recognised to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.

4. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Judgements

In the process of applying the Lvhai Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the Financial Information:

Impairment of assets

Management of the Lvhai Group has to exercise judgement in determining whether an asset is impaired or the event previously causing the asset impairment no longer exists, particularly in assessing: (1) whether an event has occurred that may affect the asset value or such event affecting the asset value has not been in existence; (2) whether the carrying value of an asset can be supported by the net present value of future cash flows which are estimated based upon the continued use of the asset or derecognition; and (3) the appropriate key assumptions to be applied in preparing cash flow projections including whether these cash flow projections are discounted using an appropriate rate. Changing the assumptions selected by management to determine the level of impairment, including the discount rates or the growth rate assumptions in the cash flow projections, could materially affect the net present value used in the impairment test.

Estimation uncertainties

Impairment of prepayments and receivables

Impairment of prepayments and receivables is made based on an assessment of the recoverability of prepayments and receivables. The identification of impairment requires management’s judgements and estimates. Where the actual outcome is different from the original estimate, such differences will impact the carrying values of the prepayments and receivables and impairment loss in the period in which such estimate has been changed. The net carrying amount of prepayments for investments and loans to third parties in the consolidated statement of financial position of the Lvhai Group as at 30 September 2010 were RMB1,090,057,000 and RMB287,534,000, respectively.

– II-39 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

5. SEGMENT INFORMATION

The Lvhai Group has not commenced any business since its establishment, and no current and non-current assets and liabilities of the Lvhai Group are located outside Mainland China. Accordingly, reportable segment information as required by HKFRS 8 Operating Segments is not presented.

6. DIRECTOR’S AND EMPLOYEES’ REMUNERATION

No remuneration has been paid to the director of the Company for the Relevant Periods and the nine-month period ended 30 September 2009. The Company and the Lvhai Group did not have any non-director employee during the Relevant Periods and the nine-month period ended 30 September 2009, and hence no employee remuneration has been incurred for such periods.

7. INCOME TAX EXPENSES

The Company and its subsidiary are domiciled and operates in Mainland China, and are subject to the PRC enterprise income tax.

Under the relevant PRC Corporate Income Tax laws and regulations, the statutory enterprise income tax rate of 33% was applicable to the Company and its subsidiary for the year ended 31 December 2007 and the income tax rate of 25% was applicable to the Company and its subsidiary for the years ended 31 December 2008 and 2009, and the nine-month periods ended 30 September 2009 and 2010.

No income tax has been incurred during the Relevant Periods and the nine-month period ended 30 September 2009 because the Company and the Lvhai Group did not have any assessable income during such periods.

A reconciliation of income tax applicable to loss before tax at the statutory rate for the jurisdiction in which the Company and its subsidiary are domiciled to the tax expenses at the effective tax rate, and a reconciliation of the statutory rate to the effective tax rate, are as follows:

				The Company	The Company				The Lvhai Group	The Lvhai Group	The Lvhai Group
							Nine-month		Nine-month
							period ended		period ended
		Year	ended 31	December			30 September		30 September
	2007		2008		2009		2009		2010
	RMB’000	%	RMB’000	%	RMB’000	%	RMB’000	%	RMB’000		%
							(Unaudited)
Loss before tax	(2)		—		(14)		(12)		(65)
Tax at the statutory tax
rate	(1)	33	—	—	(4)	25	(3)	25	(16)		25
Tax losses not recognised	1	(33)	—	—	4	(25)	3	(25)	16	(25)
Income tax at the
effective rate	—	—	—	—	—	—	—	—	—		—

As at 31 December 2007, 2008 and 2009, and 30 September 2009 and 2010, deferred tax assets have not been recognised by the Company in respect of unused tax losses amounting to RMB23,000, RMB23,000, RMB37,000, RMB35,000 (Unaudited) and RMB87,000, respectively. Deferred tax assets have not been recognised for such tax losses as it is not considered probable that taxable profit will be available against which such tax losses can be utilised.

8. LOSS ATTRIBUTABLE TO OWNERS OF THE COMPANY

The consolidated comprehensive loss attributable to owners of the Company for the nine-month period ended 30 September 2010 included a comprehensive loss of RMB50,000, which has been dealt with in the financial statements of the Company.

– II-40 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

9. INVESTMENT IN A SUBSIDIARY

The Company

The Company’s investment in a subsidiary as at 30 September 2010 represented investment cost in unlisted equity interest in Haimei of which its particulars are as follows:

			Percentage of
			equity interest
	Place and date of	Registered and	attributable to	Principal
Name	establishment and operations	paid-up capital	the Company	activities
Haimei	PRC/Mainland China	RMB50,000,000	99%*	Mining and sale
	23 January 2006			of coal

On 16 April 2010, the Company completed the acquisition of a 94% equity interest in Haimei at a cash consideration of RMB47,000,000. On 24 May 2010, the Company further acquired a 5% equity interest in Haimei from the non-controlling equity holders of Haimei at a cash consideration of RMB2,500,000. Thereafter, the Company’s equity interest in Haimei increased from 94% to 99%.

10. PREPAYMENTS FOR INVESTMENTS

The Lvhai Group

Youyi (Note (a)) Shaoyaohua (Note (b))	As at 30 September 2010 RMB’000 213,057 877,000
	1,090,057

Notes:

(a) On 23 April 2010, Haimei entered into an agreement with Mr. Zhu Jinfeng, Mr. Zhao Zhishi, Mr. Xu Wenhua and Mr. Zhang Bao (four independent third parties) for the acquisition of, in aggregate, a 100% equity interest in Youyi, a non-corporate entity engaging principally in mining and the sale of coal, at a cash consideration of RMB1,290 million. Youyi was under pre-operating period as at 30 September 2010.
(b) On 8 April 2010, Haimei entered into an agreement with Mr. Yan Changli and Mr. Li Yubao (two independent third parties) for the acquisition of a 95% equity interest in Shaoyaohua, a limited liability company engaging principally in mining and the sale of coal, at a cash consideration of RMB1,830 million.

Subsequent to the end of the Relevant Periods, on 2 December 2010, the acquisition was completed and Shaoyaohua became a subsidiary of the Triumph Group.

11. OTHER RECEIVABLES

The balances are unsecured, interest-free and have no fixed terms of repayment. The balances were neither past due nor impaired and were relate to debtors for which there was no recent history of default.

– II-41 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

12. DUE FROM AN EQUITY HOLDER

The amount due from an equity holder recorded in the Company’s statements of financial position represents an amount due from Shanxi Zhong He, which is unsecured, interest-free and has no fixed terms of repayment. Following Shanxi Zhong He’s transfer of all its equity interest in the Company to Hengming on 26 May 2010, Shanxi Zhong He is no longer an equity holder of the Company. The balance due from Shanxi Zhong He of RMB9,000,000 as at 31 December 2009 was settled in September 2010.

13. CASH AND BANK BALANCES

The Company’s and the Lvhai Group’s cash and bank balances are all denominated in RMB. The RMB is not freely convertible into other currencies. However, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Company and the Lvhai Group are permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Company and the Lvhai Group, and earn interest at the respective short term time deposit rates. The bank balances are deposited with creditworthy banks with no recent history of default.

14. OTHER PAYABLES

Loans payable (Note) Others	The Company	As at 30 September 2010 RMB’000 39,661 — 39,661	The Lvhai Group
	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 — — — 31 31 31 31 31 31		As at 30 September 2010 RMB’000 1,367,944 —
			1,367,944

Other payables are unsecured, non-interest-bearing and have no fixed terms of repayment.

Note: Subsequent to 30 September 2010, in November 2010, the following events took place:

(i) a creditor has agreed to extend the repayment date of the balance due to him of approximately RMB40 million by the Company as at 30 September 2010 to 1 July 2012; and
(ii) various other creditors have agreed to extend the repayment dates of the balances due to them by the Lvhai Group, which aggregated to RMB1,325 million as at 30 September 2010, to 1 July 2012.

15. DUE TO A RELATED PARTY

The balance represented the amount due to Mr. Chai Wei who was the director of Triumph as at 30 September 2010.

16. PAID-UP CAPITAL

The registered and paid-up capital of the Company upon its establishment was RMB1,000,000. On 15 July 2009, the registered and paid-up capital of the Company increased to RMB10,000,000. Further details are set out in note 1 to the Financial Information.

– II-42 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

17. ACQUISITION OF A SUBSIDIARY AND NON-CONTROLLING INTEREST

(a) Acquisition of a 94% equity interest in Haimei

On 16 April 2010, the Company acquired a 94% equity interest in Haimei at a cash consideration of RMB47,000,000. The principal activities of Haimei are the sale of coal products, pig iron, steel, iron ore, industrial and mining equipment and paves, construction materials and subsidiary agricultural products. As at the date of acquisition, Haimei has not commenced any operation since its establishment.

Haimei was not actively involved in any business operations at the date of the acquisition. Accordingly, in the opinion of the management of the Company, the acquisition did not constitute a business combination but an acquisition of assets and liabilities of Haimei.

The assets and liabilities of Haimei acquired by the Company as at the date of acquisition, 16 April 2010, were as follows:

Assets and liabilities acquired: Other receivables Prepayments for investments Cash and bank balances Other payables Non-controlling interests Net assets Satisfied by: Cash	RMB’000 50,000 57 1 (62 (2,996
	47,000
	47,000

(b) Acquisition of a 5% non-controlling interest in Haimei

On 24 May 2010, the Company further acquired a 5% equity interest in Haimei from the non-controlling equity holders of Haimei at a cash consideration of RMB2,500,000. The additional interest in carrying value of net assets acquired was RMB2,496,000. The difference of RMB4,000 between the consideration and the additional interest in carrying value of net assets acquired has been recognised in equity.

18. CONTINGENT LIABILITIES

At the end of each of the Relevant Periods, the Company and the Lvhai Group did not have any significant contingent liabilities.

– II-43 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

19. COMMITMENTS

The Company and the Lvhai Group had the following capital commitments at the end of each of the Relevant Periods:

Contracted, but not provided for: Acquisition of Youyi Acquisition of Shaoyaohua	The Company	As at 30 September 2010 RMB’000 — — —	The Lvhai Group
	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 — — — — — — — — —		As at 30 September 2010 RMB’000 1,077,000 953,000
			2,030,000

20. RELATED PARTY DISCLOSURES

(a) Balances with related parties

Details of the balances with an equity holder are disclosed in note 12 to the Financial Information.

(b) Other transactions with related parties

During the nine-month period ended 30 September 2010, the Company acquired a 99% equity interest in Haimei at a total consideration of RMB49,500,000. Haimei was held as to 60% by Mr. Meng Haigui, a then equity holder of the Company, before completion of such acquisition. Further details are disclosed in note 1 to the Financial Information.

(c) In the opinion of the management, the director of the Company represented the key management personnel of the Company. No remuneration was paid to the director of the Company during the Relevant Periods. Further details are disclosed in note 6 to the Financial Information.

21. FINANCIAL INSTRUMENTS BY CATEGORY

As at the end of each of the Relevant Periods, the financial assets and financial liabilities of the Company and the Lvhai Group were cash and bank balances, receivables and payables. The carrying amounts of financial assets as at the end of each of the Relevant Periods are as follows:

Other receivables Due from an equity holder Cash and bank balances	The Company	As at 30 September 2010 RMB’000 — — 74 74	The Lvhai Group
	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 1,000 1,000 967 — — 9,000 8 8 27 1,008 1,008 9,994		As at 30 September 2010 RMB’000 287,534 — 948
			288,482

– II-44 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The carrying amounts of financial liabilities at amortised cost as at the end of each of the Relevant Periods are as follows:

Other payables Due to a related party	The Company	As at 30 September 2010 RMB’000 39,661 — 39,661	The Lvhai Group
	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 31 31 31 — — — 31 31 31		As at 30 September 2010 RMB’000 1,367,944 200
			1,368,144

22. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Company’s and the Lvhai Group’s principal financial instruments comprise cash and bank balances. The main purpose of these financial instruments is to raise finance for the Company’s and the Lvhai Group’s future operations. The Company and the Lvhai Group have various other financial assets and liabilities such as other receivables and other payables, which arise directly from loans or advances.

The main risks arising from the Company’s and the Lvhai Group’s financial instruments are interest rate risk, liquidity risk and credit risk. The management of the Company reviews and approves policies for managing each of these risks and they are summarised below:

Interest rate risk

The Company’s and the Lvhai Group’s exposure to the risk of changes in market interest rates relates primarily to the Company’s and the Lvhai Group’s bank balances with floating interest rates.

Since the Company’s and the Lvhai Group’s cash and bank balances was insignificant, fluctuations of the interest rates did not have significant effects on the Company’s profit or loss and equity during the Relevant Periods.

Liquidity risk

The Company’s and the Lvhai Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of loans from third parties. The Company’s and the Lvhai Group’s financing activities are managed centrally by maintaining an adequate level of cash and bank balances to finance the Company’s and the Lvhai Group’s operations.

The Company’s and the Lvhai Group’s cash and bank balances are placed with reputable financial institutions.

– II-45 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The maturity profile of the Company’s and the Lvhai Groups’ financial liabilities at the end of each of the Relevant Periods, based on the contractual undiscounted payments, are as follows:

The Company

Other payables Other payables The Lvhai Group Other payables Due to a related party	As at 31 December 2007, 2008 and 2009 On demand Within 1 year 1 to 5 years RMB’000 RMB’000 RMB’000 — 31 — As at 30 September 2010 On demand Within 1 year 1 to 5 years RMB’000 RMB’000 RMB’000 39,630 31 — As at 30 September 2010 On demand Within 1 year 1 to 5 years RMB’000 RMB’000 RMB’000 1,367,650 294 — 200 — — 1,367,850 294 —	Total RMB’000 31
		Total RMB’000 39,661
		Total RMB’000 1,367,944 200
		1,368,144

In November 2010, a creditor has agreed to extend the repayment date of the balance due to him by the Company of RMB40 million as at 30 September 2010 to 1 July 2012. In addition, various other creditors have agreed to extend the repayment dates of the balances due to them by the Lvhai Group, which aggregated to RMB1,325 million as at 30 September 2010, to 1 July 2012.

Credit risk

The credit risk of the Company’s and the Lvhai Group’s financial assets, which comprise cash and bank balances, other receivables and an amount due from an equity holder, arises from default of the counterparty, with a maximum exposure equal to the carrying amounts of these instruments.

Since the Company and the Lvhai Group only provide loans to recognised and creditworthy parties, there is no requirement for collateral.

At the end of each of the Relevant Periods, there was no significant concentration of credit risk, except for the Company’s other receivables of RMB1,000,000, RMB1,000,000, RMB967,000, and Nil as at 31 December 2007, 2008 and 2009 and 30 September 2010 respectively, and the Lvhai Group’s prepayments for investments and other receivables of RMB1,090,057,000 and RMB287,534,000 as at 30 September 2010, respectively.

Capital management

The primary objective of the Company’s and the Lvhai Group’s capital management is to safeguard the Company’s and the Lvhai Group’s ability to continue as a going concern and to maintain healthy capital ratios in order to support their business and maximise equity holders’ value.

The Company and the Lvhai Group manage their capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Company and the Lvhai Group may adjust the dividend payment to equity holders, return capital to equity holders or call for additional equity. No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods.

– II-46 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The Company and the Lvhai Group monitor capital using a gearing ratio, which is net debt divided by equity plus net debt. Net debt is the other payables less cash and bank balances. Equity represents equity attributable to the owners of the Company and the Lvhai Group.

The gearing ratios for the Company and the Lvhai Group as at the end of each of the Relevant Periods were as follow:

Other payables Less: Cash and bank balances Net debt Equity Equity and net debt Gearing ratio	The Company	As at 30 September 2010 RMB’000 39,661 (74) 39,587 9,913 49,500 80%	The Lvhai Group
	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 31 31 31 (8) (8) (27) 23 23 4 977 977 9,963 1,000 1,000 9,967 2% 2% —		As at 30 September 2010 RMB’000 1,368,144 (948
			1,367,196 10,395
			1,377,591
			99%

23. EVENTS AFTER THE REPORTING PERIOD

(i) In November 2010, various creditors have agreed to extend the repayment dates of the balances due to them by the Lvhai Group, which aggregated to RMB1,365 million as at 30 September 2010, to 1 July 2012. In October 2010, the Lvhai Group has obtained loans aggregating to RMB1,887 million from various creditors which was used in further settlement of the consideration for the acquisition of equity interests in Youyi and Shaoyaohua as set out in note 19 to the Financial Information. Such creditors have also agreed with the Lvhai Group to extend the repayment dates of such loans of RMB1,887 million to 1 July 2012. Further details of which is set out in notes 2 and 14 to the Financial Information.
(ii) On 2 December 2010, Haimei, a subsidiary of the Company, completed the acquisition of a 95% equity interest in Shaoyaohua, at a consideration of RMB1,830 million, and thereafter, Shaoyaohua became a subsidiary of the Company. Further details of which are set out in note 10(b) to the Financial Information.

24. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Company and the Lvhai Group in respect of any period subsequent to 30 September 2010.

Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong

– II-47 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

3. ACCOUNTANTS’ REPORT ON SHANXI HAIMEI MINING COMPANY LIMITED

9 February 2011

The Directors King Stone Energy Group Limited

Dear Sirs,

We set out below our report on the financial information relating to Shanxi Haimei Mining Company Limited (the ‘‘Company’’, formerly known as ‘‘Shanxi Haimei Trading Company Limited’’) for each of the three years ended 31 December 2007, 2008, and 2009, and the nine-month period ended 30 September 2010 (the ‘‘Relevant Periods’’) and the financial information of the nine-month period ended 30 September 2009 (the ‘‘30 September 2009 Financial Information’’), prepared on the basis set out in note 2 of Section II below, for inclusion in the circular of King Stone Energy Group Limited (‘‘King Stone’’) dated 9 February 2011 in connection with the proposed acquisition of a 60% equity interest in Triumph Fund A1 Limited (‘‘Triumph’’), a holding company of the Company, by a subsidiary of King Stone.

The Company was established as a limited liability company in the People’s Republic of China (the ‘‘PRC’’) on 23 January 2006. The principal activities of the Company are the sale of coal products, pig iron, steel, iron ore, industrial and mining equipment and paves, construction materials and secondary agricultural products. The Company has not commenced any operation since its establishment.

The Company has adopted 31 December as its financial year end date. The management accounts of the Company were prepared in accordance with the PRC accounting standards and financial regulations. Accordingly, no audited accounts under Hong Kong Financial Reporting Standards (‘‘HKFRSs’’) are available. For the purpose of this report, the management of the Company has prepared the statements of comprehensive income, statements of changes in equity and statements of cash flows of the Company for each of the Relevant Periods and the nine-month period ended 30 September 2009, the statements of financial position of the Company as at 31 December 2007, 2008 and 2009, and 30 September 2010, together with the notes thereto, in accordance with HKFRSs (including all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (‘‘HKASs’’) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants (the ‘‘HKICPA’’) (collectively the ‘‘Financial Information’’). No adjustments were made to the Financial Information in preparing this report.

Respective Responsibilities of Management and Reporting Accountants

– II-48 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

fair presentation of the Financial Information that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

It is our responsibility to form an independent opinion on the Financial Information for the Relevant Periods and to report our opinion to you.

Procedures Performed in Respect of the Financial Information of the Relevant Periods

For the purpose of this report, we have carried out an independent audit on the financial information of the Company for each of the three years ended 31 December 2007, 2008 and 2009 and the nine-month period ended 30 September 2010, which has been prepared by the management of the Company in accordance with HKFRSs. We conducted our audit in accordance with Hong Kong Standards on Auditing (‘‘HKSAs’’) issued by the HKICPA and carried out such additional procedures as we consider necessary in accordance with Auditing Guideline 3.340 ‘‘Prospectuses and the Reporting Accountant’’ issued by the HKICPA.

Procedures Performed in Respect of the 30 September 2009 Financial Information

Opinion in Respect of the Financial Information of the Relevant Periods

Review Conclusion in Respect of the 30 September 2009 Financial Information

Based on our review, nothing has come to our attention that causes us to believe that the 30 September 2009 Financial Information does not give a true and fair view of the results and cash flows of the Company for the nine-month period ended 30 September 2009 in accordance with HKFRSs.

– II-49 –

APPENDIX II FINANCIAL INFORMATION ON THE TARGET GROUP

I. FINANCIAL INFORMATION

Statements of Comprehensive Income

The following is a summary of the statements of comprehensive income of the Company for each of the Relevant Periods and the nine-month period ended 30 September 2009, prepared on the basis set out in note 2 of Section II below:

Bank interest income Administrative expenses LOSS AND TOTAL COMPREHENSIVE LOSS FOR THE YEAR/PERIOD, NET OF TAX	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 — — — (1) (17) (3) (1) (17) (3)	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) — 13 (3) (29) (3) (16)

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

– II-50 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Statements of Financial Position

The following is a summary of the statements of financial position of the Company as at the end of each of the Relevant Periods, prepared on the basis set out in note 2 of Section II below:

Notes NON-CURRENT ASSET Prepayments for investments 8 CURRENT ASSETS Other receivables 9 Cash and bank balances 10 Total current assets CURRENT LIABILITIES Other payables 11 Due to a related party 12 Total current liabilities NET CURRENT ASSETS/ (LIABILITIES) Net assets EQUITY Paid-up capital 13 Accumulated losses Total equity	As 2007 RMB’000 — 3,000 3 3,003 43 — 43 2,960 2,960 3,000 (40) 2,960	at 31 December 2008 2009 RMB’000 RMB’000 — — 3,006 3,000 3 1 3,009 3,001 66 61 — — 66 61 2,943 2,940 2,943 2,940 3,000 3,000 (57) (60) 2,943 2,940	As at 30 September 2010 RMB’000 1,090,000 287,534 874 288,408 1,328,284 200 1,328,484 (1,040,076) 49,924 50,000 (76) 49,924

– II-51 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Statements of Changes in Equity

The movements in the statements of changes in equity of the Company for each of the Relevant Periods and the nine-month period ended 30 September 2009, prepared on the basis set out in note 2 of Section II below, are as follows:

At 1 January 2007 Total comprehensive loss for the year At 31 December 2007 and at 1 January 2008 Total comprehensive loss for the year At 31 December 2008 and at 1 January 2009 Total comprehensive loss for the year At 31 December 2009 and at 1 January 2010 Total comprehensive loss for the period Increase in capital (note 13) At 30 September 2010 Nine-month period ended 30 September 2009 (Unaudited) At 31 December 2008 and at 1 January 2009 Total comprehensive loss for the period At 30 September 2009	Paid-up capital RMB’000 3,000 — 3,000 — 3,000 — 3,000 — 47,000 50,000 3,000 — 3,000	Accumulated losses RMB’000 (39) (1) (40) (17) (57) (3) (60) (16) — (76) (57) (3) (60)	Total equity RMB’000 2,961 (1) 2,960 (17) 2,943 (3) 2,940 (16) 47,000 49,924 2,943 (3) 2,940

– II-52 –

APPENDIX II FINANCIAL INFORMATION ON THE TARGET GROUP

Statements of Cash Flows

The statements of cash flows of the Company for each of the Relevant Periods and the ninemonth period ended 30 September 2009, prepared on the basis set out in note 2 of Section II below, are as follows:

CASH FLOWS FROM OPERATING ACTIVITIES Loss before tax Adjustment for: Bank interest income Increase/(decrease) in other receivables Increase/(decrease) in other payables Net cash flows used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES Interest received Increase in other receivables Increase in prepayments for investments Net cash flows used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Increase in paid-up capital Increase in other payables Increase in due to a related party Net cash flows from financing activities	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 (1) (17) (3) — — — (1) (17) (3) — (6) 6 1 23 (5) — — (2) — — — — — — — — — — — — — — — — — — — — — — — —	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) (3) (16) — (13) (3) (29) 4 — (3) 2 (2) (27) — 13 — (284,534) — (1,090,000) — (1,374,521) — 47,000 — 1,328,221 — 200 — 1,375,421

– II-53 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

NET INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year/period CASH AND CASH EQUIVALENTS AT END OF YEAR/PERIOD ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 — — (2) 3 3 3 3 3 1 3 3 1	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) (2) 873 3 1 1 874 1 874	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) (2) 873 3 1 1 874 1 874
			874
			874

– II-54 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

II. NOTES TO THE FINANCIAL INFORMATION

1. CORPORATE INFORMATION AND THE REORGANISATION

The Company was established as a limited liability company in the PRC on 23 January 2006 with registered and paid-up capital of RMB3,000,000. Since then, Mr. Meng Haigui’s, Mr. Wang Huaping’s and Mr. Hu Shaojun’s equity interests in the Company were 60%, 20% and 20%, respectively.

On 16 April 2010, the registered capital of the Company increased to RMB50,000,000 and a new equity holder, Shanxi Lvhai Mining Company limited (‘‘Lvhai’’) injected RMB47,000,000 into the Company to acquire a 94% equity interest in the Company. Mr. Meng Haigui, Mr. Wang Huaping and Mr. Hu Shaojun’s equity interests in the Company dropped to 3.6%, 1.2% and 1.2%, respectively.

On 24 May 2010, Mr. Meng Haigui, Mr. Wang Huaping and Mr. Hu Shaojun transferred all their equity interests in the Company to Lvhai and Mr. Sun Chuntian, respectively. Thereafter, Lvhai and Mr. Sun Chuntian’s equity interests in the Company were 99% and 1%, respectively.

In order to rationalise the group structure of Triumph for the proposed acquisition by a subsidiary of King Stone, on 26 May 2010, Shanxi Hengming Mining Company Limited (‘‘Hengming’’), a subsidiary of Triumph, had completed the acquisition of a 99% equity interest in Lvhai and thereafter, Lvhai and the Company became subsidiaries of Hengming and Triumph became a holding company of the Company. Triumph was wholly owned by All Aces Investments Limited as at 30 September 2010.

In addition, subsequent to the end of the Relevant Periods, on 2 December 2010, Haimei acquired 99% equity interests in Shanxi Shanyin Shaoyaohua Coal Company Limited (‘‘Shaoyaohua’’). Further details of which are set out in notes 8 and 19 to the Financial Information.

2. BASIS OF PREPARATION

As at 30 September 2010, the Company’s current liabilities exceeded its current assets by RMB1,040 million, and had contracted capital commitment of RMB2,030 million in respect of the acquisition of equity interest in Shanxi Shuozhou Shanyin Youyi Coal Company Limited (‘‘Youyi’’) and Shaoyaohua. However, the management of the Company has prepared the Financial Information on a going concern basis because, as further detailed in notes 11 and 19, in November 2010, various creditors have agreed to extend the repayment dates of the balances due to them, which aggregated to RMB1,325 million as at 30 September 2010, to 1 July 2012. In addition, in October 2010, the Company has obtained loans aggregating to RMB1,887 million from various creditors which was used in further settlement of the consideration for acquisition of equity interests in Youyi and Shaoyaohua as mentioned in note 15 to the Financial information. Such creditors have also agreed with the Company to extend the repayment dates of such loans of RMB1,887 million to 1 July 2012.

Accordingly, the management is of the opinion that the Company shall have adequate financial resources to meet its liabilities as and when they fall due in the foreseeable future.

The Financial Information has been prepared in accordance with HKFRSs and the disclosure requirements of the Hong Kong Companies Ordinance and on a historical cost convention. The accounting policies set out below have been consistently applied throughout the Relevant Periods and the nine-month period ended 30 September 2009. The Financial Information is presented in Renminbi (‘‘RMB’’), which is the functional and presentation currency of the Company and all values are rounded to the nearest thousand (RMB’000) except when otherwise indicated.

For the purpose of the Financial Information, the Company has adopted at the beginning of the Relevant Periods all the new, revised or amended HKFRSs applicable to the Relevant Periods.

– II-55 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The Company has not applied the following new, revised or amended HKFRSs, that have been issued but not yet effective, in the Financial Information:

HKFRS 1 Amendment	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial
	Reporting Standards — Limited Exemption from Comparative HKFRS 7
	Disclosures for First-time Adopters2
HKFRS 1 Amendment	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial
	Reporting Standards — Severe Hyperinflation and Removal of Fixed Dates
	for First-time Adopters4
HKFRS 7 Amendments	Amendments to HKFRS 7 Financial Instruments: Disclosures — Transfers of
	Financial Assets4
HKFRS 9	Financial Instruments6
Additions to HKFRS 9	Financial Instruments — Financial Liabilities6
HKAS 12 Amendment	Amendments to HKAS 12 Income Taxes — Deferred Tax: Recovery of
	Underlying Assets5
HKAS 24 (Revised)	Related Party Disclosures3
HKAS 32 Amendment	Amendment to HKAS 32 Financial Instruments: Presentation — Classification
	of Rights Issues1
HK(IFRIC)-Int 14 Amendments	Amendments to HK(IFRIC)-Int 14 Prepayments of a Minimum Funding
	Requirement3
HK(IFRIC)-Int 19	Extinguishing Financial Liabilities with Equity Instruments2
Improvement to HKFRSs	Amendments to a number of HKFRSs
(May 2010)

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

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

3 Effective for annual periods beginning on or after 1 January 2011

4 Effective for annual periods beginning on or after 1 July 2011

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

6 Effective for annual periods beginning on or after 1 January 2013

The Company is in the process of making an assessment of the impact of these new, revised or amended HKFRSs upon initial application. So far, it has concluded that these new, revised or amended HKFRSs are unlikely to have a significant impact on the Company’s results of operations and financial position.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been consistently applied throughout the Relevant Periods.

Impairment of non-financial assets

The Company assesses at each reporting date whether there is an indication that an asset may be impaired. Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than financial assets), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.

– II-56 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Related parties

A party is considered to be related to the Company if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Company; (ii) has an interest in the Company that gives it significant influence over the Company; or (iii) has joint control over the Company;
(b) the party is an associate;
(c) the party is a jointly-controlled entity;
(d) the party is a member of the key management personnel of the Company or its holding companies;
(e) the party is a close member of the family of any individual referred to in (a) or (d); or
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e).

Investments and other financial assets

The Company’s financial assets within the scope of HKAS 39 include only loans and receivables, which are initially recognised and measured at fair value. When financial assets are recognised initially, they are measured at fair value plus directly attributable transaction costs. The Company determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the end of the reporting period.

All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the Company commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

The Company’s financial assets include cash and bank balances and other receivables.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such assets are subsequently measured at amortised cost using the effective interest rate method less any allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and includes fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in ‘‘Finance income’’ profit or loss. The loss arising from impairment is recognised in profit or loss in ‘‘Finance costs’’.

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

. the rights to receive cash flows from the asset have expired; or
. the Company has transferred its rights to receive cash flows from the asset, or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘‘passthrough’’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

– II-57 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

When the Company has transferred its rights to receive cash flows from an asset or has entered into a ‘‘passthrough’’ arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Company’s continuing involvement in the asset. In that case, the Company also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained.

Impairment of financial assets

The Company assesses at the end of each reporting period whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘‘loss event’’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortised cost

For financial assets carried at amortised cost, the Company first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to ‘‘Finance costs’’ in profit or loss.

Financial liabilities at amortised cost

The Company’s financial liabilities within the scope of HKAS 39 include only loans and borrowings. Loans and borrowings are recognised initially at fair value less directly attributable transaction costs. After initial recognition, loans and borrowings are subsequently measured at amortised cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in the statements of comprehensive income when the liabilities are derecognised as well as through the effective interest rate method amortisation process.

– II-58 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Cash and cash equivalents

For the purpose of the statements of cash flows, cash and cash equivalents comprise cash on hand and demand deposits which are not restricted as to use.

Provisions

Income tax

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of each of the reporting period, taking into consideration interpretations and practices prevailing in the countries in which the Company operates.

Deferred tax is provided, using the liability method, on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are provided in full while deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

– II-59 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

4. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Judgements

In the process of applying the Company’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the Financial Information:

Impairment of assets

Management of the Company has to exercise judgement in determining whether an asset is impaired or the event previously causing the asset impairment no longer exists, particularly in assessing: (1) whether an event has occurred that may affect the asset value or such event affecting the asset value has not been in existence; (2) whether the carrying value of an asset can be supported by the net present value of future cash flows which are estimated based upon the continued use of the asset or disposal; and (3) the appropriate key assumptions to be applied in preparing cash flow projections including whether these cash flow projections are discounted using an appropriate rate. Changing the assumptions selected by management to determine the level of impairment, including the discount rates or the growth rate assumptions in the cash flow projections, could materially affect the net present value used in the impairment test.

Estimation uncertainties

Impairment of prepayments and receivables

Impairment of prepayments and receivables is made based on an assessment of the recoverability of prepayments and receivables. The identification of impairment requires management’s judgements and estimates. Where the actual outcome is different from the original estimate, such differences will impact the carrying values of the prepayments and receivables and impairment loss in the period in which such estimate has been changed. The net carrying amounts of prepayments for investments as at 30 September 2010 was RMB1,090,000,000 and the net carrying amounts of other receivables as at 31 December 2007, 2008 and 2009 and 30 September 2010 were RMB3,000,000, RMB3,006,000 RMB3,000,000 and RMB287,534,000, respectively.

5. SEGMENT INFORMATION

The Company has not commenced any business since its establishment, and no current and non-current assets and liabilities of the Company are located outside Mainland China. Accordingly, reportable segment information as required by HKFRS 8 Operating Segments is not presented.

6. DIRECTOR’S AND EMPLOYEES’ REMUNERATION

No remuneration has been paid to the director of the Company for the Relevant Periods and the nine-month period ended 30 September 2009. The Company did not have any non-director employee during the Relevant Periods and the ninemonth period ended 30 September 2009, and hence no employee remuneration has been incurred for such periods.

7. INCOME TAX EXPENSES

The Company is domiciled and operates in Mainland China, and is subject to PRC enterprise income tax.

– II-60 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Under the relevant PRC Corporate Income Tax laws and regulations, the statutory enterprise income tax rate of 33% was applicable to the Company for the year ended 31 December 2007 and the income tax rate of 25% was applicable to the Company for the years ended 31 December 2008 and 2009, and the nine-month periods ended 30 September 2009 and 2010.

No income tax has been incurred during the Relevant Periods and the nine-month period ended 30 September 2009 because the Company did not have any assessable income during such periods.

A reconciliation of income tax applicable to loss before tax at the statutory rate for the jurisdiction in which the Company is domiciled to the income tax at the effective tax rate, and a reconciliation of the statutory rate to the effective tax rate, are as follows:

Loss before tax Tax at the statutory tax rate Tax losses not recognised Income tax at the Company’s effective rate	Year ended 31 December 2007 2008 2009 RMB’000 % RMB’000 % RMB’000 % (1) (17) (3) — 33 (4) 25 (1) 25 — (33) 4 (25) 1 (25) — — —	Nine-month period ended 30 September 2009 2010 RMB’000 % RMB’000 % (Unaudited) (4) (16) (1) 25 (4) 25 1 (25) 4 (25 — —

As at 31 December 2007, 2008 and 2009, and 30 September 2009 and 2010, deferred tax assets have not been recognised by the Company in respect of unused tax losses amounting to RMB40,000, RMB57,000, RMB60,000, RMB60,000 (Unaudited) and RMB76,000, respectively. Deferred tax assets have not been recognised for such tax losses as it is not considered probable that taxable profit will be available against which such tax losses can be utilised.

8. PREPAYMENTS FOR INVESTMENTS

Youyi (Note (a)) Shaoyaohua (Note (b))	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 — — — — — — — — —	As at 30 September 2010 RMB’000 213,000 877,000
		1,090,000

Notes:

(a) On 23 April 2010, the Company entered into an agreement with Mr. Zhu Jinfeng, Mr. Zhao Zhishi, Mr. Xu Wenhua and Mr. Zhang Bao (four independent third parties) for the acquisition of, in aggregate, a 100% equity interest in Youyi, an non-corporate entity engaging principally in mining and the sale of coal, at a cash consideration of RMB1,290 million. Youyi was under pre-operating period as at 30 September 2010.
(b) On 8 April 2010, the Company entered into an agreement with Mr. Yan Changli and Mr. Li Yubao (two independent third parties) for the acquisition of a 95% equity interest in Shaoyaohua, a limited liability company engaging principally in mining and the sale of coal, at a cash consideration of RMB1,830 million.

Subsequent to the end of the Relevant Periods, on 2 December 2010, the acquisition was completed and Shaoyaohua became a subsidiary of the Company.

– II-61 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

9. OTHER RECEIVABLES

Due from third parties	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 3,000 3,006 3,000	As at 30 September 2010 RMB’000 287,534

None of the above assets is either past due or impaired. The financial assets included in the above balances relate to receivables for which there was no recent history of default.

Loans to third parties are unsecured, interest-free and have no fixed terms of repayment.

10. CASH AND BANK BALANCES

The Company’s cash and bank balances are all denominated in RMB. The RMB is not freely convertible into other currencies. However, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Company is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Company, and earn interest at the respective short term time deposit rates. The bank balances are deposited with creditworthy banks with no recent history of default.

11. OTHER PAYABLES

Loans from third parties (Note) Others	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 — — — 43 66 61 43 66 61	As at 30 September 2010 RMB’000 1,328,221 63
		1,328,284

Other payables are unsecured, non-interest-bearing and have no fixed terms of repayment.

Note: In November 2010, various creditors have agreed to extend the repayment date of the balances due to them, which aggregated to RMB1,325 million as at 30 September 2010, to 1 July 2012.

12. DUE TO A RELATED PARTY

The balance represented the amount due to Mr. Chai Wei who was the director of Triumph as at 30 September 2010.

13. PAID-UP CAPITAL

The registered and paid-up capital of the Company upon its establishment was RMB3,000,000. On 16 April 2010, the registered and paid-up capital of the Company increased to RMB50,000,000. Further details are set out in note 1 to the Financial Information.

14. CONTINGENT LIABILITIES

At the end of each of the Relevant Periods, the Company did not have any significant contingent liabilities.

– II-62 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

15. COMMITMENTS

The Company had the following capital commitments at the end of each of the Relevant Periods:

Contracted, but not provided for: Acquisition of Youyi Acquisition of Shaoyaohua	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 — — — — — — — — —	As at 30 September 2010 RMB’000 1,077,000 953,000
		2,030,000

16. RELATED PARTY DISCLOSURES

In the opinion of the management, the director of the Company represented the key management personnel of the Company. No remuneration was paid to the director of the Company during the Relevant Periods. Further details are disclosed in note 6 to the Financial Information.

17. FINANCIAL INSTRUMENTS BY CATEGORY

As at the end of each of the Relevant Periods, the financial assets and financial liabilities of the Company were cash and bank balances, receivables and payables. The carrying amounts of the Company’s financial assets as at the end of each of the Relevant Periods are as follows:

Other receivables Cash and bank balances	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 3,000 3,006 3,000 3 3 1 3,003 3,009 3,001	As at 30 September 2010 RMB’000 287,534 874
		288,408

The carrying amounts of the Company’s financial liabilities at amortised cost as at the end of each of the Relevant Periods are as follows:

Other payables Due to a related party	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 43 66 61 — — — 43 66 61	As at 30 September 2010 RMB’000 1,328,284 200
		1,328,484

18. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Company’s principal financial instruments comprise cash and bank balances. The main purpose of these financial instruments is to raise finance for the Company’s future operations. The Company and has various other financial assets and liabilities such as other receivables and other payables, which arise directly from loans or advances.

– II-63 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The main risks arising from the Company’s financial instruments are interest rate risk, liquidity risk and credit risk. The management of the Company reviews and approves policies for managing each of these risks and they are summarised below:

Interest rate risk

The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s bank balances with floating interest rates.

Since the Company’s cash and bank balances was insignificant, fluctuations of the interest rates did not have significant effects on the Company’s profit or loss and equity during the Relevant Periods.

Liquidity risk

The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of loans from third parties. The Company’s financing activities are managed centrally by maintaining an adequate level of cash and bank balances to finance the Company’s operations.

The Company’s cash and bank balances are placed with reputable financial institutions.

The maturity profile of the Company’s financial liabilities at the end of each of the Relevant Periods, based on the contractual undiscounted payments, is as follows:

As at 31 December 2007 Other payables As at 31 December 2008 Other payables As at 31 December 2009 Other payables As at 30 September 2010 Other payables Due to a related party	On demand RMB’000 — — — 1,328,221 200 1,328,421	Within 1 year RMB’000 43 66 61 63 — 63	1 to 5 years RMB’000 — — — — — —	Over 5 years RMB’000 — — — — — —	Total RMB’000 43
					66
					61
					1,328,284 200
					1,328,484

In November 2010, various creditors have agreed to extend the repayment date of the balances due to them, which aggregated to RMB1,325 million as at 30 September 2010, to 1 July 2012.

Credit risk

The credit risk of the Company’s financial assets, which comprise cash and bank balances and other receivables, arises from default of the counterparty, with a maximum exposure equal to the carrying amounts of these instruments.

Since the Company only provides loans to recognised and creditworthy parties, there is no requirement for collateral.

– II-64 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

At the end of each of the Relevant Periods, there was no significant concentration of credit risk, except for the Company’s prepayment for investment of RMB1,090,000,000 as at 30 September 2010 and other receivables of RMB3,000,000, RMB3,006,000, RMB3,000,000 and RMB287,534,000 as at December 2007, 2008 and 2009 and 30 September 2010, respectively.

Capital management

The primary objective of the Company’s capital management is to safeguard the Company’s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximise equity holders’ value.

The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Company may adjust the dividend payment to equity holders, return capital to equity holders or call for additional capital. No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods.

The Company monitors capital using a gearing ratio, which is net debt divided by equity plus net debt. Net debt is calculated as the other payables less cash and bank balances. Equity represents equity attributable to the owners of the Company.

The gearing ratios as at the end of each of the Relevant Periods are as follows:

Other payables Less: Cash and cash equivalents Net debt Equity Equity and net debt Gearing ratio	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 43 66 61 (3) (3) (1) 40 63 60 2,960 2,943 2,940 3,000 3,006 3,000 1.3% 2.1% 2.0%	As at 30 September 2010 RMB’000 1,328,484 (874) 1,327,610 49,924 1,377,534 96.4%

19. EVENTS AFTER THE REPORTING PERIOD

(i) In November 2010, various creditors have agreed to extend the repayment dates of the balances due to them, which aggregated to RMB1,325 million as at 30 September 2010, to 1 July 2012. In October 2010, the Company has obtained loans aggregating to RMB1,887 million from various creditors which was used in further settlement of the consideration for the acquisition of equity interests in Youyi and Shaoyaohua as set out in note 15 to the Financial Information. Such creditors have also agreed with the Company to extend the repayment dates of such loans of RMB1,887 million to 1 July 2012. Further details of which is set out in notes 2 and 11 to the Financial Information.
(ii) On 2 December 2010, the Company completed the acquisition of a 95% equity interest in Shaoyaohua, at a consideration of RMB1,830 million, and thereafter, Shaoyaohua became a subsidiary of the Company. Further details of which is set out in note 8(b) to the Financial Information.

20. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Company in respect of any period subsequent to 30 September 2010.

Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong

– II-65 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

ACCOUNTANTS’ REPORT ON SHANXI SHANYIN SHAOYAOHUA COAL COMPANY LIMITED

9 February 2011

The Directors King Stone Energy Group Limited

Dear Sirs,

We set out below our report on the financial information relating to Shanxi Shanyin Shaoyaohua Coal Company Limited (the ‘‘Company’’, formerly known as ‘‘Shanyin County Shaoyaogou Coal’’, ‘‘Shaoyaogou Coal’’) for each of the three years ended 31 December 2007, 2008 and 2009, and the ninemonth period ended 30 September 2010 (the ‘‘Relevant Periods’’) and the financial information of the nine-month period ended 30 September 2009 (the ‘‘30 September 2009 Financial Information’’), prepared on the basis set out in note 2 of Section II below, for inclusion in the circular of King Stone Energy Group Limited (‘‘King Stone’’) dated 9 February 2011 in connection with the proposed acquisition of a 60% equity interest in Triumph Fund A1 Limited (‘‘Triumph’’), a holding company of the Company, by a subsidiary of King Stone.

The Company was transformed from a non-corporate entity into a limited liability company in the People’s Republic of China (the ‘‘PRC’’) on 11 December 2007 with a registered and paid-up capital of RMB30,000,000. The principal activities of the Company are mining and the sale of coal.

– II-66 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Respective Responsibilities of Management and Reporting Accountants

The management of the Company is responsible for the preparation and the true and fair presentation of the Financial Information in accordance with HKFRSs. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of the Financial Information that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

It is our responsibility to form an independent opinion on the Financial Information for the Relevant Periods and to report our opinion to you.

Procedures Performed in Respect of the Financial Information of the Relevant Periods

For the purpose of this report, we have carried out an independent audit on the financial information of the Company for each of the three years ended 31 December 2007, 2008 and 2009 and the nine-month period ended 30 September 2010, which has been prepared by the management of the Company in accordance with HKFRSs. We conducted our audit in accordance with Hong Kong Standards on Auditing (‘‘HKSAs’’) issued by the HKICPA and carried out such additional procedures as we consider necessary in accordance with Auditing Guideline 3.340 ‘‘Prospectuses and the Reporting Accountant’’ issued by the HKICPA.

Procedures Performed in Respect of the 30 September 2009 Financial Information

Opinion in Respect of the Financial Information of the Relevant Periods

– II-67 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Review Conclusion in Respect of the 30 September 2010 Financial Information

Based on our review, nothing has come to our attention that causes us to believe that the 30 September 2009 Financial Information does not give a true and fair view of the results and cash flows of the Company for the nine-month period ended 30 September 2009 in accordance with HKFRSs.

I. FINANCIAL INFORMATION

Statements of Comprehensive Income

Notes REVENUE 6 Cost of sales Gross profit Other income and gains 6 Selling and distribution costs Administrative expenses Finance costs PROFIT BEFORE TAX 7 Income tax expense 8 PROFIT AFTER TAX AND TOTAL COMPREHENSIVE INCOME FOR THE YEAR/PERIOD, NET OF TAX	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 73,306 412,378 270,226 (45,975) (132,449) (110,673) 27,331 279,929 159,553 246 214 81 (2,149) (3,309) (2,947) (15,933) (28,052) (26,405) — — — 9,495 248,782 130,282 (4,127) (62,458) (32,889) 5,368 186,324 97,393	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) 177,455 443,140 (77,269) (147,944) 100,186 295,196 45 80 (2,034) (6,851) (15,856) (32,836) — (476) 82,341 255,113 (20,621) (64,503) 61,720 190,610

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

– II-68 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Statements of Financial Position

The following is a summary of the statements of financial position of the Company as at the end of each of the Relevant Periods, prepared on the basis set out in note 2 of Section II below:

Notes NON-CURRENT ASSETS Property, plant and equipment 10 Mining rights 11 Prepayments for non-current assets Deferred tax assets 19 Total non-current assets CURRENT ASSETS Inventories 12 Trade and bills receivables 13 Prepayments, deposits and other receivables 14 Due from related parties 15 Cash and bank balances 16 Total current assets CURRENT LIABILITIES Other payables and accruals 17 Income tax payable Other borrowing 18 Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITY Deferred tax liabilities 19 Net assets EQUITY Paid-up capital 20 Reserves Total equity	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 177,542 237,320 346,678 14,255 12,278 10,402 9,836 61,229 25,824 — 897 2,838 201,633 311,724 385,742 22,669 15,035 18,151 4,464 50,426 11,362 6,036 9,272 22,413 5,206 5,640 77,030 9,506 2,623 36,021 47,881 82,996 164,977 95,064 73,190 90,960 38,403 93,735 102,166 — — — 133,467 166,925 193,126 (85,586) (83,929) (28,149) 116,047 227,795 357,593 686 — — 115,361 227,795 357,593 30,000 30,000 30,000 85,361 197,795 327,593 115,361 227,795 357,593	As at 30 September 2010 RMB’000 392,238 110,616 7,114 3,040 513,008 10,552 88,316 30,013 31,828 284,749 445,458 373,034 62,760 102,200 537,994 (92,536) 420,472 — 420,472 30,000 390,472 420,472

– II-69 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Statements of Changes in Equity

At 1 January 2007 Total comprehensive income for the year Profit appropriation to reserves Increase in capital (Note 20) Owners’ contribution (Note (b)) At 31 December 2007 and at 1 January 2008 Total comprehensive income for the year Profit appropriation to reserves Owners’ contribution (Note (b)) Dividend approved (Note 21) At 31 December 2008 and at 1 January 2009 Total comprehensive income for the year Profit appropriation to reserves Owners’ contribution (Note (b)) At 31 December 2009 and at 1 January 2010 Total comprehensive income for the period Owners’ contribution (Note (c)) Dividend approved (Note 21) At 30 September 2010 Nine-month period ended 30 September 2009 (Unaudited) At 1 January 2009 Total comprehensive income for the period Owners’ contribution (Note (b)) At 30 September 2009	Paid-up capital RMB’000 2,330 — — 27,670 — 30,000 — — — — 30,000 — — — 30,000 — — — 30,000 30,000 — — 30,000	Capital reserve RMB’000 12,735 — — — 49,649 62,384 — — 46,110 — 108,494 — — 32,405 140,899 — 8,738 — 149,637 108,494 — 22,474 130,968	Reserve funds RMB’000 (Note (a)) 1,431 — 1,418 — — 2,849 — 21,425 — — 24,274 — 13,456 — 37,730 — — — 37,730 24,274 — — 24,274	Retained profits/ (accumulated losses) RMB’000 16,178 5,368 (1,418) — — 20,128 186,324 (21,425) — (120,000) 65,027 97,393 (13,456) — 148,964 190,610 — (136,469) 203,105 65,027 61,720 — 126,747	Total equity RMB’000 32,674 5,368 — 27,670 49,649
					115,361 186,324 — 46,110 (120,000
					227,795 97,393 — 32,405
					357,593 190,610 8,738 (136,469
					420,472
					227,795 61,720 22,474
					311,989

These reserve accounts comprise the reserves of RMB85,361,000, RMB197,795,000, RMB327,593,000 and RMB390,472,000 in the statements of financial position as at 31 December 2007, 2008 and 2009, and 30 September 2010, respectively.

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APPENDIX II

Notes:

(a) The reserve funds refer to the PRC statutory reserve fund. Appropriations to such reserve funds are made out of the profit after tax of the statutory financial statements of the Company and the amount should not be less than 10% of the profit after tax determined under PRC accounting standards unless the aggregate amount standing to the credit of these reserves exceeds 50% of the registered capital of the Company. During each of the Relevant Periods and the nine-month period ended 30 September 2009, transfers equivalent to 10% of the profit of the year/period was made out of the retained profits to the reserve funds.
(b) Owners’ contribution for each of the three years ended 31 December 2007, 2008 and 2009, and the ninemonth period ended 30 September 2009 represented fair value of property, plant and equipment contributed by the owners of the Company (note 10), which aggregated to RMB74,102,000, RMB61,477,000, RMB43,209,000 and RMB29,966,000 (Unaudited), respectively, net of related corporate income tax impact of RMB24,453,000, RMB15,367,000, RMB10,804,000 and RMB7,492,000 (Unaudited) respectively.
(c) Owners’ contribution for the nine-month period ended 30 September 2010 included property, plant and equipment contributed by the owners of the Company (note 10), which amounted to RMB3,296,000, and employee benefit expenses and government levies borne by the owners of the Company, which amounted to RMB8,353,000, net of related corporate income tax impact of RMB2,911,000.

– II-71 –

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APPENDIX II

Statements of Cash Flows

Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax Adjustments for: Bank interest income 6 Finance costs Gain on disposal of items of property, plant and equipment 6 Depreciation 10 Amortisation of a mining right 11 Decrease/(increase) in inventories Decrease/(increase) in trade and bills receivables Decrease/(increase) in prepayments, deposits and other receivables Increase/(decrease) in other payables and accruals Income tax paid Net cash flows from operating activities	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 9,495 248,782 130,282 (193) (214) (58) — — — (43) — (19) 6,509 12,346 19,944 745 1,977 1,876 16,513 262,891 152,025 (13,272) 7,634 (3,116) (2,616) (45,962) 39,064 9,929 (3,236) (13,141) 10,975 30,128 30,453 21,529 251,455 205,285 (4,491) (24,078) (37,201) 17,038 227,377 168,084	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) 82,341 255,113 (22) (41) — 476 (19) (39) 14,221 20,690 1,194 2,301 97,715 278,500 1,577 7,599 29,446 (76,954) (28,757) (17,358) 4,910 (9,354) 104,891 182,433 (37,004) (103,524) 67,887 78,909

– II-72 –

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APPENDIX II

CASH FLOWS FROM INVESTING ACTIVITIES Interest received Purchases of items of property, plant and equipment Purchases of intangible assets Decrease/(increase) in prepayments for non- current assets Proceeds from disposal of items of property, plant and equipment Net cash flows used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Increase in capital New other borrowings Decrease/(increase) in amounts due from related parties Increase/(decrease) in other payables and accruals Dividends paid Net cash flows from/(used in) financing activities NET INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year/period CASH AND CASH EQUIVALENTS AT END OF YEAR/PERIOD ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 193 214 58 (29,663) (16,471) (82,328) — — — (3,282) (51,393) 35,405 43 — 19 (32,709) (67,650) (46,846) 27,670 — — — — — (5,206) (434) (71,390) 1,947 (46,176) (16,450) — (120,000) — 24,411 (166,610) (87,840) 8,740 (6,883) 33,398 766 9,506 2,623 9,506 2,623 36,021 9,506 2,623 36,021	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) 22 41 (68,259) (56,222) — (102,515) 39,137 18,711 19 39 (29,081) (139,946) — — — 102,200 (2,577) 45,202 (550) 298,832 — (136,469) (3,127) 309,765 35,679 248,728 2,623 36,021 38,302 284,749 38,302 284,749

– II-73 –

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APPENDIX II

II. NOTES TO THE FINANCIAL INFORMATION

1. CORPORATE INFORMATION AND THE REORGANISATION

The Company was transformed from Shaoyaogou Coal, a non-corporate entity owned by the local government, into a limited liability company in the PRC on 11 December 2007. Immediately before the transformation, Shaoyaogou Coal’s registered and paid-up capital was RMB2,330,000 and it had a net liabilities position of RMB74,000. To facilitate the transformation, each of the then owners of Shaoyaogou Coal, Mr. Yan Changli and Mr. Li Yubao, paid RMB37,000 to Shaoyaogou Coal to true-up its net asset value to zero. Upon the transformation, the registered capital of the Company was increased to RMB30,000,000 and each of Mr. Yan Changli and Mr. Li Yubao acquired a 50% equity interest in the Company at a cash consideration of RMB15,000,000.

In order to rationalise the group structure of Triumph for the proposed acquisition by King Stone, on 26 May 2010, Shanxi Hengming Mining Company Limited (‘‘Hengming’’), a subsidiary of Triumph, completed the acquisition of a 99% equity interest in Shanxi Lvhai Mining Company Limited (‘‘Lvhai’’) and thereafter, both Lvhai and its subsidiary (Shanxi Haimei Mining Company Limited, ‘‘Haimei’’) became subsidiaries of Triumph.

In addition, subsequent to the end of the Relevant Periods, on 2 December 2010, Haimei had completed the acquisition of a 95% equity interest in the Company and thereafter, the Company became a subsidiary of Haimei and Triumph became a holding company of the Company. As at the date of this report, Triumph is wholly owned by All Aces Investments Limited.

2. BASIS OF PREPARATION

As at 30 September 2010, the Company’s current liabilities exceeded its current assets by RMB92,536,000. However, the management of the Company has prepared the Financial Information on a going concern basis because subsequent to 30 September 2010, in November 2010, a creditor has agreed to extend the repayment date of a loan payable of the Company amounting to RMB102,200,000 as at 30 September 2010 to 1 July 2012. In addition, the management of the Company estimates that the net operating cash inflow generated by the Company’s coal mining business shall be adequate to meet with the liabilities and capital commitment of the Company as and when they fall due. Accordingly, the management is of the opinion that the Company shall have adequate financial resources to meet its liabilities as and when they fall due in the foreseeable future.

The Financial Information has been prepared in accordance with HKFRSs and the disclosure requirements of the Hong Kong Companies Ordinance. The Financial Information has been prepared on a historical cost convention. For the purpose of the Financial Information, the Company has adopted at the beginning of the Relevant Periods all the new, revised or amended HKFRSs applicable to the Relevant Periods and the nine-month period ended 30 September 2009. The Financial Information is presented in Renminbi (‘‘RMB’’), which is the Company’s functional and presentation currency, and all values are rounded to the nearest thousand (RMB’000) except when otherwise indicated.

The Company has not applied the following new, revised or amended HKFRSs, that have been issued but not yet effective, in the Financial Information:

HKFRS 1 Amendment	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial
	Reporting Standards — Limited Exemption from Comparative HKFRS 7
	Disclosures for First-time Adopters2
HKFRS 1 Amendment	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial
	Reporting Standards — Severe Hyperinflation and Removal of Fixed Dates
	for First-time Adopters4
HKFRS 7 Amendments	Amendments to HKFRS 7 Financial Instruments: Disclosures — Transfers of
	Financial Assets4
HKFRS 9	Financial Instruments6
Additions to HKFRS 9	Financial Instruments — Financial Liabilities6
HKAS 12 Amendment	Amendments to HKAS 12 Income Taxes — Deferred Tax: Recovery of
	Underlying Assets5
HKAS 24 (Revised)	Related Party Disclosures3

– II-74 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

HKAS 32 Amendment Amendment to HKAS 32 Financial Instruments: Presentation — Classification of Rights Issues[1] HK(IFRIC)-Int 14 Amendments Amendments to HK(IFRIC)-Int 14 Prepayments of a Minimum Funding Requirement[3] HK(IFRIC)-Int 19 Extinguishing Financial Liabilities with Equity Instruments[2] Improvement to HKFRSs Amendments to a number of HKFRSs (May 2010)

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

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

3 Effective for annual periods beginning on or after 1 January 2011

4 Effective for annual periods beginning on or after 1 July 2011

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

6 Effective for annual periods beginning on or after 1 January 2013

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been consistently applied throughout the Relevant Periods.

Impairment of non-financial assets

The Company assess at each reporting date whether these is an indication that an asset may be impaired. Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, deferred tax assets and financial assets), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Related parties

A party is considered to be related to the Company if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Company; (ii) has an interest in the Company that gives it significant influence over the Company; or (iii) has joint control over the Company;
(b) the party is an associate;
(c) the party is a jointly-controlled entity;

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FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

(d) the party is a member of the key management personnel of the Company;
(e) the party is a close member of the family of any individual referred to in (a) or (d); or
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e).

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, are stated at cost (for property, plant and equipment contributed by owners of the Company, stated at valuation) less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to profit or loss in the period in which it is incurred. In situations where the recognition criteria are satisfied, the expenditure for major inspection is capitalised in the carrying amount of the asset or as a replacement. Where significant parts of property, plant and equipment are required to be replaced at intervals, the Company recognises such parts as individual assets which specific useful lives and depreciation.

Depreciation is calculated on the straight-line basis to write off the cost (or valuation) of each item of property, plant and equipment, except for mining structures, to its residual value over its estimated useful life. The estimated useful lives used for this purpose are as follows:

		Estimated
Item	Residual value	useful life
Buildings	5%	20 years
Plant and machinery	5%	10 years
Furniture and fixtures	5%	3–5 years
Motor vehicles	5%	4 years

Where parts of an item of property, plant and equipment have different useful lives, the cost (or valuation) of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

The mining structures of the Company include the main and auxiliary mine shafts and underground tunnels. Depreciation is provided to write off the cost (or valuation) of the mining structures using the units of production method based on the estimated production volume for which the structure was designed and over the total proven and probable reserves of the coal mine.

Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year end.

An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in profit or loss in an accounting period the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress representing buildings, mining structures under construction and other assets under construction, is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.

Mining rights

Mining rights are stated at cost less accumulated amortisation and any impairment losses, the mining rights are amortised on the units of production method based on the estimated production volume for which the structure was designed and over the total proven and probable reserves of the coal mine.

– II-76 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Company is the lessee, rentals payable under operating leases are charged to profit or loss on the straight-line basis over the lease terms.

Financial assets

The Company’s financial assets in the scope of HKAS 39 include only loans and receivables, which are initially recognised and measured at fair value. The Company determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the end of the reporting period.

The Company’s financial assets include trade and bills receivables, prepayments, deposits and other receivables, amounts due from related parties and cash and bank balances.

Loans and receivables

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

. the rights to receive cash flows from the asset have expired; or
. the Company has transferred its rights to receive cash flows from the asset, or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘‘passthrough’’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

– II-77 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Impairment of financial assets

Financial assets carried at amortised cost

Financial liabilities at amortised cost

The Company’s financial liabilities within the scope of HKAS 39 include only loans and borrowings. Loans and borrowings are recognised initially at fair value less directly attributable transaction costs. After initial recognition, loans and borrowings are subsequently measured at amortised cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the effective interest rate method amortisation process.

– II-78 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis, and in the case of finished goods (coal productions), comprises direct materials, direct labour and appropriate proportion of overheads. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.

Cash and cash equivalents

For the purpose of the statements of cash flows, cash and cash equivalents comprise cash on hand and demand deposits which are not restricted as to use.

Provisions

Revenue recognition

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

(i) from sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Company maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold; and
(ii) interest income, on an accrual basis using the effective interest rate method by applying the rate that exactly discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset.

Income tax

– II-79 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Retirement benefits

The Company contributes on a monthly basis to a defined contribution retirement scheme organised by the relevant municipal and provincial government in the PRC. The municipal and provincial government undertakes to assume the retirement benefits payable to all existing and future retired employees under this scheme and the Company has no further obligations for post-retirement benefits beyond the contributions made. The contributions to the scheme are charged to profit or loss as they become payable in accordance with the rules of the scheme.

Dividends

Final dividends proposed by management are classified as a separate allocation of retained profits within the equity section of the statement of financial position, until they have been approved by the owners in a general meeting. When these dividends have been approved by the owners and declared, they are recognised as a liability.

4. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Judgements

Impairment of assets

Estimation uncertainties

– II-80 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Useful lives and residual values of property, plant and equipment

In determining the useful lives and residual values of items of property, plant and equipment, the Company has to consider various factors, such as technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset, expected usage of the asset, expected physical wear and tear, the care and maintenance of the asset, and legal or similar limits on the use of the asset. The estimation of the useful life of the asset is based on the experience of the Company with similar assets that are used in a similar way. Additional depreciation is made if the estimated useful lives and/or the residues values of items of property, plant and equipment are different from the previous estimation. Useful lives and residual values are reviewed at each financial year end date based on changes in circumstances. The net carrying amounts of property, plant and equipment as at 31 December 2007, 2008 and 2009 and 30 September 2010 were RMB177,542,000, RMB237,320,000, RMB346,678,000 and RMB392,238,000, respectively.

Impairment of property, plant and equipment and a mining right

The Company assesses each cash-generating unit annually to determine whether any indication of impairment exists. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made, which is considered to be the higher of the fair value less costs to sell and value in use. The carrying value of the property, plant and equipment and a mining rights, is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with the accounting policy as disclosed in this report. Estimating the value in use requires the Company to estimate future cash flows from the cash-generating unit and to choose a suitable discount rate in order to calculate the present value of those cash flows. The net carrying amounts of property, plant and equipment as at 31 December 2007, 2008 and 2009 and 30 September 2010 were RMB177,542,000, RMB237,320,000, RMB346,678,000 and RMB392,238,000, respectively. The net carrying amounts of the mining right were RMB14,255,000, RMB12,278,000, RMB10,402,000 and RMB110,616,000 as at 31 December 2007, 2008 and 2009 and 30 September 2010, respectively.

Mine reserves

Engineering estimates of the Company’s mine reserves are inherently imprecise and represent only approximate amounts because of the significant judgments involved in developing such information. There are authoritative guidelines regarding the engineering criteria that have to be met before estimated mine reserves can be designated as ‘‘proved’’ and ‘‘probable’’. Proved and probable mine reserve estimates are updated at regular intervals taking into account recent production and technical information about each mine. In addition, as prices and cost levels change from year to year, the estimate of proved and probable mine reserves also changes. This change is considered a change in estimates for accounting purposes and is reflected on a prospective basis in both depreciation rate of the mining structures and the amortisation rates of the mining right, which are calculated on a unit of production basis. Changes in the estimate of mine reserves are also taken into account in the impairment assessment of the mining right. The net carrying amounts of the mining right were RMB14,255,000, RMB12,278,000, RMB10,402,000 and RMB110,616,000 as at 31 December 2007, 2008 and 2009 and 30 September 2010, respectively.

Write-down of inventories to net realisable value

Write-down of inventories to net realisable value is made based on the ageing and estimated net realisable value of inventories. The assessment of the write-down amount requires management’s estimates and judgement. Where the actual outcome or expectation in the future is different from the original estimate, such differences will impact the carrying value of inventories and write-down/write-back of inventories in the period in which such estimate has been changed. The net carrying amounts of inventories as at 31 December 2007, 2008 and 2009, and 30 September 2010 were RMB22,669,000, RMB15,035,000, RMB18,151,000 and RMB10,552,000, respectively.

Impairment of receivables

Impairment of receivables is made based on an assessment of the recoverability of receivables. The identification of impairment requires management’s judgements and estimates. Where the actual outcome is different from the original estimate, such differences will impact the carrying values of the receivables and impairment loss in the period in which such estimate has been changed.

– II-81 –

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APPENDIX II

The net carrying amounts of prepayments for non-current assets as at 31 December 2007, 2008 and 2009 and 30 September 2010 were RMB9,836,000, RMB61,229,000, RMB25,824,000 and RMB7,114,000, respectively. The net carrying amounts of trade and bills receivables as at 31 December 2007, 2008 and 2009 and 30 September 2010 were RMB4,464,000, RMB50,426,000, RMB11,362,000 and RMB88,316,000, respectively. In addition, the net carrying amounts of prepayment, deposits and other receivables as at 31 December 2007, 2008 and 2009, and 30 September 2010 were RMB6,036,000, RMB9,272,000, RMB22,413,000 and RMB30,013,000, respectively.

Current tax and deferred tax

The Company is subject to income taxes in Mainland China. The Company carefully evaluates tax implications of its transactions in accordance with prevailing tax regulations and makes tax provision accordingly. However, judgement is required in determining the Company’s provision for income taxes as there are many transactions and calculations of which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact on the income tax and deferred tax provision in the periods in which such determination is made. The carrying amounts of current income tax payable carried as liabilities in the statements of financial position as at 31 December 2007, 2008 and 2009 and 30 September 2010 were RMB38,403,000, RMB93,735,000, RMB102,166,000 and RMB62,760,000, respectively.

Deferred tax assets relating to certain temporary differences and tax losses are recognised when management considers it is probable that future taxable profit will be available against which the temporary differences or tax losses can be utilised. Where the expectations are different from the original estimates, such differences will impact on the recognition of deferred tax assets and deferred tax in the periods in which such estimates have been changed. The carrying amount of deferred tax assets as at 31 December 2007, 2008 and 2009, and 30 September 2010 were RMB nil, RMB897,000, RMB2,838,000 and RMB3,040,000 respectively.

Provision for rehabilitation

Provision for rehabilitation is based on estimates of future expenditures incurred by management to undertake rehabilitation and restoration work which are discounted at a rate reflecting the term and nature of the obligation. Significant estimates and assumptions are made in determining the provision for rehabilitation as there are numerous factors that will affect the ultimate liability payable. These factors include estimates of the extent and costs of rehabilitation activities, technological changes, regulatory changes, cost increases and changes in the discount rate. Those uncertainties may result in future actual expenditure differing from the amounts currently provided. The provision at the end of the reporting period represents management’s best estimate of the present value of the future rehabilitation costs required. Changes to estimated future costs are recognised in the statements of financial position by adjusting the rehabilitation asset and liability. During the Relevant Periods and the nine-month period ended 30 September 2009, the management of the Company estimated that no provision for rehabilitation was required.

5. SEGMENT INFORMATION

The Company’s revenue, operating results, assets and liabilities are solely generated from the business activity of mining and the sale of coal output in Mainland China. Accordingly, the management of the Company is of the opinion that mining and the sale of coal output in Mainland China is a single reportable segment of the Company for each of the Relevant Periods and the nine-month period ended 30 September 2009.

Information about geographical areas

The Company’s revenue from external customers is derived solely from its operations in Mainland China, and no current and non-current assets and liabilities of the Company are located outside Mainland China. Accordingly, reportable segment information as required by HKFRS 8 Operating Segments is not presented.

Information about major customers

Revenue from customers contributed to over 10% of the revenue for the year ended 31 December 2007 aggregated to RMB67,373,000 (92% of the Company’s total revenue for that year) and the revenue generated from each of such customers for that year were RMB36,778,000, RMB20,550,000 and RMB10,045,000, respectively.

– II-82 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Revenue from customers contributed to over 10% of the revenue for the year ended 31 December 2008 aggregated to RMB298,964,000 (72% of the Company’s total revenue for that year) and the revenue generated from each of such customers for that year were RMB210,964,000, RMB44,516,000 and RMB43,484,000, respectively.

Revenue from customers contributed to over 10% of the revenue for the year ended 31 December 2009 aggregated to RMB173,805,000 (64% of the Company’s total revenue for that year) and the revenue generated from each of such customers for that year were RMB108,256,000 and RMB65,549,000, respectively.

Revenue from customers contributed to over 10% of the revenue for the nine-month period ended 30 September 2009 aggregated to RMB109,702,000 (Unaudited) (62% of the Company’s total revenue for that period) and the revenue generated from each of such customers for that period were RMB75,306,000 and RMB34,396,000, respectively.

Revenue from customers contributed to over 10% of the revenue for the nine-month period ended 30 September 2010 aggregated to RMB323,396,000 (73% of the Company’s total revenue for that period) and the revenue generated from each of such customers for that period were RMB52,950,000, RMB49,854,000 and RMB220,592,000, respectively.

6. REVENUE, OTHER INCOME AND GAINS

Revenue, which is also the Company’s turnover, represents the net invoice value of goods sold, after deduction of relevant taxes and allowances for returns and trade discounts.

An analysis of the Company’s revenue, other income and gains for each of the Relevant Periods and the nine-month period ended 30 September 2009 is as follows:

Revenue Sale of goods Other income and gains Bank interest income Gain on disposal of items of property, plant and equipment Others Total other income and gains	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 73,306 412,378 270,226 193 214 58 43 — 19 10 — 4 246 214 81	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) 177,455 443,140 22 41 19 39 4 — 45 80	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) 177,455 443,140 22 41 19 39 4 — 45 80
			41 39 —
			80

– II-83 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

7. PROFIT BEFORE TAX

The Company’s profit before tax is arrived at after charging:

Notes Cost of inventories sold Depreciation 10 Amortisation of mining right* 11 Employee benefit expenses (including a director’s remuneration (note 9)): Wages, salaries and staff welfare Retirement benefit contributions	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 45,975 132,449 110,673 6,509 12,346 19,944 745 1,977 1,876 6,433 22,854 26,442 1,287 4,571 5,288 7,720 27,425 31,730	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) 77,269 147,944 14,221 20,690 1,194 2,301 15,660 20,769 3,132 4,154 18,792 24,923	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) 77,269 147,944 14,221 20,690 1,194 2,301 15,660 20,769 3,132 4,154 18,792 24,923
			24,923

The amortisation of mining right is included in ‘‘Cost of sales’’ in the statements of comprehensive income.

8. INCOME TAX EXPENSES

The Company is domiciled and operates in Mainland China, and subject to the PRC enterprise income tax.

An analysis of the Company’s income tax expenses for each of the Relevant Periods and the nine-month period ended 30 September 2009 is as follows:

Current — PRC Deferred (note 19) Total income tax charge for the year/period	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 3,491 64,041 34,830 636 (1,583) (1,941) 4,127 62,458 32,889	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) 21,936 64,705 (1,315) (202 20,621 64,503	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) 21,936 64,705 (1,315) (202 20,621 64,503
			64,503

– II-84 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

A reconciliation of income tax expenses applicable to profit before tax at the statutory rate for the jurisdiction in which the Company is domiciled to the income tax expenses at the effective tax rate, and a reconciliation of the statutory tax rate to the effective tax rate, are as follows:

Profit before tax Tax at the statutory tax rate Expenses not deductible for tax Tax charged at the Company’s effective rate	Year ended 31 December 2007 2008 2009 RMB’000 % RMB’000 % RMB’000 % 9,495 248,782 130,282 3,133 33 62,196 25 32,571 25 994 10 262 — 318 — 4,127 43 62,458 25 32,889 25	Nine-month period ended 30 September 2009 2010 RMB’000 % RMB’000 % (Unaudited) 82,341 255,113 20,585 25 63,778 25 36 — 725 — 20,621 25 64,503 25

DIRECTOR’S REMUNERATION AND THE FIVE HIGHEST PAID EMPLOYEES
(a) During the Relevant Periods and the nine-month period ended 30 September 2009, the Company paid remunerations to Mr. Yan Changli and Mr. Sun Chuntian, the directors of the Company. The details are as follows:

Fees Other emoluments: Salaries, allowances and benefits in kind Retirement benefit contributions Total	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 — — — 48 73 78 10 15 16 58 88 94	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) — — 59 59 12 12 71 71	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) — — 59 59 12 12 71 71
			71

– II-85 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

(b) Five highest paid employees

For each of the Relevant Periods and the nine-month period ended 30 September 2009, the five highest paid employees of the Company included a director and four non-directors.

The remuneration of the four non-directors, highest paid employees all fell within the band of Nil to HK$1,000,000, and their aggregate remunerations are analyzed as follows:

Salaries, allowances and benefits in kind Retirement benefit contributions Total	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 206 268 268 41 54 54 247 322 322	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) 202 173 40 35 242 208	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) 202 173 40 35 242 208
	247		208

During the Relevant Periods and the nine-month period ended 30 September 2009, no remuneration was paid by the Company to the director and the non-director highest paid employees as an inducement to join or upon joining the Company or as compensation for loss of office.

10. PROPERTY, PLANT AND EQUIPMENT

31 December 2007 At 1 January 2007: Cost or valuation Accumulated depreciation Net carrying amount Cost at 1 January 2007, net of accumulated depreciation Additions Owners’ contribution Depreciation provided during the year Cost at 31 December 2007, net of accumulated depreciation At 31 December 2007: Cost or valuation Accumulated depreciation Net carrying amount	Mining structures RMB’000 13,476 (1,556)	Buildings RMB’000 13,979 (825) 13,154 13,154 5,169 4,504 (898) 21,929 23,652 (1,723) 21,929	Plant and machinery RMB’000 29,079 (6,865) 22,214 22,214 16,426 8,335 (3,933) 43,042 53,840 (10,798) 43,042	Furniture and fixtures RMB’000 786 (152) 634 634 596 — (333) 897 1,382 (485) 897	Motor vehicles RMB’000 2,658 (316) 2,342 2,342 2,724 — (955) 4,111 5,382 (1,271) 4,111	Construction in progress RMB’000 29,860 — 29,860 29,860 4,910 — — 34,770 34,770 — 34,770	Total RMB’000 89,838 (9,714
	11,920						80,124
	11,920 — 61,263 (390)						80,124 29,825 74,102 (6,509
	72,793						177,542
	74,739 (1,946)						193,765 (16,223
	72,793						177,542

– II-86 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

31 December 2008 At 1 January 2008: Cost or valuation Accumulated depreciation Net carrying amount Cost at 1 January 2008, net of accumulated depreciation Additions Owners’ contribution Transfers Depreciation provided during the year Cost at 31 December 2008, net of accumulated depreciation At 31 December 2008: Cost or valuation Accumulated depreciation Net carrying amount 31 December 2009 At 1 January 2009: Cost or valuation Accumulated depreciation Net carrying amount Cost at 1 January 2009, net of accumulated depreciation Additions Owners’ contribution Disposals Depreciation provided during the year Cost at 31 December 2009, net of accumulated depreciation At 31 December 2009: Cost or valuation Accumulated depreciation Net carrying amount	Mining structures RMB’000 74,739 (1,946) 72,793 72,793 40 50,882 — (2,253) 121,462 125,661 (4,199) 121,462 125,661 (4,199) 121,462 121,462 85 37,549 — (3,185) 155,911 163,295 (7,384) 155,911	Buildings RMB’000 23,652 (1,723) 21,929 21,929 — 2,053 5,199 (1,298) 27,883 30,904 (3,021) 27,883 30,904 (3,021) 27,883 27,883 20,753 657 — (1,753) 47,540 52,314 (4,774) 47,540	Plant and machinery RMB’000 53,840 (10,798) 43,042 43,042 7,614 8,542 25,087 (6,813) 77,472 95,083 (17,611) 77,472 95,083 (17,611) 77,472 77,472 61,824 5,003 (7) (12,810) 131,482 161,897 (30,415) 131,482	Furniture and fixtures RMB’000 1,382 (485) 897 897 493 — 47 (511) 926 1,922 (996) 926 1,922 (996) 926 926 317 — — (532) 711 2,239 (1,528) 711	Motor vehicles RMB’000 5,382 (1,271) 4,111 4,111 1,619 — — (1,471) 4,259 7,001 (2,742) 4,259 7,001 (2,742) 4,259 4,259 — — (14) (1,664) 2,581 6,951 (4,370) 2,581	Construction in progress RMB’000 34,770 — 34,770 34,770 881 — (30,333) — 5,318 5,318 — 5,318 5,318 — 5,318 5,318 3,135 — — — 8,453 8,453 — 8,453	Total RMB’000 193,765 (16,223
							177,542
							177,542 10,647 61,477 — (12,346
							237,320
							265,889 (28,569
							237,320
							265,889 (28,569
							237,320
							237,320 86,114 43,209 (21 (19,944
							346,678
							395,149 (48,471
							346,678

– II-87 –

APPENDIX II

FINANCIAL INFORMATION ON THE TARGET GROUP

30 September 2010 At 1 January 2010: Cost or valuation Accumulated depreciation Net carrying amount Cost at 1 January 2010, net of accumulated depreciation Additions Owners’ contribution Disposal Transfers Depreciation provided during the period Cost at 30 September 2010, net of accumulated depreciation At 30 September 2010: Cost or valuation Accumulated depreciation Net carrying amount	Mining structures RMB’000 163,295 (7,384) 155,911 155,911 — 253 — 1,328 (4,532) 152,960 164,877 (11,917) 152,960	Buildings RMB’000 52,314 (4,774) 47,540 47,540 29,426 120 (318) 6,109 (2,563) 80,314 87,599 (7,285) 80,314	Plant and machinery RMB’000 161,897 (30,415) 131,482 131,482 18,229 2,923 (2,475) 1,924 (11,987) 140,096 180,623 (40,527) 140,096	Furniture and fixtures RMB’000 2,239 (1,528) 711 711 15 — (62) — (282) 382 2,128 (1,746) 382	Motor vehicles RMB’000 6,951 (4,370) 2,581 2,581 1,342 — — — (1,326) 2,597 8,293 (5,696) 2,597	Construction in progress RMB’000 8,453 — 8,453 8,453 16,912 — (115) (9,361) — 15,889 15,889 — 15,889	Total RMB’000 395,149 (48,471
							346,678
							346,678 65,924 3,296 (2,970 — (20,690
							392,238
							459,409 (67,171
							392,238

During each of the year ended 31 December 2007, 2008 and 2009, and the nine-month period ended 30 September 2010, the owners contributed items of property, plant and equipment which aggregated to RMB74,102,000, RMB61,477,000, RMB43,209,000 and RMB3,296,000, respectively to the Company. As at 31 December 2007, 2008 and 2009, and 30 September 2010, property, plant and equipment with carrying amounts of approximately RMB86,838,000, RMB148,315,000, RMB191,524,000 and RMB194,821,000 were contributed by the owners of the Company.

All the buildings of the Company are located in Mainland China and are erected on land held under medium term leases. As at 30 September 2010, the Company was in the process of applying for the title certificates of certain of its buildings and motor vehicles with an aggregate net carrying amounts of approximately RMB41,400,000. The management is of the opinion that the Company is entitled to lawfully and validly occupy or use the above-mentioned buildings and motor vehicles. The management of the Company is also of the opinion that the aforesaid matter will not have any significant impact on the Company’s financial position as at 30 September 2010.

– II-88 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

11. MINING RIGHTS

The movements in mining rights of the Company during the Relevant Periods are as follows:

Cost at beginning of the year/period, net of accumulated amortisation Addition Amortisation provided during the year/period At end of the year/period At end of the year/period Cost Accumulated amortisation Net carrying amount 12. INVENTORIES Materials and supplies Coal 13. TRADE AND BILLS RECEIVABLES Trade receivables Bills receivable Impairment	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 15,000 14,255 12,278 — — — (745) (1,977) (1,876) 14,255 12,278 10,402 15,000 15,000 15,000 (745) (2,722) (4,598) 14,255 12,278 10,402 As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 11,017 9,867 10,093 11,652 5,168 8,058 22,669 15,035 18,151 As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 4,517 50,479 11,415 — — — (53) (53) (53) 4,464 50,426 11,362	Nine-month period ended 30 September 2010 RMB’000 10,402 102,515 (2,301
		110,616
		117,515 (6,899
		110,616
		As at 30 September 2010 RMB’000 9,680 872
		10,552
		As at 30 September 2010 RMB’000 68,649 19,720 (53
		88,316

The Company normally allows a credit period of not more than three months to its customers. The Company seeks to maintain strict control over its outstanding receivables. Overdue balances are reviewed regularly by senior management. In view of the above credit control, there is no significant concentration of credit risk. Trade and bills receivables are noninterest-bearing, with bills receivables matured within 6–9 months.

Impairment loss of RMB53,000 was recognised by the Company in respect of a trade receivable from a debtor who was in financial difficulty and recoverability of the amount is in doubt.

– II-89 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

An aged analysis of the trade and bills receivables of the Company as at the end of each of the Relevant Periods, based on the invoice date and net of impairment provisions, is as follows:

Within 1 month 1 to 2 months 2 to 3 months 3 to 6 months 6 months to 1 year	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 4,464 50,426 11,362 — — — — — — — — — — — — 4,464 50,426 11,362	As at 30 September 2010 RMB’000 67,035 12,300 720 7,761 500
		88,316

The carrying amounts of the trade and bills receivables approximate to their fair values.

As at the end of each of the Relevant Periods, the Company did not have any past due but not impaired trade and bills receivables. Neither past due nor impaired trade and bills receivables were RMB4,464,000, RMB50,426,000, RMB11,362,000 and RMB88,316,000 as at 31 December 2007, 2008, 2009 and 30 September 2010 respectively. These receivables relate to various customers for whom there was no recent history of default.

14. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Prepayments Deposits and other receivables	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 5,435 7,518 20,522 601 1,754 1,891 6,036 9,272 22,413	As at 30 September 2010 RMB’000 27,244 2,769
		30,013

Past due but not impaired prepayments, deposits and other receivables were nil. The financial assets included in the above balances relate to receivables for which there was no recent history of default.

15. DUE FROM RELATED PARTIES

The amounts due from related parties as at the end of each of the Relevant Periods are set out below:

Notes Mr. Yan Changli (a) Mr. Li Yubao (b) Total	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 4,761 4,978 40,673 445 662 36,357 5,206 5,640 77,030	As at 30 September 2010 RMB’000 22,365 9,463
		31,828

The balances due from related parties are unsecured, interest-free and repayable on demand.

Notes:

(a) Owner and the director of the Company.

(b) Owner of the Company.

– II-90 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

16. CASH AND BANK BALANCES

Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Company, and earn interest at the respective short term time deposit rates. The bank balances are deposited with creditworthy banks with no recent history of default.

17. OTHER PAYABLES AND ACCRUALS

Advances from customers Advances on investments Accruals Others	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 195 — 32,214 — — — 12,148 41,965 40,273 82,721 31,225 18,473 95,064 73,190 90,960	As at 30 September 2010 RMB’000 855 270,000 48,826 53,353
		373,034

Other payables and accruals are unsecured, non-interest-bearing and have no fixed terms of repayment.

18. OTHER BORROWING

The borrowing is obtained from the lender at a fixed annual interest rate of 4.86%. The balance at 30 September 2010 is unsecured, repayable on demand and denominated in RMB. In November 2010, the Company has agreed with the lender to extend the repayment date of such borrowing to 1 July 2012.

19. DEFERRED TAX

The movements in deferred tax assets/(liabilities) during the Relevant Periods are as follows:

At the beginning of the year/period, net Deferred tax credited/(charged) to profit or loss during the year/period (note 8) At the end of the year/period, net	Year 2007 RMB’000 (50) (636) (686)	ended 31 December 2008 2009 RMB’000 RMB’000 (686) 897 1,583 1,941 897 2,838	Nine-month period ended 30 September 2010 RMB’000 2,838 202
			3,040

– II-91 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The principal components of the Company’s deferred tax assets/(liabilities) are as follows:

At 1 January 2007 Credited/(charged) to profit or loss during the year At 31 December 2007 and 1 January 2008 Credited/(charged) to profit or loss during the year At 31 December 2008 and 1 January 2009 Credited/(charged) to profit or loss during the year At 31 December 2009 and 1 January 2010 Charged to profit or loss during the period At 30 September 2010	Accruals of salary and welfare payables RMB’000 — 166 166 1,823 1,989 2,734 4,723 74 4,797	Depreciation and amortisation of non-current assets RMB’000 (50) (802) (852) (240) (1,092) (793) (1,885) 128 (1,757)	Total RMB’000 (50 (636
			(686 1,583
			897 1,941
			2,838 202
			3040

There are no income tax consequences attaching to the payment of dividends by the Company to its owners.

20. PAID-UP CAPITAL

As further detailed in note 1 to the Financial Information, the Company was transformed from Shaoyaogou Coal, a non-corporate entity owned by the local government, into a limited liability company in the PRC on 11 December 2007. Immediately before the transformation, Shaoyaugou Coal’s registered and paid-up capital was RMB2,330,000. When Shaoyaogou Coal was transformed into the Company on 11 December 2007, its registered capital was increased to RMB30,000,000. Additional capital of RMB27,670,000 was paid by the then owners of the Company.

The registered and paid-up capital of the Company as at 31 December 2007, 2008 and 2009 and 30 September 2010 was RMB30,000,000.

21. DIVIDEND

Final dividend paid to owners of the Company for each of the Relevant Periods and the nine-month period ended 30 September 2009 is as follows:

					Nine-month period	Nine-month period
		Year	ended 31 December		ended 30 September
		2007	2008	2009	2009	2010
		RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
					(Unaudited)
Final	dividend	—	120,000	—	—	136,469

22. CONTINGENT LIABILITIES

At the end of each of the Relevant Periods, the Company did not have any significant contingent liabilities.

– II-92 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

23. COMMITMENTS

The Company had the following capital commitments at the end of each of the Relevant Periods:

Contracted, but not provided for: Property, plant and equipment	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 27,145 18,750 11,770	As at 30 September 2010 RMB’000 1,136

24. RELATED PARTY DISCLOSURES

(a) As further set out in note (c) to the statements of changes in equity in Section I of this report, the owners of the Company contributed property, plant and equipment to the Company during each of the Relevant Periods and the nine-month period ended 30 September 2009 and also borne employee benefit expenses on behalf of the Company during the nine-month period ended 30 September 2010.

(b) Balances with related parties

Details of the balances with related parties are disclosed in note 15 to the Financial Information.

(c) Compensation of key management personnel of the Company

Fees Other emoluments: Salaries, allowances and benefits in kind Retirement benefit contributions Total	Year ended 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 — — — 206 268 268 41 54 54 247 322 322	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) — — 202 173 40 35 242 208	Nine-month period ended 30 September 2009 2010 RMB’000 RMB’000 (Unaudited) — — 202 173 40 35 242 208
			208

25. FINANCIAL INSTRUMENTS BY CATEGORY

The Company’s financial assets include only loans and receivables. The carrying amounts of financial assets as at the end of each of the Relevant Periods are as follows:

Trade and bills receivables Financial assets included in prepayments, deposits and other receivables Due from related parties Cash and bank balances	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 4,464 50,426 11,362 601 1,754 1,891 5,206 5,640 77,030 9,506 2,623 36,021 19,777 60,443 126,304	As at 30 September 2010 RMB’000 88,316 2,769 31,828 284,749
		407,662

– II-93 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

The carrying amounts of financial liabilities at amortised cost as at the end of each of the Relevant Periods are as follows:

Financial liabilities included in other payables and accruals Other borrowings	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 82,721 31,225 18,473 — — — 82,721 31,225 18,473	As at 30 September 2010 RMB’000 53,353 102,200
		155,553

26. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Company’s principal financial instruments comprise balances with related parties and cash and bank balances. The main purpose of these financial instruments is to raise finance for the Company’s operations. The Company has various other financial assets and liabilities such as trade and bills receivables and other payables, which arise directly from its operations.

The main risks arising from the Company’s financial instruments are interest rate risk, liquidity risk and credit risk. The management reviews and approves policies for managing each of these risks and they are summarised below:

Interest rate risk

The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s cash and bank balances with floating interest rates.

The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Company’s profit before tax and equity respectively.

		Increase/
		(Decrease)
	Change in basis	in profit	Increase
	interest rate	before tax	in equity
	%	RMB’000	RMB’000
Year ended 31 December 2007	10	19		13
	20	38		26
Year ended 31 December 2008	10	21		16
	20	42		32
Nine-month period ended 30 September 2009
(Unaudited)	10	2		2
	20	4		4
Year ended 31 December 2009	10	6		4
	20	12		8
Nine-month period ended 30 September 2010	10	(44)		(33)
	20	(88)		(66)

– II-94 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Liquidity risk

The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of trade finance facilities. The Company’s financing activities are managed centrally by maintaining an adequate level of cash and bank balances to finance the Company’s operations.

The Company’s cash and bank balances are placed with reputable financial institutions.

The maturity profile of the Company’s financial liabilities included in other payables and accruals at the end of each of the Relevant Periods, based on the contractual undiscounted payments, is as follows:

As at 31 December 2007 As at 31 December 2008 As at 31 December 2009 As at 30 September 2010	On demand RMB’000 73,860 27,684 11,234 40,543	Within 1 year RMB’000 8,861 3,541 7,239 115,010	1 to 5 years RMB’000 — — — —	Over 5 years RMB’000 — — — —	Total RMB’000 82,721 31,225 18,473 155,553

In November 2010, a creditor has agreed to extend the repayment date of a loan due from the Company of RMB102,200,000 as at 30 September 2010 to 1 July 2012.

Credit risk

The Company trades only with recognised and creditworthy third parties. It is the Company’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and the Company’s exposure to bad debts is not significant.

The credit risk of the Company’s other financial assets, which comprise cash and bank balances, amounts due from related parties, and prepayments, deposits and other receivables, arises from default of the counterparty, with a maximum exposure equal to the carrying amounts of these instruments.

Since the Company trades only with recognised and creditworthy third parties, there is no requirement for collateral.

At the end of each of the Relevant Periods, trade and bills receivables from individual external customers which contributed to over 10% of the Company’s total revenue for the Relevant Periods in aggregate, were:

Number of individual external customers with trade and bills receivables which contributed to over 10% of the Company’s total revenue for the year/period Total trade and bills receivables as at the end of year/period from the above customers Percentage to total trade and bills receivables at the year/period end	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 3 3 2 4,464 26,814 9,413 100% 53% 83%	As at 30 September 2010 RMB’000 3 65,996 98%

Save as mentioned in the above table, at the end of each of the Relevant Periods, there was no significant concentration of credit risk.

– II-95 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Capital management

The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Company may adjust the dividend payment to owners, return capital to owners or request additional paid-up capital from the owners. No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods.

The Company monitors capital using a gearing ratio, which is net debt divided by equity plus net debt. Net debt is calculated as other payables and accruals, less cash and bank balances.

The gearing ratios as at the end of each of the Relevant Periods are as follows:

Other payables and accruals Less: Cash and bank balances Net debt Equity Equity and net debt Gearing ratio	As at 31 December 2007 2008 2009 RMB’000 RMB’000 RMB’000 95,064 73,190 90,960 (9,506) (2,623) (36,021) 85,558 70,567 54,939 115,361 227,795 357,593 200,919 298,362 412,532 43% 24% 13%	As at 30 September 2010 RMB’000 373,034 (284,749) 88,285 420,472 508,757 17%

27. EVENT AFTER THE REPORTING PERIOD

(i) In November 2010, a creditor has agreed to extend the repayment date of a loan due from the Company of RMB102,200,000 as at 30 September 2010 to 1 July 2012.
(ii) On 2 December 2010, Haimei, a subsidiary of Triumph, had completed the acquisition of a 95% equity interest in the Company at a consideration of RMB1,830 million, and thereafter, the Company became a subsidiary of Haimei, and Triumph became a holding company of the Company.

28. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Company in respect of any period subsequent to 30 September 2010.

Yours faithfully, Ernst & Young

Certified Public Accountants Hong Kong

– II-96 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

ACCOUNTANTS’ REPORT ON SHANXI SHUOZHOU SHANYIN YOUYI COAL COMPANY LIMITED

9 February 2011

The Directors King Stone Energy Group Limited

Dear Sirs,

We set out below our report on the financial information relating to Shanxi Shuozhou Shanyin Youyi Coal Company Limited (the ‘‘Company’’) for the period from 14 September 2009 (date of reorganisation approval) to 31 December 2009, and the nine-month period ended 30 September 2010 (the ‘‘Relevant Periods’’) and the financial information of the Company for the period from 14 September 2009 (date of reorganisation approval) to 30 September 2009 (the ‘‘30 September 2009 Financial Information’’), prepared on the basis set out in note 2 of Section II below, for inclusion in the circular of King Stone Energy Group Limited (‘‘King Stone’’) dated 9 February 2011 in connection with the proposed acquisition of a 60% equity interest in Triumph Fund A1 Limited (‘‘Triumph’’), a proposed holding company of the Company, by a subsidiary of King Stone.

The Company was proposed to be established as a result of coal mine reorganisation implemented by the Shanxi government of the People’s Republic of China (the ‘‘PRC’’), and the reorganisation in respect of the Company was approved by the Shanxi government on 14 September 2009. However, at the date of this report, the Company still has not yet obtained its business license and hence it is currently an non-corporate entity under pre-operating period. The principal activities of the Company will be mining and the sale of coal.

The Company has adopted 31 December as its financial year end date. The management accounts of the Company were prepared in accordance with the PRC accounting standards and financial regulations. Accordingly, no audited accounts under Hong Kong Financial Reporting Standards (‘‘HKFRSs’’) are available. For the purpose of this report, the management of the Company has prepared the statements of comprehensive income, statements of changes in equity and statements of cash flows of the Company for each of the Relevant Periods, the statements of financial position of the Company as at 31 December 2009 and 30 September 2010, together with the notes thereto, in accordance with HKFRSs (including all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (‘‘HKASs’’) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants (the ‘‘HKICPA’’) (collectively the ‘‘Financial Information’’). No adjustments were made to the Financial Information in preparing this report.

Respective Responsibilities of Management and Reporting Accountants

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APPENDIX II

fair presentation of the Financial Information that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

It is our responsibility to form an independent opinion on the Financial Information for the Relevant Periods and to report our opinion to you.

Procedures Performed in Respect of the Financial Information of the Relevant Periods

For the purpose of this report, we have carried out an independent audit on the financial information of the Company for each of the Relevant Periods and the statements of financial position of the Company as at 31 December 2009 and 30 September 2010, which have been prepared by the management of the Company in accordance with HKFRSs. We conducted our audit in accordance with Hong Kong Standards on Auditing (‘‘HKSAs’’) issued by the HKICPA and carried out such additional procedures as we consider necessary in accordance with Auditing Guideline 3.340 ‘‘Prospectuses and the Reporting Accountant’’ issued by the HKICPA.

Procedures Performed in Respect of the 30 September 2009 Financial Information

For the purpose of this report, we have also performed a review of the 30 September 2009 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 enquires of the Company’s management 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 September 2009 Financial Information.

Opinion in Respect of the Financial Information of the Relevant Periods

Review Conclusion in Respect of the 30 September 2009 Financial Information

Based on our review, nothing has come to our attention that causes us to believe that the 30 September 2009 Financial Information does not give a true and fair view of the results and cash flows of the Company for the period from 14 September 2009 (date of reorganisation approval) to 30 September 2009 in accordance with HKFRSs.

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APPENDIX II FINANCIAL INFORMATION ON THE TARGET GROUP

I. FINANCIAL INFORMATION

Statements of Comprehensive Income

The following is a summary of the statements of comprehensive income of the Company for each of the Relevant Periods and the period from 14 September 2009 (date of reorganisation approval) to 30 September 2009, prepared on the basis set out in note 2 of Section II below:

Note Administrative expenses Finance costs 7 LOSS AND TOTAL COMPREHENSIVE LOSS FOR THE PERIOD, NET OF TAX	From 14 September 2009 (date of reorganisation approval) to 30 September 2009 RMB’000 (Unaudited) (63) — (63)	From 14 September 2009 (date of reorganisation approval) to 31 December 2009 RMB’000 (745) (449) (1,194)	Nine-month period ended 30 September 2010 RMB’000 (4,659) (2,088) (6,747)

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

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APPENDIX II

Statements of Financial Position

The following is a summary of the statements of financial position of the Company as at the end of each of the Relevant Periods, prepared on the basis set out in note 2 of Section II below:

Notes NON-CURRENT ASSETS Property, plant and equipment 9 Mining rights 10 Total non-current assets CURRENT ASSETS Prepayment and other receivables Cash on hand 11 Total current assets CURRENT LIABILITIES Other payables and accruals 12 NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Other payables and accruals 12 Net liabilities EQUITY Accumulated losses	As at 31 December 2009 RMB’000 — 49,260 49,260 — 224 224 13,778 (13,554) 35,706 36,900 (1,194) (1,194)	As at 30 September 2010 RMB’000 26 49,260 49,286 338 113 451 18,691 (18,240) 31,046 38,987 (7,941) (7,941)

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APPENDIX II

Statement of Changes in Equity

The movements in the statement of changes in equity of the Company for each of the Relevant Periods and the period from 14 September 2009 (date of reorganisation approval) to 30 September 2009, prepared on the basis set out in note 2 of Section II below, are as follows:

At 14 September 2009 (date of reorganisation approval) Total comprehensive loss for the period At 31 December 2009 and at 1 January 2010 Total comprehensive loss for the period At 30 September 2010 From 14 September 2009 (date of reorganisation approval) to 30 September 2009 (Unaudited) At 14 September 2009 (date of reorganisation approval) Total comprehensive loss for the period At 30 September 2009	Accumulated losses RMB’000 — (1,194) (1,194) (6,747) (7,941) — (63) (63)	Total equity RMB’000 — (1,194) (1,194) (6,747) (7,941) — (63) (63)

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APPENDIX II FINANCIAL INFORMATION ON THE TARGET GROUP

Statements of Cash Flows

The statements of cash flows of the Company for each of the Relevant Periods and the period from 14 September 2009 (date of reorganisation approval) to 30 September 2009, prepared on the basis set out in note 2 of Section II below, are as follows:

CASH FLOWS FROM OPERATING ACTIVITIES Loss before tax Adjustment for: Finance cost Fixed asset depreciation Increase in prepayment and other receivables Increase in other payables and accruals Net cash flows used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of items of property, plant and equipment Purchase of mining rights Net cash flows used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Increase in other payables and accruals Net cash flows from financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of period CASH AND CASH UIVALENTS AT END OF PERIOD EQUIVALENTS ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash on hand	From 14 September 2009 (date of reorganisation approval) to 30 September 2009 RMB’000 (Unaudited) (63) — (63) — — — (63) — — — 300 300 237 — 237 237	From 14 September 2009 (date of reorganisation approval) to 31 December 2009 RMB’000 (1,194) 449 (745) — — 69 (676) — — — 900 900 224 — 224 224	Nine-month period ended 30 September 2010 RMB’000 (6,747) 2,088 (4,659) 2 (338) 628 (4,367) (28) (12,810) (12,838) 17,094 17,094 (111) 224 113 113

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APPENDIX II

II. NOTES TO THE FINANCIAL INFORMATION

1. CORPORATE INFORMATION AND THE REORGANISATION

The Company is proposed to be established as a result of coal mine reorganisation implemented by the Shanxi government, and the Company’s proposed coal mine reorganisation was approved by the Shanxi government on 14 September 2009. On 3 October 2009, Shanxi Land and Resource Bureau issued a mining right certificate to the Company at a consideration of RMB49 million. However, the Company is currently still pending for its business license to be issued by the Shanxi government.

In order to rationalise the group structure of Triumph for the proposed acquisition by a subsidiary of King Stone, on 26 May 2010, Shanxi Hengming Mining Company Limited (‘‘Hengming’’), a subsidiary of Triumph, completed the acquisition of a 99% equity interest in Shanxi Lvhai Mining Company Limited (‘‘Lvhai’’) and thereafter, both Lvhai and its subsidiary (Shanxi Haimei Mining Company Limited, ‘‘Haimei’’) became subsidiaries of Triumph. As at 30 September 2010, Haimei has an outstanding capital commitment of RMB1,077 million in respect of the acquisition of a 100% equity interest in the Company.

2. BASIS OF PREPARATION

As at 30 September 2010, the Company’s current liabilities exceeded their current assets by RMB18.2 million. However, the management of the Company has prepared the Financial Information on a going concern basis because, as further set out in notes 12 and 18(i) to the Financial Information, in November 2010, Haimei, Mr. Zhu Jinfeng and Mr. Sun Chuntian agreed to extend the repayment dates of the balances due to them by the Company of RMB16.7 million, RMB1.2 million and RMB0.1 million as at 30 September 2010, respectively to 1 July 2012. Further, in November 2010, Haimei has agreed to provide adequate financial support to the Company so as to ensure that the Company is able to meet with its liabilities when fall due in the foreseeable future. Accordingly, the management is of the opinion that the Company shall have adequate financial resources to meet its liabilities as and when they fall due in the foreseeable future.

The Financial Information has been prepared in accordance with HKFRSs and the disclosure requirements of the Hong Kong Companies Ordinance and on a historical cost convention. The Financial Information is presented in Renminbi (‘‘RMB’’) which is the functional and presentation currency of the Company. All values are rounded to the nearest thousand (RMB’000) except when otherwise indicated.

For the purpose of the Financial Information, the Company has adopted at the beginning of the Relevant Periods all the new, revised or amended HKFRSs applicable to the Relevant Periods.

The Company has not applied the following new, revised or amended HKFRSs, that have been issued but not yet effective, in the Financial Information:

HKFRS 1 Amendment	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial
	Reporting Standards — Limited Exemption from Comparative HKFRS 7
	Disclosures for First-time Adopters2
HKFRS 1 Amendment	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial
	Reporting Standards — Severe Hyperinflation and Removal of Fixed Dates
	for First-time Adopters4
HKFRS 7 Amendments	Amendments to HKFRS 7 Financial Instruments: Disclosures — Transfers of
	Financial Assets4
HKFRS 9	Financial Instruments6
Additions to HKFRS 9	Financial Instruments — Financial Liabilities6
HKAS 12 Amendment	Amendments to HKAS 12 Income Taxes — Deferred Tax: Recovery of
	Underlying Assets5
HKAS 24 (Revised)	Related Party Disclosures3
HKAS 32 Amendment	Amendment to HKAS 32 Financial Instruments: Presentation — Classification
	of Rights Issues1
HK(IFRIC)-Int 14 Amendments	Amendments to HK(IFRIC)-Int 14 Prepayments of a Minimum Funding
	Requirement3
HK(IFRIC)-Int 19	Extinguishing Financial Liabilities with Equity Instruments2
Improvements to HKFRSs	Amendments to a number of HKFRSs
(May 2010)

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APPENDIX II

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

2 Effective for annual periods beginning on or after 1 July 2010 3 Effective for annual periods beginning on or after 1 January 2011 4 Effective for annual periods beginning on or after 1 July 2011 5 Effective for annual periods beginning on or after 1 January 2012 6 Effective for annual periods beginning on or after 1 January 2013

The Company is in the process of making an assessment of the impact of these new, revised and amended HKFRSs upon initial application. So far, it has concluded that these new, revised and amended HKFRSs are unlikely to have a significant impact on the Company’s results of operations and financial position.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been consistently applied throughout the Relevant Periods.

Impairment of non-financial assets

An assessment is made at the end of each reporting period as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation) had no impairment loss been recognised for the asset in prior accounting periods. A reversal of such an impairment loss is credited to profit or loss in the period in which it arises.

Related parties

A party is considered to be related to the Company if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Company; (ii) has an interest in the Company that gives it significant influence over the Company; or (iii) has joint control over the Company;
(b) the party is an associate;
(c) the party is a jointly-controlled entity;
(d) the party is a member of the key management personnel of the Company;
(e) the party is a close member of the family of any individual referred to in (a) or (d); or
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e).

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APPENDIX II

Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to profit or loss in the period in which it is incurred. In situations where the recognition criteria are satisfied, the expenditure for major inspection is capitalised in the carrying amount of the asset or as a replacement. Where significant parts of property, plant and equipment are required to be replaced at intervals, the Company recognises such parts as individual assets which specific useful lives and depreciation.

Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The estimated useful life for furniture and fixtures is 3 years and the residual value is 5%.

Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year end.

Mining rights

Financial assets

The Company’s financial assets include cash on hand, prepayment and other receivables.

Loans and receivables

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APPENDIX II

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

. the rights to receive cash flows from the asset have expired; or
. the Company has transferred its rights to receive cash flows from the asset, or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘‘passthrough’’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Impairment of financial assets

Financial assets carried at amortised cost

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APPENDIX II

If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to ‘‘Finance costs’’ in profit or loss.

Financial liabilities at amortised cost

The Company’s financial liabilities within the scope of HKAS 39 include only loans and borrowings. Loans and borrowings are recognised initially at fair value less directly attributable transaction costs. After initial recognition, loans and borrowings are subsequently measured at amortised cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the effective interest rate method amortisation process.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Cash and cash equivalents

For the purpose of the statements of cash flows, the Company’s cash and cash equivalents comprise cash on hand.

Provisions

Income tax

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APPENDIX II

Deferred tax liabilities are provided in full, while deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Retirement benefits

The Company contributes on a monthly basis to a defined contribution retirement scheme organised by the relevant municipal and provincial government in the PRC. The municipal and provincial government undertakes to assume the retirement benefits payable to all existing and future retired employees under this scheme and the Company has no further obligations for post-retirement benefits beyond the contributions made. The contributions to the scheme are charged to profit or loss as they became payable in accordance with the rules of the scheme.

4. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Judgements

Impairment of assets

The Company has to exercise judgement in determining whether an asset is impaired or the event previously causing the asset impairment no longer exists, particularly in assessing: (1) whether an event has occurred that may affect the asset value or such event affecting the asset value has not been in existence; (2) whether the carrying value of an asset can be supported by the net present value of future cash flows which are estimated based upon the continued use of the asset or disposal; and (3) the appropriate key assumptions to be applied in preparing cash flow projections including whether these cash flow projections are discounted using an appropriate rate. Changing the assumptions selected by management to determine the level of impairment, including the discount rates or the growth rate assumptions in the cash flow projections, could materially affect the net present value used in the impairment test.

Estimation uncertainties

Mining rights

Impairment of mining right is made based on an assessment of the recoverable amount of the mining rights. The identification of impairment requires management’s judgements and estimates. Where the actual outcome is different from the original estimate, such differences will impact the carrying value of the mining rights and impairment loss in the period in which such estimate has been changed. The net carrying amount of mining rights as at 31 December 2009 and 30 September 2010 were both RMB49,260,000.

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FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

5. SEGMENT INFORMATION

The Company is still under pre-operating period and has not commenced any business since its reorganisation approval, and no current and non-current assets and liabilities of the Company are located outside Mainland China. Accordingly, reportable segment information as required by HKFRS 8 Operating Segments is not presented.

6. DIRECTORS’ REMUNERATION AND THE FIVE HIGHEST PAID EMPLOYEES

(a) The Company is in the process of establishment and hence did not have any director till the date of this report.

(b) Five highest paid employees

All the five highest paid employees for each of the Relevant Periods and the period from 14 September 2009 (date of reorganisation approval) to 30 September 2009 were non-director employees. Details of their remuneration are as follows:

Salaries, allowances and benefits in kind Retirement benefit contributions	From 14 September 2009 (date of reorganisation approval) to 30 September 2009 RMB’000 (Unaudited) — — —	From 14 September 2009 (date of reorganisation approval) to 31 December 2009 RMB’000 32 6 38	Nine-month Period ended 30 September 2010 RMB’000 248 6
			254

The remuneration of the five non-director, highest paid employees were all fell within the band of Nil to HK$1,000,000 during the Relevant Periods.

During the Relevant Periods and the period from 14 September 2009 (date of reorganisation approval) to 30 September 2009, no remuneration was paid by the Company to the non-director, highest paid employees as an inducement to join or upon joining the Company or as compensation for loss of office.

7. FINANCE COSTS

Imputed interest on interest-free other payables with extended credit periods	From 14 September 2009 (date of reorganisation approval) to 30 September 2009 RMB’000 (Unaudited) —	From 14 September 2009 (date of reorganisation approval) to 31 December 2009 RMB’000 449	Nine-month Period ended 30 September 2010 RMB’000 2,088

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APPENDIX II

8. INCOME TAX EXPENSES

The Company is domiciled and operates in Mainland China, and subject to the PRC enterprise income tax. Under the relevant PRC Corporate Income Tax laws and regulations, the statutory enterprise income tax rate of 25% was applicable to the Company for the Relevant Periods and the period from 14 September 2009 (date of reorganisation approval) to 30 September 2009.

No income tax has been incurred during the Relevant Periods and the period from 14 September 2009 (date of reorganisation approval) to 30 September 2009 because the Company did not have any assessable income during such periods.

Loss before tax Tax at the statutory tax rate Tax losses not recognised Income tax at the effective rate	From 14 September 2009 (date of reorganisation approval) to 30 September 2009 RMB’000 % (Unaudited) (63) (16) 25 16 25 —	From 14 September 2009 (date of reorganisation approval) to 31 December 2009 RMB’000 % (1,194) (299) 25 299 25 —	Nine-month period ended 30 September 2010 RMB’000 % (6,747) (1,687) 25 1,687 25 —

As at 31 December 2009, 30 September 2009 and 2010, deferred tax assets have not been recognised by the Company in respect of unused tax losses amounting to RMB1,194,000, RMB63,000 (Unaudited) and RMB7,941,000 respectively. Deferred tax assets have not been recognised for such tax losses as it is not considered probable that taxable profit will be available against which such tax losses can be utilised.

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APPENDIX II

9. PROPERTY, PLANT AND EQUIPMENT

The movements in furniture and fixtures of the Company for the Relevant Periods and the period from 14 September (date of reorganisation approval) to 30 September 2009 are as follows:

Cost at beginning of the period, net of accumulated depreciation Additions Depreciation At end of the period, net of accumulated depreciation At end of the period: Cost Accumulated depreciation Net carrying amount	From 14 September 2009 (date of reorganisation approval) to 30 September 2009 RMB’000 (Unaudited) — — — — — — —	From 14 September 2009 (date of reorganisation approval) to 31 December 2009 RMB’000 — — — — — — —	Nine-month period ended 30 September 2010 RMB’000 — 28 (2
			26
			28 (2
			26

10. MINING RIGHTS

The movements in mining rights of the Company for each of the Relevant Periods and the period from 14 September 2009 (date of reorganisation approval) to 30 September 2009 are as follows:

Cost at beginning of period Additions At end of period	From 14 September 2009 (date of reorganisation approval) to 30 September 2009 RMB’000 (Unaudited) — — —	From 14 September 2009 (date of reorganisation approval) to 31 December 2009 RMB’000 — 49,260 49,260	Nine-month period ended 30 September 2010 RMB’000 49,260 —
			49,260

No amortisation has been made for the mining rights since the Company has not yet started mining operations.

11. CASH ON HAND

The Company’s cash on hand is all denominated in RMB. The RMB is not freely convertible into other currencies. However, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Company is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

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APPENDIX II

12. OTHER PAYABLES AND ACCRUALS

Current portion Loans from third parties — Haimei — Mr. Zhu Jinfeng — Mr. Sun Chuntian Accruals Payable for purchase of mining rights Non-current portion Payable for purchase of mining rights	As at 31 December 2009 RMB’000 — 900 — 68 12,810 13,778 36,900	As at 30 September 2010 RMB’000 16,682 1,212 100 697 —
		18,691
		38,987

Loans from third parties are unsecured, interest-free and are repayable on demand. Subsequent to the end of the Relevant Periods, in November 2010, Haimei, Mr. Zhu Jinfeng and Mr. Sun Chuntian have agreed to extend the repayment dates of the balances due to them by the Company of RMB13.5 million, RMB1.2 million and RMB0.1 million as at 30 September 2010, respectively, to 1 July 2012.

13. CONTINGENT LIABILITIES

At the end of each of the Relevant Periods, the Company did not have any significant contingent liabilities.

14. COMMITMENTS

The Company had the following capital commitments at the end of each of the Relevant Periods:

Contracted, but not provided for: Property, plant and equipment	As at 31 December 2009 RMB’000 —	As at 30 September 2010 RMB’000 1,975

15. RELATED PARTY DISCLOSURES

During each of the Relevant Periods and the period from 14 September 2009 (date of reorganisation approval) to 30 September 2009, the Company did not have any related party transactions or balances.

16. FINANCIAL INSTRUMENTS BY CATEGORY

As at the end of each of the Relevant Periods, the financial assets and financial liabilities of the Company were cash, receivables and financial liabilities stated at amortised costs, respectively.

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APPENDIX II

The carrying amounts of financial assets as at the end of each of the Relevant Periods are as follows:

Financial assets included in prepayment and other receivables Cash on hand	As at 31 December 2009 RMB’000 — 224 224	As at 30 September 2010 RMB’000 338 113
		451

The carrying amounts of financial liabilities at amortised cost as at the end of each of the Relevant Periods are as follows:

Financial liabilities included in other payables	As at 31 December 2009 RMB’000 900	As at 30 September 2010 RMB’000 17,994

17. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Company’s principal financial instruments comprise cash on hand. The main purpose of these financial instruments is to raise finance for the Company’s future operations. The Company has various other financial assets and liabilities such as other receivables and other payables, which arise directly from its operations.

The main risk arising from the Company’s financial instruments is liquidity risk. The management of the Company reviews and approves policies for managing such risk and they are summarised below:

Liquidity risk

The Company’s objective is to maintain a balance between continuity of funding and flexibility through the loans from third parties. The Company’s financing activities are managed centrally by maintaining an adequate level of cash on hand to finance the Company’s operations.

The maturity profile of the Company’s financial liabilities at the end of each of the Relevant Periods, based on the contractual undiscounted payments, is as follows:

As at 31 December 2009 Other payables and accruals As at 30 September 2010 Other payables and accruals	On demand RMB’000 900 17,994	Within 1 year RMB’000 — —	1 to 5 years RMB’000 — —	Over 5 years RMB’000 — —	Total RMB’000 900
					17,994

Subsequent to 30 September 2010, in November 2010, Haimei, Mr. Zhu Jinfeng and Mr. Sun Chuntian have agreed to extend the repayment dates of the amounts due to them by the Company of RMB16.7 million, RMB1.2 million and RMB0.1 million as at 30 September 2010, respectively, to 1 July 2012. Further, Haimei has agreed to provide adequate financial support to the Company so as to ensure that the Company is able to meet with its liabilities when fall due in the foreseeable future.

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APPENDIX II

Capital management

The primary objectives of the Company’s capital management are to safeguard the Company’s ability to continue as a going concern and to maintain healthy capital ratios in order to support business and maximise equity holders’ value.

The Company has not yet been established at the date of this report, and hence it depends on funding and financial support from its owners to manage its capital structure.

18. EVENT AFTER THE REPORTING PERIODS

In November 2010, Haimei, Mr. Zhu Jinfeng and Mr. Sun Chuntian have agreed to extend the repayment dates of the balances due to them by the Company of RMB16.7 million, RMB1.2 million and RMB0.1 million as at 30 September 2010, respectively, to 1 July 2012. Further, Haimei has agreed to provide adequate financial support to the Company so as to ensure that the Company is able to meet with its liabilities when fall due in the foreseeable future.

19. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Company in respect of any period subsequent to 30 September 2010.

Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong

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APPENDIX II

6. MANAGEMENT DISCUSSION AND ANALYSIS ON SHAOYAOHUA

Set out below is the management discussion and analysis on Shaoyaohua, for each of the three financial years ended 31 December 2009 and the nine months ended 30 September 2010:

Business review and financial performance

The principal activity of Shaoyaohua is the mining of long flame coal and gas coal which can be used for power generation and coking respectively.

Revenue

For the three financial years ended 31 December 2007, 2008 and 2009 and for the nine months ended 30 September 2010, Shaoyaohua recorded revenue of approximately RMB73.3 million, approximately RMB412.4 million, approximately RMB270.2 million and approximately RMB443.1 million respectively.

Shaoyaohua’s revenue decreased by approximately 34% from 2008 to 2009. Such decrease was mainly due to the fact that in December 2008, a serious mine disaster occurred in Shanyin County (山陰縣青楊嶺礦難, of which at least 30 people died in that mine disaster), under the request by Shanyin local government, all mines in Shanyin County have to cease production for rectification for the period from February 2009 to May 2009. As Shaoyaohua operated for only 8 months in 2009 and a decrease in average selling price, revenue for year 2009 decreased by 34% as compared to year 2008.

Cost of sales

For the three financial years ended 31 December 2007, 2008 and 2009 and for the nine months ended 30 September 2010, Shaoyaohua recorded cost of sales of approximately RMB46.0 million, approximately RMB132.4 million, approximately RMB110.7 million and approximately RMB147.9 million respectively.

For the three financial years ended 31 December 2007, 2008 and 2009 and for the nine months ended 30 September 2010, Shaoyaohua recorded gross profit of approximately RMB27.3 million, approximately RMB279.9 million, approximately RMB159.6 million and approximately RMB295.2 million, respectively.

From the beginning of year 2008, local government put more emphasis on supervising and managing the safety in production of mines (as a measure to welcome the Beijing Olympic Games). As a result, a lot of small coal pits were closed and coal mines with potential safety hazards had to cease production for rectification. As the Company was one of the few coal mines allowed by the local government to continue production, market demand for the Company’s coal kept increasing which led the quantity and the average unit selling price of coal were both higher than other years/periods of the Relevant Periods. In 2009, more and more coal mines had rectified their safety hazards and the market demand for coals decreased after the Beijing Olympic Games, both the quantity and average unit selling price resumed to normal.

– II-115 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Other income and gains

For the three financial years ended 31 December 2007, 2008 and 2009 and for the nine months ended 30 September 2010, Shaoyaohua recorded bank interest income of approximately RMB0.19 million, approximately RMB0.21 million, approximately RMB58,000 and approximately RMB41,000 respectively.

For the financial years ended 31 December 2007 and 2009 and for the nine months ended 30 September 2010, Shaoyaohua recorded gain on disposal of items of property, plant and equipment of approximately RMB43,000, approximately RMB19,000 and approximately RMB39,000 respectively. For the financial year ended 31 December 2008, Shaoyaohua recorded no gain on disposal of items of property, plant and equipment.

Selling and distribution costs

For the three financial years ended 31 December 2007, 2008 and 2009 and for the nine months ended 30 September 2010, Shaoyaohua recorded selling and distribution costs of approximately RMB2.1 million, approximately RMB3.3 million, approximately RMB2.9 million and approximately RMB6.9 million respectively.

Administrative expenses

For the three financial years ended 31 December 2007, 2008 and 2009 and for the nine months ended 30 September 2010, Shaoyaohua recorded administrative expenses of approximately RMB15.9 million, approximately RMB28.1 million, approximately RMB26.4 million and approximately RMB32.9 million respectively.

Finance costs

For the nine months ended 30 September 2010, Shaoyaohua recorded finance costs of approximately RMB0.48 million. For the three financial years ended 31 December 2007, 2008 and 2009, Shaoyaohua recorded no finance costs.

Income tax expenses

For the three financial years ended 31 December 2007, 2008 and 2009 and for the nine months ended 30 September 2010, Shaoyaohua recorded income tax expense of approximately RMB4.1 million, approximately RMB62.5 million, approximately RMB32.9 million and approximately RMB64.5 million respectively.

Profit after tax and total comprehensive income

For the three financial years ended 31 December 2007, 2008 and 2009 and for the nine months ended 30 September 2010, Shaoyaohua recorded profit after tax and total comprehensive income of approximately RMB5.4 million, approximately RMB186.3 million, approximately RMB97.4 million and approximately RMB190.6 million respectively.

– II-116 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Financial position

Liquidity and financial resources

During the three financial years ended 31 December 2007, 2008 and 2009 and the nine months ended 30 September 2010, the principal source of liquidity of Shaoyaohua was cash generated from operations.

As at 30 September 2010, Shaoyaohua had an outstanding unsecured borrowing of approximately RMB102.2 million.

As at 31 December 2007, 2008 and 2009 and as at 30 September 2010, the cash balances of Shaoyaohua were approximately RMB9.5 million, approximately RMB2.6 million, approximately RMB36.0 million and approximately RMB284.7 million respectively.

Charges on assets

As at 31 December 2007, 2008 and 2009 and as at 30 September 2010, Shaoyaohua did not pledge any assets respectively.

Net current assets/liabilities

As at 31 December 2007, 2008 and 2009 and as at 30 September 2010, Shaoyaohua had net current liabilities of approximately RMB85.6 million, approximately RMB83.9 million, approximately RMB28.1 million and approximately RMB92.5 million respectively.

Gearing ratio

As at 31 December 2007, 2008 and 2009 and as at 30 September 2010, the gearing ratios of Shaoyaohua (calculated as a percentage on Shaoyaohua’s total debt divided by Shaoyaohua’s total shareholders’ equity) were 0%, 0%, 0% and 24.3%.

Material acquisitions and disposals of subsidiaries and associated companies

Shaoyaohua had not made any material acquisition and disposal of subsidiaries and affiliated companies during the three financial years ended 31 December 2007, 2008 and 2009 and the nine months ended 30 September 2010.

Future plans for material investments

Shaoyaohua had no solid plan on future investments.

Significant investment held

Shaoyaohua had not made any significant investment during the three financial years ended 31 December 2007, 2008 and 2009 and for the nine months ended 30 September 2010.

– II-117 –

FINANCIAL INFORMATION ON THE TARGET GROUP

APPENDIX II

Contingent liabilities

As at 31 December 2007, 2008 and 2009 and as at 30 September 2010, Shaoyaohua had no contingent liabilities.

Capital structure

The capital structures of Shaoyaohua as at 31 December 2007, 2008 and 2009, and as at 30 September 2010, consisted of shareholders’ equity of approximately RMB115.4 million, approximately RMB227.8 million, approximately RMB357.6 million and approximately RMB420.5 million.

Capital commitment

The capital commitments of Shaoyaohua in respect of acquisition of property, plant and equipment as at 31 December 2007, 2008 and 2009, and as at 30 September 2010 were approximately RMB27.1 million, approximately RMB18.8 million, approximately RMB11.8 million and approximately RMB1.1 million.

Exchange risk and hedging

As most of Shaoyaohua’s transactions, assets and liabilities were denominated in RMB, the operations of Shaoyaohua were not subject to significant exchange risk. Accordingly, no financial instruments for hedging purposes were used by Shaoyaohua during the three financial years ended 31 December 2007, 2008 and 2009 and the nine months ended 2010.

Staff and remuneration policies

For the three financial years ended 31 December 2007, 2008 and 2009 and for the nine months ended 30 September 2010, total staff costs (including retirement benefit contributions and a director’s remuneration) of Shaoyaohua were approximately RMB7.7 million, approximately RMB27.4 million, approximately RMB31.7 million and approximately RMB249.2 million respectively.

7. MANAGEMENT DISCUSSION AND ANALYSIS ON YOUYI

Youyi is a company to be established in the PRC with limited liability and has not commenced any operation.

8. EMPLOYEES OF SHAOYAOHUA AND YOUYI

As at 31 December 2007, 31 December 2008, 31 December 2009 and 30 September 2010, the numbers of employees of Shaoyaohua were 280, 900, 900 and 850, respectively.

As at 31 December 2007, 31 December 2008, 31 December 2009 and 30 September 2010, the numbers of employees of Youyi were nil, nil, 24 and 55, respectively.

– II-118 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

A. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

1. Introduction

The accompanying unaudited pro forma financial information of the Enlarged Group (as defined in this circular), comprising the unaudited pro forma statements of comprehensive income and cash flows of the Enlarged Group for the year ended 31 December 2009 and the unaudited pro forma statement of financial position of the Enlarged Group as at 31 December 2009, has been prepared by the Directors (as defined in this circular) in accordance with rule 4.29 of The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, for illustrative purposes only, to provide information about how the Acquisition (as defined in this circular) as detailed in the section headed ‘‘Letter from the Board’’ in this circular might have affected the results of operations, financial position and cash flows of the Group (as defined in this circular) as if (i) the acquisitions of the respective 95% and 100% equity interests of Shaoyaohua (as defined in this circular) and Youyi (as defined in this circular) by Haimei (as defined in this circular); (ii) the acquisition of 99% equity interest of Haimei by Lvhai (as defined in this circular); (iii) the acquisition of 99% equity interest of Lvhai by Hengming (as defined in this circular); and (iv) the Acquisition, had all been completed on 1 January 2009 in respect of the unaudited pro forma statements of comprehensive income and cash flows of the Enlarged Group; and (i) the acquisitions of the respective 95% and 100% equity interests of Shaoyaohua and Youyi by Haimei; (ii) the acquisition of 99% equity interest of Haimei by Lvhai; (iii) the acquisition of 99% equity interest of Lvhai by Hengming; and (iv) the Acquisition, had all been completed on 31 December 2009 in respect of the unaudited pro forma statement of financial position of the Enlarged Group.

The unaudited pro forma financial information of the Enlarged Group has been prepared 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 2009 and the audited consolidated statement of financial position of the Group as at 31 December 2009 as set out in Appendix I to this circular and the audited financial information of the Triumph Group, Lvhai, Haimei, Shaoyaohua and Youyi as set out in the accountants’ reports in Appendices II-1 to II-5 to this circular, respectively, after giving effect to the pro forma adjustments described in the accompanying notes. Narrative descriptions of the pro forma adjustments that are (i) directly attributable to the transactions; (ii) expected to have a continuing impact on the Enlarged Group; and (iii) factually supportable, are 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 proposed Acquisition been completed on the dates indicated herein. 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 or cash flows.

– III-1 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

The unaudited pro forma financial information of the Enlarged Group should be read in conjunction with the audited financial information of the Group for the year ended 31 December 2009 as set out in Appendix I to this circular and the audited financial information of the Triumph Group, Lvhai, Haimei, Shaoyaohua and Youyi for the year/period ended 31 December 2009 as set out in Appendices II-1 to II-5 to this circular, and other financial information included elsewhere in this circular.

Pursuant to the Acquisition Agreement (as defined in this circular), the Purchaser (as defined in this circular) has conditionally agreed to acquire 60% equity interest in Triumph at an aggregate consideration of HK$3,540,000,000 (subject to adjustment). Among others, the proposed Acquisition is conditional on the completion of the proposed acquisitions of the respective 95% and 100% equity interests of Shaoyaohua and Youyi by Haimei and thereafter, Triumph will be holding 100%, 99%, 99%, 95% and 100% equity interests in Hengming, Lvhai, Haimei, Shaoyaohua and Youyi, respectively.

In accordance with the Acquisition Agreement, part of the Consideration (as defined in this circular) shall be payable by way of issue of the 1st Tranche Convertible Bonds (as defined in this circular) and the 2nd Tranche Convertible Bonds (as defined in this circular) (collectively the ‘‘Convertible Bonds’’) by the Company to the Vendor or its nominee on the Acquisition Completion (as defined in this circular). The share conversion feature of such financial instruments constitutes an embedded derivative which requires bifurcation from the host contract under Hong Kong Accounting Standard (‘‘HKAS’’) 39 Financial Instruments: Recognition and Measurement issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’). At the date of issue, the fair values of the derivative and the host contract shall be assessed, of which the fair value of the derivative portion will be credited as an equity component of the Company and the fair value of the host contract be credited as a liability. For the purpose of this unaudited pro forma financial information of the Enlarged Group, the Directors (as defined in this circular) had assumed that the face values of the Convertible Bonds approximate to the aggregate fair values of the derivatives and the host contracts on the date of issue and the fair values of the host contracts are measured first using a 8.5% market rate for an equivalent non-convertible financial instrument. Accordingly, the fair values of the derivatives are the residual amounts of the face values of the Convertible Bonds after taking out the discounted cash flows of the host contracts.

In accordance with the Acquisition Agreement, the Consideration will be adjusted by the extent of fulfillment of the Profit Guarantee (as defined in this circular) within the Profit Guarantee Period (as defined in this circular). For the purpose of this unaudited pro forma financial information of the Enlarged Group, it is assumed that the Consideration will not be adjusted, thus, all the 2nd Tranche Convertible Bonds will be issued. The possible adjustment on the Consideration was not reflected in this unaudited pro forma financial information of the Enlarged Group.

Further, for the purpose of this unaudited pro forma financial information of the Enlarged Group, in the opinion of the Directors, the Target Group’s fair value of the assets and liabilities being acquired is subject to changes upon completion of the proposed Acquisition because the fair value of the Target 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

– III-2 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

prepared solely for illustrative purposes, the Directors had assumed the fair values of the mining rights as at 31 October 2010, as assessed by independent valuers on 31 December 2010, were the fair values of the mining rights as at the completion date, and the fair value of other assets and liabilities of the Target Group to be their respective carrying values. The possible changes to fair value of other assets and liabilities of the Target Group being acquired were not reflected in the unaudited pro forma financial information of the Enlarged Group.

In addition to the Acquisition, a Call Option (as defined in this circular) was granted by the Vendor to the Purchaser pursuant to which the Purchaser will be entitled to acquire the remaining 40% equity interest in Triumph, in whole or in part, for an aggregate consideration of HK$2,360,000,000 (subject to adjustment).

The fair value of the Call Option is to be assessed on the date of grant and to be accounted for as a derivative financial asset in accordance with HKAS 32 Financial Instruments: Presentation issued by the HKICPA. Further, subsequent gains or losses on changes in fair value of the Call Option shall be recognised in the statement of comprehensive income of the Company. This unaudited pro forma financial information of the Enlarged Group is prepared by the Directors on the basis without taking into account the fair value of the Call Option and its subsequent change in fair value.

– III-3 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

		Pro Forma	Enlarged	Group	HK$’000		396,768	(259,274)	137,494	266,314	(14,949)	(1,053,831)	11,450	(9,091)	(51,463)	(7,800)	(38,221)		(760,097)	(24,670)	(784,767)				(2)		(6,910)		(6,912)	(791,679)		(767,858)	(16,909)	(784,767)			(774,770)	(16,909)	(791,679)
					Notes			10(i)		7						8(i)	8(i)	8(iv)		10(i)
			Pro Forma	Adjustments	HK$’000			(50,657)		266,314						(7,800)	(15,276)	(20,948)		12,664
			Pro forma	combined	HK$’000		396,768	(208,617)	188,151	—	(14,949)	(1,053,831)	11,450	(9,091)	(51,463)	—	(1,997)		(931,730)	(37,334)	(969,064)				(2)		(6,910)		(6,912)	(975,976)		(968,923)	(141)	(969,064)			(975,835)	(141)	(975,976)
Youyi	From 14 September 2009	(date of reorganisation	approval) to	31 December 2009	RMB’000 HK$’000	(Note (6)) (Note (6))	— —	— —	— —	— —	— —	— —	— —	— —	(745) (849)	— —	(449) (512)		(1,194) (1,361)	— —	(1,194) (1,361)				— —		— —		— —	(1,194) (1,361)		(1,194) (1,361)	— —	(1,194) (1,361)			(1,194) (1,361)	— —	(1,194) (1,361)
		Shaoyaohua	For the year ended	31 December 2009	RMB’000 HK$’000	(Note (5)) (Note (5))	270,226 308,058	(110,673) (126,167)	159,553 181,891	— —	— —	— —	81 92	(2,947) (3,360)	(26,405) (30,102)	— —	— —		130,282 148,521	(32,889) (37,493)	97,393 111,028				— —		— —		— —	97,393 111,028		97,393 111,028	— —	97,393 111,028			97,393 111,028	— —	97,393 111,028
		Haimei	For the year ended	31 December 2009	RMB’000 HK$’000	(Note (4)) (Note (4))	— —	— —	— —	— —	— —	— —	— —	— —	(3) (3)	— —	— —		(3) (3)	— —	(3) (3)				— —		— —		— —	(3) (3)		(3) (3)	— —	(3) (3)			(3) (3)	— —	(3) (3)
		Lvhai	For the year ended	31 December 2009	RMB’000 HK$’000	(Note (3)) (Note (3))	— —	— —	— —	— —	— —	— —	— —	— —	(14) (16)	— —	— —		(14) (16)	— —	(14) (16)				— —		— —		— —	(14) (16)		(14) (16)	— —	(14) (16)			(14) (16)	— —	(14) (16)
	The Triumph Group	From 16 June 2009	(date of incorporation) to	31 December 2009	RMB’000 HK$’000	(Note (2)) (Note (2))	— —	— —	— —	— —	— —	— —	— —	— —	(46) (52)	— —	— —		(46) (52)	— —	(46) (52)				— —		— —		— —	(46) (52)		(46) (52)	— —	(46) (52)			(46) (52)	— —	(46) (52)
The Group	For the year	ended	31 December	2009	HK$’000	(Note (1))	88,710	(82,450)	6,260	—	(14,949)	(1,053,831)	11,358	(5,731)	(20,441)	—	(1,485)		(1,078,819)	159	(1,078,660)				(2)		(6,910)		(6,912)	(1,085,572)		(1,078,519)	(141)	(1,078,660)			(1,085,431)	(141)	(1,085,572)
							Revenue	Cost of sales	Gross profit	Gain in a bargain purchase	Impairment of goodwill	Fair value loss of convertible notes	Other income and gains	Selling and distribution costs	Administrative expenses	Other expenses	Finance costs		Profit/(loss) before tax	Income tax	Profit/(loss) for the year/period	OTHER COMPREHENSIVE LOSS	Exchange difference on translation of foreign	operations:	— decrease for the year/period	— reclassification adjustment on disposal of	subsidiaries	Other comprehensive income/(loss) for the year/period,	net of tax	Total comprehensive income/(loss) for the year/period	Profit/(loss) for the year/period attributable to	Owners of the Company	Non-controlling interests		Total comprehensive income/(loss) for the year/	period attributable to:	Owners of the Company	Non-controlling interests

– III-4 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

	Pro Forma	Enlarged	Group	HK$’000				1,247,028	12,416	7,893,468		262,608	3,235	9,418,755		1,770,878	27,460	47,551	113,931	98,852	(625,449)					1,433,223			25,558	271,506	56,790	116,474	151,611	41	15,276	179,724	816,980	616,243	10,034,998
				Notes						10(i)	10(i)					10(iii)					8(i)	8(i)	8(i)	8(ii)	8(ii)										8(i)	8(i)
		Pro Forma	Adjustments	HK$’000						3,490,222	1,950,244					1,770,878					195,000	(7,800)	(180,000)	203,000	(1,020,024)										15,276	179,724
		Pro forma	combined	HK$’000				1,247,028	12,416	2,453,002		262,608	3,235	3,978,289		—	27,460	47,551	113,931	98,852	184,375					472,169			25,558	271,506	56,790	116,474	151,611	41	—	—	621,980	(149,811)	3,828,478
		Youyi	As at 31 December 2009	RMB’000 HK$’000	(Note (6)) (Note (6))			— —	— —	49,260 56,156		— —	— —	49,260 56,156		— —	— —	— —	— —	— —	224 255					224 255			— —	13,778 15,707	— —	— —	— —	— —	— —	— —	13,778 15,707	(13,554) (15,452)	35,706 40,704
		Shaoyaohua	As at 31 December 2009	RMB’000 HK$’000	(Note (5)) (Note (5))			346,678 395,213	— —	10,402 11,858		25,824 29,439	2,838 3,235	385,742 439,745		— —	18,151 20,692	11,362 12,953	22,413 25,551	77,030 87,814	36,021 41,064					164,977 188,074			— —	90,960 103,694	— —	102,166 116,469	— —	— —	— —	— —	193,126 220,163	(28,149) (32,089)	357,593 407,656
		Haimei	As at 31 December 2009	RMB’000 HK$’000	(Note (4)) (Note (4))			— —	— —	— —		— —	— —	— —		— —	— —	— —	3,000 3,420	— —	1 1					3,001 3,421			— —	61 70	— —	— —	— —	— —	— —	— —	61 70	2,940 3,351	2,940 3,351
		Lvhai	As at 31 December 2009	RMB’000 HK$’000	(Note (3)) (Note (3))			— —	— —	— —		— —	— —	— —		— —	— —	— —	967 1,102	9,000 10,260	27 31					9,994 11,393			— —	31 35	— —	— —	— —	— —	— —	— —	31 35	9,963 11,358	9,963 11,358
		The Triumph Group	As at 31 December 2009	RMB’000 HK$’000	(Note (2)) (Note (2))			— —	— —	— —		— —	— —	— —		— —	— —	— —	— —	295 336	— —					295 336			— —	— —	— —	— —	— —	— —	— —	— —	— —	295 336	295 336
The Group	As at	31 December	2009	HK$’000	(Note (1))			851,815	12,416	2,384,988		233,169	—	3,482,388		—	6,768	34,598	83,858	442	143,024					268,690			25,558	152,000	56,790	5	151,611	41	—	—	386,005	(117,315)	3,365,073
						ASSETS	Non-current assets	Property, plant and equipment	Prepaid land premium	Mining rights		Prepayments	Deferred tax assets	Total non-current assets	Current assets	An indemnification asset	Inventories	Trade and bills receivables	Prepayments, deposits and other receivables	Due from related parties	Cash and bank balances					Total current assets	LIABILITIES	Current liabilities	Trade and bills payables	Other payables and accruals	Interest-bearing bank borrowings	Tax payables	Due to related parties	Due to directors	Derivative liabilities	Convertible notes	Total current liabilities	Net current liabilities	Total assets less current liabilities

– III-5 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

	Pro Forma	Enlarged	Group	HK$’000			77,392	1,019,970	851,850	2,657,443	1,924,181		6,530,836	3,504,162				134,810			618,586						753,396	2,750,766	3,504,162
				Notes				8(v)		8(iv)	10(i)	10(i)						8(ii)	8(iii)	11	7	8(i)	8(ii)	8(iii)	8(iv)	11		11
		Pro Forma	Adjustments	HK$’000				1,019,970		246,443	872,556	487,561						10,000	47,472	(49,407)	266,314	(7,800)	193,000	697,838	124,123	(371,932)		2,670,382
		Pro forma	combined	HK$’000			77,392	—	851,850	2,411,000	564,064		3,904,306	(75,828)				126,745			(282,957)						(156,212)	80,384	(75,828)
		Youyi	As at 31 December 2009	RMB’000 HK$’000	(Note (6)) (Note (6))		36,900 42,066	— —	— —	— —	— —		36,900 42,066	(1,194) (1,362)				— —			(1,194) (1,362)						(1,194) (1,362)	—	(1,194) (1,362)
		Shaoyaohua	As at 31 December 2009	RMB’000 HK$’000	(Note (5)) (Note (5))		— —	— —	— —	— —	— —		— —	357,593 407,656				30,000 34,200			327,593 373,456						357,593 407,656	— —	357,593 407,656
		Haimei	As at 31 December 2009	RMB’000 HK$’000	(Note (4)) (Note (4))		— —	— —	— —	— —	— —		— —	2,940 3,351				3,000 3,419			(60) (68)						2,940 3,351	— —	2,940 3,351
		Lvhai	As at 31 December 2009	RMB’000 HK$’000	(Note (3)) (Note (3))		— —	— —	— —	— —	— —		— —	9,963 11,358				10,000 11,400			(37) (42)						9,963 11,358	— —	9,963 11,358
		The Triumph Group	As at 31 December 2009	RMB’000 HK$’000	(Note (2)) (Note (2))		— —	— —	— —	— —	— —		— —	295 336				341 388			(46) (52)						295 336	— —	295 336
The Group	As at	31 December	2009	HK$’000	(Note (1))		35,326	—	851,850	2,411,000	564,064		3,862,240	(497,167)				77,338			(654,889)						(577,551)	80,384	(497,167)
						Non-current liabilities	Other payables and accruals	Contingent consideration payables	Interest-bearing bank borrowings	Convertible notes	Deferred tax liabilities		Total non-current liabilities	Net assets/(liability)	EQUITY	Equity attributable to equity holders of	the Company	Issued capital			Reserves							Non-controlling interests	Total equity

– III-6 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

		Pro Forma	Enlarged	Group	HK$’000			(760,097)						38,221		(615)		(22)	(6,262)	1,053,831	23,928	21	52,988	14,949	(161)	(3,985)	7,800	(266,314)	154,282	72,838		(15,057)	10,596	30,151	52	(5,401)	41	46,164	(95,901)	197,765	(1,485)	(41,415)	154,865
					Notes			7	8(i)	8(i)	8(iv)	10(i)		8(i)	8(iv)								10(i)				8(i)	7
			Pro Forma	Adjustments	HK$’000			266,314	(7,800)	(15,276)	(20,948)	(50,657)		15,276	20,948								50,657				7,800	(266,314)
			Pro forma	combined	HK$’000			(931,730)						1,997		(615)		(22)	(6,262)	1,053,831	23,928	21	2,331	14,949	(161)	(3,985)	—	—	154,282	72,838		(15,057)	10,596	30,151	52	(5,401)	41	46,164	(95,901)	197,765	(1,485)	(41,415)	154,865
Youyi	From 14 September 2009	(date of reorganisation	approval) to	31 December 2009	RMB’000 HK$’000	(Note (6)) (Note (6))		(1,194) (1,361)						449 512		— —		— —	— —	— —	— —	— —	— —	— —	— —	— —	— —	— —	(745) (849)	— —		— —	— —	— —	— —	— —	— —	69 78	— —	(676) (771)	— —	— —	(676) (771)
		Shaoyaohua	For the year ended	31 December 2009	RMB’000 HK$’000	(Note (5)) (Note (5))		130,282 148,521						— —		(58) (66)		(19) (22)	— —	— —	19,944 22,736	— —	1,876 2,139	— —	— —	— —	— —	— —	152,025 173,308	39,064 44,533		(13,141) (14,981)	(3,116) (3,552)	— —	— —	— —	— —	30,453 34,717	— —	205,285 234,025	— —	(37,201) (42,409)	168,084 191,616
		Haimei	For the year ended	31 December 2009	RMB’000 HK$’000	(Note (4)) (Note (4))		(3) (3)						— —		— —		— —	— —	— —	— —	— —	— —	— —	— —	— —	— —	— —	(3) (3)	— —		6 7	— —	— —	— —	— —	— —	(5) (6)	— —	(2) (2)	— —	— —	(2) (2)
		Lvhai	For the year ended	31 December 2009	RMB’000 HK$’000	(Note (3)) (Note (3))		(14) (16)						— —		— —		— —	— —	— —	— —	— —	— —	— —	— —	— —	— —	— —	(14) (16)	— —		— —	— —	— —	— —	— —	— —	— —	—	(14) (16)	— —	— —	(14) (16)
	The Triumph Group	From 16 June 2009	(date of incorporation) to	31 December 2009	RMB’000 HK$’000	(Note (2)) (Note (2))		(46) (52)						— —		— —		— —	— —	— —	— —	— —	— —	— —	— —	— —	— —	— —	(46) (52)	— —		— —	— —	— —	46 52	— —	— —	— —	— —	— —	— —	— —	— —
The Group	For the year	ended	31 December	2009	HK$’000	(Note (1))		(1,078,819)						1,485		(549)		—	(6,262)	1,053,831	1,192	21	192	14,949	(161)	(3,985)	—	—	(18,106)	28,305		(83)	14,148	30,151	—	(5,401)	41	11,375	(95,901)	(35,471)	(1,485)	994	(35,962)
							CASH FLOW FROM OPERATING ACTIVITIES	Profit/(loss) before tax:					Adjustment for:	Finance costs		Bank interest income	Gain on disposal of items of property, plant and	equipment	Gain on disposal of subsidiaries	Fair value loss of convertible notes	Depreciation	Amortisation of prepaid land premium	Amortisation of mining right	Impairment of goodwill	Write-down of inventories	Reversal of impairment on trade receivable	Share issue expenses	Gain in a bargain purchase		Decrease in trade receivables	Decrease/(increase) in prepayments, deposits and other	receivables	Decrease/(increase) in inventories	Increase in amounts due from related companies	Decrease in amounts due from a director	Decrease in trade and bills payables	Increase in amounts due to directors	Increase/(decrease) in other payables and accruals	Increase in accounts due to related companies	Cash generated from/(used in) operations	Discounting charges paid	Income tax refunded/(paid)	Net cash from/(used in) operating activities

– III-7 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

		Pro Forma	Enlarged	Group	HK$’000			615	(108,502)	40,362		22	(1,126,690)		27,324		(44,285)		38	(10,260)	(1,221,376)			221,260	195,000	(7,806)	(81,385)	(17,727)	309,342		(757,169)	87,437	(2)	(669,734)		(681,630)					56,181		(625,449)		(44,285)		(669,734)
					Notes								8(i)	8(ii)										8(ii)	8(i)	8(i)										8(i)	8(i)	8(i)	8(ii)	8(ii)
			Pro Forma	Adjustments	HK$’000								(180,000)	(1,020,024)										203,000	195,000	(7,800)										195,000	(7,800)	(180,000)	203,000	(1,020,024)
			Pro forma	combined	HK$’000			615	(108,502)	40,362		22	73,334		27,324		(44,285)		38	(10,260)	(21,352)			18,260	—	(6)	(81,385)	(17,727)	(80,858)		52,655	87,437	(2)	140,090		128,194					56,181		184,375		(44,285)		140,090
The Group Youyi	The Triumph Group For the year From 14 September 2009	Lvhai Haimei Shaoyaohua ended 31 December From 16 June 2009 (date of incorporation) to For the year ended For the year ended For the year ended (date of reorganisation approval) to		2009 31 December 2009 31 December 2009 31 December 2009 31 December 2009 31 December 2009	HK$’000 RMB’000 HK$’000 RMB’000 HK$’000 RMB’000 HK$’000 RMB’000 HK$’000 RMB’000 HK$’000	(Note (1)) (Note (2)) (Note (2)) (Note (3)) (Note (3)) (Note (4)) (Note (4)) (Note (5)) (Note (5)) (Note (6)) (Note (6))	CASH FLOW FROM INVESTING ACTIVITIES	Interest received 549 — — — — — — 58 66 — —	Purchase of items of property, plant and equipment (14,648) — — — — — — (82,328) (93,854) — —	Decrease in prepayments for non-current assets — — — — — — — 35,405 40,362 — —	Proceeds from disposal of items of property, plant and	equipment — — — — — — — 19 22 — —	Acquisition of subsidiaries 73,334 — — — — — — — — — —		Proceeds from disposal of subsidiaries 27,324 — — — — — — — — — —	Increase in time deposits with maturity of more than	three months when acquired (44,285) — — — — — — — — — —	Decrease in prepayments, deposits and other	receivables — — — 33 38 — — — — — —	Increase in an amount due from an equity holder — — — (9,000) (10,260) — — — — — —	Net cash from/(used in) investing activities 42,274 — — (8,967) (10,222) — — (46,846) (53,404) — —	CASH FLOW FROM FINANCING ACTIVITIES	Proceeds from issue of shares/increase in paid-up	capital 8,000 — — 9,000 10,260 — — — — — —	Proceeds from issue of convertible bonds — — — — — — — — — — —	Share issue expense (6) — — — — — — — — — —	Increase in amounts due from related companies — — — — — — — (71,390) (81,385) — —	Increase/(decrease) in other payables and accruals — — — — — — — (16,450) (18,753) 900 1,026	Net cash from/(used in) financing activities 7,994 — — 9,000 10,260 — — (87,840) (100,138) 900 1,026	NET INCREASE/(DECREASE) IN CASH AND	CASH EQUIVALENTS 14,306 — — 19 22 (2) (2) 33,398 38,074 224 255	Cash and cash equivalents at beginning of year/period 84,435 — — 8 9 3 3 2,623 2,990 — —	Effect of foreign exchange rate changes (2) — — — — — — — — —	Cash and cash equivalents at end of year/period 98,739 — — 27 31 1 1 36,021 41,064 224 255	Analysis of balances of cash and cash equivalents	Cash and cash equivalents 86,843 — — 27 31 1 1 36,021 41,064 224 255					Time deposit 56,181 — — — — — — — — — —	Cash and cash equivalents at stated in the	consolidated statement of financial position 143,024 — — 27 31 1 1 36,021 41,064 224 255	Non-pledged time deposits with maturity of more than	3 months when acquired (44,285) — — — — — — — — — —	Cash and cash equivalents at stated in the	consolidated statement of cash flows 98,739 — — 27 31 1 1 36,021 41,064 224 255

– III-8 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

Notes:

The balances are extracted from the audited financial information of the Group for the year ended 31 December 2009 as set out in Section 1 of Appendix I to this circular.
The balances are extracted from the audited financial information of the Triumph Group as set out in Appendix II-1 to this circular and were translated to Hong Kong dollars at the exchange rate of RMB100 = HK$114.
The balances are extracted from the audited financial information of Lvhai as set out in Appendix II-2 to this circular and were translated to Hong Kong dollars at the exchange rate of RMB100 = HK$114.
The balances are extracted from the audited financial information of Haimai as set out in Appendix II-3 to this circular and were translated to Hong Kong dollars at the exchange rate of RMB100 = HK$114.
The balances are extracted from the audited financial information of Shaoyaohua as set out in Appendix II-4 to this circular and were translated to Hong Kong dollars at the exchange rate of RMB100 = HK$114.
The balances are extracted from the audited financial information of Youyi as set out in Appendix II-5 to this circular and were translated to Hong Kong dollars at the exchange rate of RMB100 = HK$114.
Under HKFRS 3 (Revised) Business Combinations issued by the HKICPA, the Group apply the purchase method to account for the acquisition of the Target Group in the consolidated financial statements of the Group and the individual assets and liabilities of the Target Group acquired by the Group are adjusted to fair values at 31 December 2009 in preparation for the unaudited pro forma statement of financial position of the Enlarged Group.

For the purpose of the unaudited pro forma financial information of the Enlarged Group, the Directors had assumed the fair values of the mining rights as at 31 October 2010, as assessed by independent valuers on 31 December 2010, were the fair values of the mining rights as at the completion date. The Directors further assumed that the fair value of other assets and liabilities for each of the Triumph Group, Lvhai, Haimei, Shaoyaohua and Youyi as at 31 December 2009 to be their respective carrying values. Accordingly, possible changes to fair value of other assets and liabilities of the Target Group being acquired were not reflected in the unaudited pro forma financial information of the Enlarged Group.

The gain in a bargain purchase arising from the Acquisition is calculated as follows:

Fair value of the Consideration (notes 8(i) to 8(v) below) Share of adjusted fair value of net assets of the Target Group acquired (note 10 below) Gain in a bargain purchase	HK$’000 3,335,870 (3,602,184
	(266,314

The gain in a bargain purchase will not have a continuing effect on the Enlarged Group.

In accordance with the Acquisition Agreement, the Consideration for the proposed acquisition is HK$3,540,000,000 (subject to adjustment), satisfied as to (i) HK$180,000,000 in cash as the refundable earnest money which was paid on 27 September 2010 pursuant to the Deposit Agreement (as defined in this circular); (ii) HK$1,020,024,000 in cash by way of remittance into the bank account designated by the Vendor on the Acquisition Completion; (iii) HK$949,440,000 by way of allotment and issue of 4,747,200,000 Consideration Shares (as defined in this circular) by the Company to the Vendor or its nominee at a price of HK$0.20 per each Consideration Share on the Acquisition Completion; (iv) HK$370,566,000 by way of issue of the 1st Tranche Convertible Bonds by the Company to the Vendor or its nominee on the Acquisition Completion; and (v) HK$1,019,970,000 (subject to adjustment) by way of issue of the 2nd Tranche Convertible Bonds by the Company to the Vendor or its nominee on the First Distribution Day (as defined in this circular) and the Second Distribution Day (as defined in this circular) (as the case may be), respectively.

– III-9 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

For the purpose of the preparation of the unaudited pro forma financial information of the Enlarged Group, the components of the Consideration are accounted for as follows:

(i) The HK$195,000,000 2% one-year redeemable convertible bonds issued on 24 September 2010 to settle the HK$180,000,000 earnest money is assumed to have been issued on 1 January 2009 for the purpose of the unaudited pro forma statement of comprehensive income and statement of cash flows of the Enlarged Group and 31 December 2009 for the purpose of the unaudited pro forma statement of financial position of the Enlarged Group, and is accounted for as a compound financial instrument in accordance with HKAS 32, which requires classification of its component parts on initial recognition. For the purpose of the unaudited pro forma financial information of the Group, the Directors had assumed the market rate for an equivalent non-convertible financial instrument is 8.5%, thus, the liability component is measured first using this assumed market rate, and the difference between the proceeds of the convertible bond issue and the fair value of the liability is assigned to the derivative liability component.

On this basis, the convertible bonds with face value of HK$195,000,000 has been recognised as a current liability of HK$179,724,000 and a derivative liability component of HK$15,276,000 on the respective issue dates and for the purpose of this unaudited pro forma financial information of the Enlarged Group, expenses related to the issuance of the convertible bonds amounted to approximately HK$7,800,000 are charged to profit or loss immediately upon issuance of the convertible bonds. The issuance expenses will not have a continuing effect on the Enlarged Group.

Further, for the purpose of the unaudited pro forma statement of comprehensive income and statement of cash flows of the Enlarged Group, imputed interest expenses on the liability component of HK$15,276,000 were charged to the unaudited pro forma statement of comprehensive income of the Enlarged Group for the year ended 31 December 2009. As the convertible bonds was matured in one year, the imputed interest expenses will not have a continuing effect on the Enlarged Group.

On actual completion, the fair value of the derivative component of the convertible bonds shall be assessed at the date of issue and the residual of the proceeds will be assigned to the liability component. Thus, the actual amounts may be materially different from the estimated amounts shown in the unaudited pro forma financial information of the Enlarged Group.

(ii) Part of the consideration for the Acquisition of HK$1,020,024,000 is required to be paid in cash. Part of such cash payment amounted to HK$203,000,000 was assumed by the Directors to be paid by the estimated net proceeds from the issuance of 1 billion new shares on 31 December 2010 (pro forma adjustment amounting to HK$10,000,000 represents the par value of the 1 billion shares with a par value of HK$0.01 each and the pro forma adjustment amounting to HK$193,000,000 represents the share premium on the issuance) and the Directors assumed that the remaining cash payment of HK$817,024,000 was paid by the internal resources and/or other funding arrangements of the Group. The payment will not have a continuing effect on the Enlarged Group.
(iii) The fair value of each Consideration Shares is assumed to be the published closing price of the Shares quoted on the Stock Exchange on 31 December 2009 of HK$0.157 each. On this basis, pro forma adjustment amounting to HK$47,472,000 represents the par value of 4,747,200,000 Consideration Shares with a par value of HK$0.01 each, and the pro forma adjustment amounting to HK$697,838,000 represents the share premium arising from the issue of the 4,747,200,000 Consideration Shares at the assumed fair value of HK$0.157 each.

The actual share premium amount to be recorded in the financial statements of the Group on the date of completion of the Acquisition shall be based on the market price of the share of the Company on the date of completion of the Acquisition, which may be materially different from the estimated share premium as shown in the unaudited pro forma statement of financial position of the Enlarged Group.

(iv) The 1st Tranche Convertible Bonds are accounted for as compound financial instruments in accordance with HKAS 32, which requires classification of their component parts on initial recognition. For the purpose of the unaudited pro forma financial information of the Enlarged Group, the Directors had assumed that the face values of the Convertible Bonds approximate to the aggregate fair values of the derivatives and the host contracts on the date of issue and the Directors further assumed that the market rate for an equivalent non-convertible financial instrument is 8.5%. Thus,

– III-10 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

the fair value of the host contracts is measured first using the assumed market rate. Accordingly, the fair value of the derivative is the residual amount of the face value of the 1st Tranche Convertible Bonds after taking out the discounted cash flows of the host contracts.

On this basis, the 1st Tranche Convertible Bonds with face value of HK$370,566,000 has been recognised as a noncurrent liability of HK$246,443,000 and an increase in equity reserves of HK$124,123,000 on the respective issue dates and expenses related to the issuance of the convertible bonds were assumed to be nil.

Further, for the purpose of the unaudited pro forma statement of comprehensive income and statement of cash flows of the Enlarged Group, imputed interest expenses on the liability component of HK$20,948,000 were charged to the unaudited pro forma statement of comprehensive income of the Enlarged Group for the year ended 31 December 2009. The imputed interest expenses will have a continuing effect on the Enlarged Group.

The market rate and the actual fair value of each of the component parts of the 1st Tranche Convertible Bonds shall be assessed at the date of issue, which may be materially different from the estimated amounts shown in the unaudited pro forma financial information of the Enlarged Group.

(v) Pursuant to the Acquisition Agreement, the Consideration will be adjusted by the extent to fulfillment of the Profit Guarantee within the Profit Guarantee Period (i.e. a contingent consideration). For the purpose of the unaudited pro forma statement of comprehensive income and statement of cash flows of the Enlarged Group, the Directors had assumed that the Group had early adopted HKFRS 3 (Revised) Business Combinations, which was effective for business combination completed on or after 1 July 2009 and which stipulated the accounting treatments on contingent consideration. For the purpose of the unaudited pro forma financial information of the Enlarged Group, it is assumed that the Consideration will not be adjusted, thus, all the 2nd Tranche Convertible Bonds will be issued on the First Distribution Day and the Second Distribution Day (as the case may be), respectively. The possible adjustment on the Consideration was not reflected in the unaudited pro forma financial information of the Enlarged Group.

Under the HKFRS 3 (Revised), any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration will be recognised in profit or loss. For the purpose of the unaudited pro forma financial information of the Enlarged Group, the fair value of the contingent consideration is assumed to be the face value of the 2nd Tranche Convertible Bonds of HK$1,019,970,000 and, for the purpose of the unaudited pro forma statement of comprehensive income and statement of cash flows of the Enlarged Group for the year ended 31 December 2009, the Directors had assumed that there is no change in the fair values of the contingent consideration as at 1 January 2009 and 31 December 2009.

The actual fair values of the contingent consideration shall be assessed at the date of completion of the Acquisition and at the end of each of the reporting period, which may be materially different from the estimated amounts shown in the unaudited pro forma financial information of the Enlarged Group.

Pursuant to the Acquisition Agreement, the Vendor has granted a Call Option to the Group pursuant to which the Group will be entitled to acquire the remaining 40% equity interest of Triumph, in whole or in part, for a Call Option Consideration (as defined in this circular) of HK$2,360,000,000 (subject to adjustment) within nine months from the date of the Acquisition Completion by giving the Call Option Notice to the Vendor.

The fair value of the Call Option is to be assessed on the date of grant and to be accounted for as a derivative financial asset in accordance with HKAS 32 Financial Instruments: Presentation issued by the HKICPA. Further, subsequent gains or losses on changes in fair value of the Call Option shall be recognised in profit or loss. This unaudited pro forma financial information of the Enlarged Group is prepared by the Directors on the basis without taking into account the fair value of the Call Option and its subsequent change in fair value.

In the opinion of the Directors, the Target Group’s fair value of the assets and liabilities being acquired is subject to changes upon completion of the proposed Acquisition because the fair value of the Target 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 mining rights as at 31 October 2010, as assessed by independent valuers on 31 December 2010, were the fair values of the mining rights as at the completion date. The possible changes to fair value of other assets and liabilities of the Target Group being acquired were not reflected in the unaudited pro forma financial information of the Enlarged Group.

– III-11 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

The interest in fair value of net assets of the Target Group acquired by the Group is calculated as follows:

Notes Deficiency in assets of Youyi attributable to Haimei Add: Fair value adjustment for mining rights held by Youyi (i) Less: Deferred tax effect on the fair value adjustment for mining rights (i) Adjusted net assets of Youyi attributable to Haimei Net assets of Shaoyaohua attributable to equity holders of Shaoyaohua Add: Fair value adjustment for mining rights held by Shaoyaohua (i) Less: Deferred tax effect on the fair value adjustment for mining rights (i) Add: Liabilities to be indemnified by the Vendor for Shaoyaohua after completion (iii) Adjusted net assets of Shaoyaohua attributable to equity holders of Shaoyaohua Less: Interests shared by 5% non-controlling interests of Shaoyaohua (ii) Adjusted net assets of Shaoyaohua attributable to Haimei Net assets of Haimei attributable to equity holders of Haimei Add: Liabilities to be indemnified by the Vendor for Haimei after completion (iii) Adjusted net assets of Haimei attributable to equity holders of Haimei Net assets of Haimei and its subsidiaries attributable to equity holders of Haimei Less: Interests shared by 1% non-controlling interests of Haimei (ii) Net assets of Haimei and its subsidiaries attributable to Lvhai Net assets of Lvhai attributable to equity holders of Lvhai Add: Liabilities to be indemnified by the Vendor for Lvhai after completion (iii) Adjusted net assets of Lvhai attributable to equity holders of Lvhai Net assets of Lvahi and its subsidiaries attributable to equity holders of Lvhai Less: Interests shared by 1% non-controlling interests of Lvhai (ii) Net assets of Lvahi and its subsidiaries attributable to the Triumph Group Net assets of the Triumph Group attributable to its equity holders Add: Liabilities to be indemnified by the Vendor for Triumph after completion (iii) Add: Liabilities to be indemnified by the Vendor for Hengming after completion (iii) Adjusted net assets of the Triumph Group attributable to its equity holders Net assets of the Target Group attributable to its equity holders Less: Interests shared by 40% non-controlling interests of the Target Group (ii) Net assets of the Target Group attributable to the Group	As at 31 December 2009 HK$’000 (1,362 1,950,244 (487,561
	1,461,321
	407,656 3,490,222 (872,556 10,066
	3,035,388 (151,769
	2,883,619
	3,351 1,510,572
	1,513,923
	5,858,863 (58,589
	5,800,274 11,358 45,214
	56,572
	5,856,846 (58,568
	5,798,278 336 198,574 6,452
	205,362
	6,003,640 (2,401,456
	3,602,184

– III-12 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

Notes:

(i) For the purpose of this unaudited pro forma financial information of the Enlarged Group, the Directors had assumed that only the mining rights held by Shaoyaohua and Youyi are subject to fair value adjustments and the carrying amounts of other assets and liabilities of the Target Group equal to their fair values. The Directors further assumed that the fair values of the mining rights held by Shaoyaohua and Youyi as at 31 October 2010 of HK$3,502,080,000 and HK$2,006,400,000, respectively, as assessed by the independent valuers, Roma Appraisals Limited, on 31 December 2010, represented their respective fair values as at the completion date.

Accordingly, pro forma adjustments of HK$3,490,222,000 and HK$1,950,244,000, representing the excess of the fair values over the then carrying amounts of the mining rights and pro forma adjustments of HK$872,556,000 and HK$487,561,000, representing the relevant deferred tax liabilities of such fair value adjustments were recorded each for Shaoyaohua and Youyi, respectively.

For the purpose of the unaudited pro forma statement of comprehensive income and statement of cash flows of the Enlarged Group, additional amortisation expenses in respect of the fair value adjustments recorded in Shaoyaohua of HK$50,657,000 and relevant tax credit of HK$12,664,000 were recorded in the profit or loss for the year ended 31 December 2009. These adjustments will have continuing effects on the Enlarged Group.

(ii) The non-controlling interest of the Target Group to be recognised in the pro forma financial information of the Enlarged Group is as follows:

Non-controlling interests of the Target Group: 5% non-controlling interests of Shaoyaohua 1% non-controlling interests of Haimei 1% non-controlling interests of Lvhai 40% non-controlling interests of the Target Group Total	As at 31 December 2009 HK$’000 151,769 58,589 58,568 2,401,456
	2,670,382

The adjustment to recognise the above non-controlling interests of the Target Group of HK$2,670,382,000 will have continuing effects on the Enlarged Group (note 11).

(iii) Pursuant to the Supplementary Agreement (as defined in this Circular), the Vendor had procured that the total amounts of all liabilities (excluding, among others, intra-group payables amongst the Target Group) and capital commitments shall not exceed RMB300 million upon completion. As set out in Appendices II-1 to II-5 of this circular, the total liabilities each of Triumph, Lvhai, Haimei, Shaoyaohua and Youyi as at 30 September 2010, were RMB174,188,000, RMB39,661,000, RMB1,328,484,000, RMB537,994,000 and RMB57,678,000, respectively. In addition, the total liabilities of Hengming as at 30 September 2010 was RMB5,660,000, which was included in the consolidated financial statements of the Triumph Group as set out in Appendix II-1.

For the purpose of the unaudited pro forma financial information of the Enlarged Group, the Directors had assumed that the total liabilities of each of Triumph, Lvhai, Haimei, Shaoyaohua, Youyi and Hengming as at 30 September 2010, after excluding intra-group payables amongst the Target Group, which were RMB174,188,000 (HK$198,574,000), RMB39,661,000 (HK$45,214,000), RMB1,325,063,000 (HK$1,510,572,000), RMB267,994,000 (HK$305,513,000), RMB40,836,000 (HK$46,553,000) and RMB5,660,000 (HK$6,452,000), respectively, to be the respective liabilities of entities comprising the Target Group as at the completion date.

Since the aggregate of the above liabilities of entities comprising the Target Group was HK$2,112,878,000, which exceeded the guaranteed amount of RMB300 million (HK$342 million), for the purpose of this unaudited pro forma financial information of the Enlarged Group, pro forma adjustments amounted to HK$1,770,878,000 had been recognised as an indemnification asset due from the Vendor, to reflect the liabilities to be indemnified by the Vendor

– III-13 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

after completion. The Directors assumed that the liabilities (excluding intra-group payables amongst the Target Group) to be indemnified by the Vendor for each of Triumph, Lvhai, Haimei and Hengming were their respective full amounts of such liabilities of HK$198,574,000, HK$45,214,000, HK$1,510,572,000 and HK$6,452,000.

The Directors further assumed that the liabilities to be indemnified by the Vendor for Shaoyaohua is HK$10,066,000, such that the remaining liabilities of the Target Group will be equal to RMB300 million (HK$342 million).

The pro forma adjustments of HK$49,407,000, HK$371,932,000 and HK$2,670,382,000 represent the elimination of the aggregate amounts of share capital and reserves of the Triumph Group, Lvhai, Haimei, Shaoyaohua and Youyi, respectively, and the recognition of non-controlling interests of the Target Group (note 10 above) on consolidation.

– III-14 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

B. REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

9 February 2011

The Directors

King Stone Energy Group Limited

Dear Sirs,

We report on the unaudited pro forma financial information (the ‘‘Unaudited Pro Forma Financial Information’’) set out in Section A of Appendix III to the shareholders’ circular (the ‘‘Circular’’) of King Stone Energy Group Limited (the ‘‘Company’’, together with its subsidiaries, referred to as the ‘‘Group’’) dated 9 February 2011, which has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the proposed acquisition of the 60% equity interest in Triumph Fund A1 Limited (the ‘‘Target Company’’, together with its subsidiaries, referred to as the ‘‘Target Group’’), might have affected the relevant financial information presented therein. The basis of preparation of the Unaudited Pro Forma Financial Information is set out in the section headed ‘‘Introduction’’ in Section A of Appendix III to the Circular.

Respective responsibilities of directors of the Company and reporting accountants

It is solely the responsibility of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with rule 4.29 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 (the ‘‘HKICPA’’).

It is our responsibility to form an opinion, as required by rule 4.29(7) 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.

Basis of opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 Accountants’ Reports on Pro Forma Financial Information in Investment Circulars issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

– III-15 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON 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 purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of:

. the financial position of the Group as at 31 December 2009 had the acquisition of the 60% equity interest in the Target Group actually been completed on that date or any future date; nor
. the results of operations and cash flows of the Group for the year ended 31 December 2009 had the acquisition of the 60% equity interest in the Target Group actually been completed on 1 January 2009 or any future periods.

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 rule 4.29(1) of the Listing Rules.

Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong

– III-16 –

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

==> picture [455 x 62] intentionally omitted <==

King Stone Energy Group Limited

Shaoyaohua Coal Mine and Youyi Coal Mine

Independent Technical Review and Competent Person’s Report

Date: 1 February 2011 Project No. ADV-HK-03624

– IV-1 –

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

==> picture [455 x 62] intentionally omitted <==

Competent Person’s Report Shaoyaohua Coal Mine and Youyi Coal Mine ’ Shanxi Province, People s Republic of China

Minarco-MineConsult, Level 10, Silver Fortune Plaza, 1 Wellington Street, Central, Hong Kong

[email protected] www.runge.com.au

1 February 2011

Compiled by:

Peer Review by:

Michael Johnson Senior Mining Consultant

Dan Peel

— Operations Manager Beijing

– IV-2 –

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

King Stone Energy Group Limited

Suite 3603, 36th Floor One Exchange Square 8 Connaught Place Central, Hong Kong

1 February 2011

RE: INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

Runge Asia Limited (‘‘RAL’’), trading as Minarco-MineConsult (‘‘MMC’’), has been engaged by King Stone Energy Group Limited (‘‘King Stone’’ or the ‘‘Client’’ or ‘‘Company’’) to carry out an Independent Technical Review (‘‘ITR’’) of the Shaoyaohua Coal Mine (‘‘Shaoyaohua’’) and the Youyi Coal Mine (‘‘Youyi’’), collectively referred to as the ‘‘Projects’’, located in Shanxi Province, China. The Projects are conditionally being acquired by King Stone.

The process and conclusions of the ITR are summarised in the attached Independent Technical Review and Competent Person’s Report, which will be included in a Hong Kong Stock Exchange (‘‘HKEx’’) Circular prepared as part of this transaction.

MMC’s technical team (‘‘the Team’’) consisted of both International and Chinese national senior mining engineers and geologists. The Team undertook a number of site visits to the Project’s to familiarise themselves with site conditions. MMC’s Competent Persons were responsible for compiling of the Competent Persons’ Report (‘‘CPR’’) and the JORC Coal Resource and Coal Reserve estimates stated within.

During the site visit, the Team had open discussions with the Company personnel on technical aspects relating to the project. MMC found the personnel to be cooperative and open in facilitating MMC’s work.

In addition to work undertaken to generate estimates of Coal Resources and Coal Reserves, this report relies largely on information provided by the Company, either directly from the site and other offices, or from reports by other organisations whose work is the property of the Company. The data relied upon for the JORC Coal Resource and Coal Reserve estimates completed by MMC have been compiled primarily by the Company and validated where possible by MMC. The report is based on information made available to MMC prior to the 15th of November 2010. King Stone has not advised MMC of any material change, or event likely to cause material change, to the designs or forecasts since the date of inspection.

MMC has conducted its review and preparation of the Independent Technical Review and Competent Person’s Report in accordance with the requirements of Chapter 18 of the Listing Rules of the HKEx. The report is also in compliance with:

. the ‘‘Australasian Code for Reporting Mineral Resources and Ore Reserves’’ (2004 edition published by the Joint Ore Reserves Committee (‘‘JORC’’) of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and the Minerals Council of Australia) (the ‘‘JORC Code’’); for determining Resources and Reserves; and

– IV-3 –

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

. the ‘‘Australian Guidelines for Estimation & Reporting of Inventory Coal, Coal Resources & ’’
Coal Reserves .
. the Code and Guidelines for technical assessment and/or valuation of mineral and petroleum assets and mineral and petroleum securities for Independent Expert Reports (the ‘‘Valmin Code’’).

MMC operates as an independent technical consultant providing resource evaluation, mining engineering and mine valuation services to the resources and financial services industries. This report was prepared on behalf of MMC by technical specialists, details of whose qualifications and experience are set out in Annexure A.

MMC has been paid, and has agreed to be paid, professional fees for its preparation of this report. However, none of MMC or its directors, staff or sub-consultants who contributed to this report has any interest in:

. the Company; or
. rights or options in the Projects; or
. the outcome of the proposed transaction.

The work undertaken is an ITR of the information provided, as well as information collected during site inspections completed by MMC as part of the ITR process. It specifically excludes all aspects of legal issues, marketing, commercial and financing matters, insurance, land titles and usage agreements, and any other agreements/contracts that the Company may have entered into.

MMC does not warrant the completeness or accuracy of information provided by the Company which has been used in the preparation of this report.

The title of this report does not pass to the Company until all consideration has been paid in full.

Drafts of this report were provided to the Company but only for the purpose of confirming the accuracy of factual material and the reasonableness of assumptions relied upon in the report.

Generally, the data available was sufficient for MMC to complete the scope of work. The quality and quantity of data available, and the cooperative assistance, in MMC’s view, showed a willingness by the Company to assist the ITR process. All opinions, findings and conclusions expressed in the report are those of MMC and its specialist advisors.

PROJECT SUMMARY AND CONCLUSIONS

General

The Shaoyaohua and Youyi projects are located about 30 km north and 25 km northwest of the Shanyin County Town, Shanxi Province respectively. Both mines are located close to main transportation routes, with the main local highway approximately 20 km from Shaoyaohua, and 30 km from Youyi.

– IV-4 –

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

The Shaoyaohua project is an underground coal mine currently licenced to produce 1.2 Mtpa of ROM coal. Shaoyaohua has current safety and production licences permitted by the provincial government, and a mining licence issued by the Department of Land and Resource of Shanxi Province on October 14th of 2009.

The Youyi project is a planned underground coal mine and has a current mining licence capacity of 1.2 Mtpa. Youyi is a combination of two smaller mines, currently not operating and awaiting licence to upgrade to mechanised production. A Preliminary Design (2010) report has been completed and outlines the upgrades required to achieve a ROM coal production of 3 Mtpa. The Preliminary Design report and other associated approvals and licences have not yet been granted.

Coal Types

Shaoyaohua predominately produces long flame coal (Chinese Coal Classification Standard — GB 5751-86) which is sold as thermal coal. Youyi is forecast to produce both long flame and gas coal. Both coal types are suitable for use as a thermal coal and some gas coal may be saleable as a blending coking coal. Based on the Chinese geological reports, the proportion of gas coal is approximately 15% and 48% of the resources at Shaoyaohua and Youyi respectively.

JORC Coal Resource and Reserve Estimates

Coal Resources and Coal Reserves for Shaoyaohua and Youyi have been independently estimated by MMC in accordance with the Recommendations of the JORC Code. Total Coal Resources for the two Projects are 202 Mt ROM, with total Reserves of 90 Mt, as at 15th November 2010.

Coal Resources for Shaoyaohua are 97 Mt, which consist of 45 Mt Measured, 45 Mt Indicated and 7 Mt Inferred. Coal Resources for Youyi are 105 Mt, which consists of 52 Mt Measured, 47 Mt Indicated and 6 Mt Inferred.

Coal Reserves for Shaoyouhua are 52 Mt, which consist of 26 Mt Proven and 26 Mt Probable. Coal Reserves for Youyi are 37 Mt, which consist of 25 Mt Proven and 12 Mt Probable.

Mining Method and Operations

The mining methods to be implemented at both projects include two underground high production mining methods to match the deposit characteristics, including longwall and longwall top coal caving. These methods have been successfully implemented in China and MMC considers these methods appropriate for the projects. These mining methods will be employed in Shaoyaohua’s five, and Youyi’s four mineable seams.

ROM coal at Shaoyaohua is de-stoned and screened on site prior to sale. A wash plant is planned for the project, however, MMC has not been provided details for review. Youyi plans to screen ROM coal prior to sale.

Shaoyaohua is currently producing up to 2 Mtpa of ROM Coal. The estimated production rates are greater than the current licenced production rate.

– IV-5 –

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

King Stone plans to increase ROM production at Shaoyaohua to 4 Mtpa by 2011. MMC considers the earliest the appropriate approvals and licences will be granted will be in 2013. Additionally, based on MMC’s review, the high level expansion plans completed to date only support an operation of 3.5 Mtpa. Further mine expansion studies are required to accurately estimate the required capital expenditure as well as mine infrastructure and support requirements. There remains a risk that the required approvals and licences will not be granted for the higher production capacity.

In 2010, a Geology Report, Preliminary Mine Design (3.0 Mtpa), Safety Report and Environmental Report were completed for Youyi. These are currently awaiting approval from the relevant authorities and are preconditions for the issue of a 3.0 Mtpa mining licence. The Preliminary Design estimates a mine construction period of 24 months prior to trial production. The mine plan proposes to use a significant amount of existing site infrastructure. MMC estimates, pending timely approval of the required project approvals and licences, ROM coal production will near the full production rate of 3 Mtpa in 2015.

Operating and Capital Costs

The forecast operating costs described in the Preliminary Design Report (including direct and indirect costs) is 127 RMB/ROM t. Based on actual costs from 2010 MMC estimates current operating costs are in the order of 117 RMB/ROM t. MMC considers 120 RMB/t to be a reasonable average operating cost. Operating costs may increase in the years leading up to an increase in production due to additional mine development.

The direct capital expenditure at Shaoyaohua in 2008 and 2009 to upgrade to 1.2 Mtpa was 220 M RMB. A Preliminary Design has not been completed for the expansion, however the mine forecasts that the expansion direct capital costs are 104 M RMB. MMC does not have adequate detail to comment on this figure, however, the forecast capital expenditure for the expansion appears to be low and this estimate may increase significantly following more detailed studies. As stated above, MMC considers the current high level expansion plans only suitable for a production rate of 3.5 Mtpa.

The Youyi Preliminary Design report’s forecast operating costs (including direct and indirect costs) is 132 RMB/ROM t. An increase in operating costs compared to Shaoyaohua is expected due to the greater amount of mine development required per tonne of coal produced at Youyi as well as the more complex mine layout.

The forecast Youyi direct capital costs for the mine development are 587 M RMB. Additional indirect capital costs of 36 M RMB for interest and working capital have also been estimated.

Risks

Shaoyaohua is currently operating above its licenced coal production capacity. Additionally, it plans to increase capacity. Shaoyaohua may be limited to its current licenced capacity until an increased licence capacity is granted. Additionally, the granting of licences to support a 4 Mtpa is not guaranteed.

Youyi requires additional licences and approvals prior to commencing construction of the new mine operations.

– IV-6 –

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

Various operating risks, common to underground coal mines, will need to be managed at both Projects. These include spontaneous combustion, water inrush, mine gas, and incendive sparking potential.

Youyi will require ongoing management to work around old mine workings.

The planned expansion of the Shaoyaohua mine production capacity is at a preliminary level of planning and requires more detailed studies to better define the required work and forecast capital expenditure.

Opportunities

The current ROM to Product coal yields at the Shaoyaohua mine are currently higher than has been modelled in MMC’s mining schedule. This may result in lower product coal operating costs than currently forecast. MMC expects that, over the mine life, the average yield would be similar to that modelled.

The Company has reported that the stone removed from the mine can be sold. This opportunity is difficult to quantify due to limited stone quality testing during the geological reviews; however, if the stone can be sold, it presents an opportunity that some revenue can be gained from what would otherwise be a waste material.

There may be an opportunity to develop a small open cut coal mining operation on the Youyi licence area. This opportunity requires further assessment as the shallow coal may be heavily oxidised and not suitable for sale.

Yours faithfully,

Michael Johnson

Senior Mining Consultant Minarco-Mineconsult

– IV-7 –

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

1.	INTRODUCTION . . . . . . . . . . .	INTRODUCTION . . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-13
	1.1	SCOPE OF WORK . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-13
	1.2	RELEVANT ASSETS .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-14
	1.3	REVIEW METHODOLOGY . . .			. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-14
	1.4	SITE VISITS AND INSPECTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .				IV-14
	1.5	INFORMATION SOURCES . . . .			. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-15
		Shaoyaohua . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-15
		Youyi . . . . . . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-16
	1.6	COMPETENT PERSON	AND RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . .			IV-17
		JORC Requirements . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-17
		HKEx Requirements . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-17
	1.7	LIMITATIONS AND EXCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .				IV-18
		Limited Liability . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-18
		Responsibility and Context of this			Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-18
		Intellectual Property . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-18
		Mining Unknown Factors		. . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-19
	1.8	CAPABILITY AND INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .				IV-19
2.	PROJECT OVERVIEW . . . . .		.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-20
	2.1	PROJECT LOCATION	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-20
	2.2	REGIONAL ENVIRONMENT . .			. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-20
	2.3	LICENCES AND APPROVALS			. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-24
		Shaoyaohua . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-24
		Youyi . . . . . . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-25
	2.4	HISTORY OF EXPLORATION .			. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-27
		Shaoyaohua . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-27
		Youyi . . . . . . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-28
	2.5	HISTORY OF MINING		. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-29
		Shaoyaohua . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-29
		Youyi . . . . . . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-29
3.	GEOLOGY . . . . . . . . . . . . . . . . .		.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-30
	3.1	REGIONAL GEOLOGY		. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-30
	3.2	STRUCTURE OF DEPOSIT . . . .			. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-31
		Shaoyaohua . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-31
		Youyi . . . . . . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-32
4.	COAL	SEAMS AND COAL QUALITY			. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-33
	4.1	SHAOYAOHUA . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-33
	4.2	YOUYI . . . . . . . . . . . . . .	.	. . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-34

– IV-8 –

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

5.	COAL	RESOURCE ESTIMATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	RESOURCE ESTIMATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	RESOURCE ESTIMATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-35
	5.1	JORC CODE RESOURCE REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			IV-35
	5.2	GEOLOGICAL DATA	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-36
		Structural Models . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-40
	5.3	JORC RESOURCE ESTIMATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			IV-43
		Shaohaoyua . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-43
		Youyi . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-47
6.	COAL	RESERVE ESTIMATE		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-51
	6.1	BACKGROUND . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-51
	6.2	DESCRIPTION OF MINING METHOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			IV-51
	6.3	RESERVE ESTIMATION PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			IV-52
		Mining Assumptions and	Layout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		IV-53
	6.4	RESERVE ESTIMATION PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			IV-54
7.	MINING . . . . . . . . . . . . . . . . . . .		.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-59
	7.1	DESCRIPTION OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			IV-59
	7.2	COAL MINING PROCESSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			IV-59
		Mine Development Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			IV-59
		Longwall Mining . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-60
		Longwall Top Coal Caving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			IV-61
		Coal Handling and Stockpiling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			IV-61
		Coal Processing . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-61
		Transportation to Market		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-61
	7.3	SHAOYAOHUA . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-64
		Mining Method . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-64
		Mining Areas . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-64
		Mine Development . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-65
		Production Schedule . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-66
		Site Infrastructure . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-69
	7.4	YOUYI . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-74
		Development . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-75
		Production Schedule . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-79
		Site Infrastructure . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-82
	7.5	MINE CHARACTERISTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			IV-86
		Gas . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-86
		Spontaneous Combustion		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-86
		Coal Dust . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-86
		Hydrogeology . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-87

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INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

8.	PROJECT DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-87
	8.1 SHAOYAOHUA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-87
	Licences and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-88
	Production Expansion Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-89
	Proposed Project Timeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-90
	8.2 YOUYI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-90
	Licences and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-90
9.	OPERATING COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-92
	9.1 SHAOYAOHUA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-92
	9.2 YOUYI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-93
10.	CAPITAL COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-94
	Shaoyaohua . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-94
	Youyi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-96
11.	SAFETY AND ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-97
12.	RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-105
	12.1 RISK AND OPPORTUNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-105
13.	ANNEXURE A — QUALIFICATIONS AND EXPERIENCE . . . . . . . . . . . . . . . . . . . . .	IV-109
14.	ANNEXURE B — GLOSSARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-114
15.	ANNEXURE C — CHINESE AND OTHER INTERNATIONAL RESOURCE
	REPORTING STANDARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-116
16.	ANNEXURE D — JORC COAL RESERVE CHECKLIST . . . . . . . . . . . . . . . . . . . . . . .	IV-121
17.	ANNEXURE E — MINING SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-123

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INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

LIST OF TABLES

TABLE	2-1	SHAOYAOHUA COAL MINE — LICENCE DETAILS . . . . . . . . . .	. . . . . . . . .	IV–24
TABLE	2-2	SHAOYAOHUA COAL MINE — MINING LICENCE COORDINATES . . . . .		IV-24
TABLE	2-3	SHAOYAOHUA COAL MINE — APPROVALS . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-25
TABLE	2-4	YOUYI COAL MINE — KEY CHARACTERISTICS . . . . . . . . . . . .	. . . . . . . . .	IV-26
TABLE	2-5	YOUYI COAL MINE — MINING LICENCE COORDINATES . . . .	. . . . . . . . .	IV-26
TABLE	2-6	SHAOYAOHUA COAL MINE — PRODUCT COAL
		PRODUCTION 2007–2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-29
TABLE	3-1	COMBINED MINES — REGIONAL STRATIGRAPHIC SEQUENCE . . . . . . .		IV-30
TABLE	3-2	YOUYI COAL MINE — FAULT CHARACTERISTICS . . . . . . . . . .	. . . . . . . . .	IV-32
TABLE	4-1	SHAOYAOHUA COAL MINE — SEAM STRUCTURE . . . . . . . . . .	. . . . . . . . .	IV-33
TABLE	4-2	SHAOYAOHUA COAL MINE — SEAM PROPERTIES . . . . . . . . . .	. . . . . . . . .	IV-34
TABLE	4-3	YOUYI COAL MINE — SEAM STRUCTURE . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-34
TABLE	4-4	YOUYI COAL MINE — SEAM PROPERTIES . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-35
TABLE	5-1	COMBINED MINES — DRILLHOLE INFORMATION . . . . . . . . . .	. . . . . . . . .	IV-36
TABLE	5-2	COMBINED MINES — DEFAULT STONE VALUES . . . . . . . . . . .	. . . . . . . . .	IV-37
TABLE	5-3	SHAOYAOHUA COAL MINE — SEAM THICKNESS
		AND INTERBURDEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-37
TABLE	5-4	SHAOYUOHUA DRILLHOLE STATISTICS — QUALITY DATA	. . . . . . . . .	IV-38
TABLE	5-5	YOUYI COAL MINE — SEAM THICKNESS AND INTERBURDEN . . . . . . .		IV-39
TABLE	5-6	YOUYI DRILLHOLE STATISTICS — QUALITY DATA . . . . . . . .	. . . . . . . . .	IV-39
TABLE	5-7	COMBINED MINES — NOMENCLATURE FOR STRUCTURAL MODELS .		IV-40
TABLE	5-8	COAL MINES — MODELLING PARAMETERS . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-42
TABLE	5-9	COMBINED MINES — POINTS OF OBSERVATION . . . . . . . . . . .	. . . . . . . . .	IV-43
TABLE	5-10	SHAOYAOHUA COAL MINE — MMC ESTIMATED JORC COAL
		RESOURCE BY SEAM, AS AT 15TH NOVEMBER 2010 . . . . .	. . . . . . . . .	IV-44
TABLE	5-11	SHAOYAOHUA COAL MINE — MMC ESTIMATED JORC COAL
		RESOURCE BY CLASSIFICATION, AS AT 15TH NOVEMBER	2010 . . .	IV-45
TABLE	5-12	YOUYI COAL MINE — MMC ESTIMATED JORC COAL RESOURCE BY
		SEAM, AS AT 15TH NOVEMBER 2010 . . . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-48
TABLE	5-13	YOUYI COAL MINE — MMC ESTIMATED JORC COAL RESOURCE
		BY CLASSIFICATION, AS AT 15TH NOVEMBER 2010 . . . . . .	. . . . . . . . .	IV-49
TABLE	6-1	TYPICAL MINE PLAN PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-53
TABLE	6-2	SHAOYAOHUA COAL MINE — MMC ESTIMATED JORC COAL
		RESERVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-55
TABLE	6-3	YOUYI COAL MINE — MMC ESTIMATED JORC COAL RESERVES . . . .		IV-56
TABLE	7-1	SHAOYAOHUA COAL MINE — MAIN INCLINED DRIFT DESIGN
		PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-65
TABLE	7-2	SHAOYAOHUA COAL MINE — AUXILIARY DRIFT DESIGN
		PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-65
TABLE	7-3	SHAOYAOHUA COAL MINE — VENTILATION SHAFT DESIGN
		PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-66
TABLE	7-4	SHAOYAOHUA COAL MINE — NO. 4 SEAM LONGWALL UNIT
		OPERATING DESIGN PARAMETERS . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-67
TABLE	7-5	SHAOYAOHUA COAL MINE — MMC ESTIMATED MINING SCHEDULE		IV-70
TABLE	7-6	YOUYI COAL MINE — SUMMARY OF EXISTING AND REQUIRED
		INFRASTRUCTURE AT YOUYI . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . .	IV-75
TABLE	7-7	YOUYI COAL MINE — MAIN INCLINED SHAFT DESIGN PARAMETERS		IV-76

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INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

TABLE 7-8	YOUYI COAL MINE — AUXILIARY DRIFT DESIGN PARAMETERS . . .	.	IV-76
TABLE 7-9	YOUYI COAL MINE — PERSONNEL/DOWNCAST SHAFT DESIGN
	PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-77
TABLE 7-10	YOUYI COAL MINE — VENTILATION SHAFT DESIGN PARAMETERS	.	IV-77
TABLE 7-11	YOUYI COAL MINE — VENTILATION INCLINED SHAFT DESIGN
	PARAMETERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-78
TABLE 7-12	YOUYI COAL MINE — LONGWALL DESIGN PARAMETERS
	SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-79
TABLE 7-13	YOUYI COAL MINE — COAL HANDLING SYSTEM PRODUCTIVITY . .	.	IV-80
TABLE 7-14	YOUYI COAL MINE — MMC ESTIMATED MINING SCHEDULE . . . . . . .	.	IV-81
TABLE 7-15	YOUYI VENTILATION FAN CAPACITY ESTIMATION . . . . . . . . . . . . . . . .	.	IV-84
TABLE 7-16	ESTIMATED GAS EMISSIONS FROM SHAOYAOHUA AND YOUYI . . . .	.	IV-86
TABLE 8-1	SHAOYAOHUA COAL MINE — CURRENT LICENCES
	AND APPROVALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-88
TABLE 8-2	YOUYI COAL MINE — REQUIRED LICENSES AND APPROVALS
	(3.0 MTPA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-90
TABLE 9-1	SHAOYAOHUA COAL MINE — 2008 PRELIMINARY DESIGN ESTIMATED
	OPERATING COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-92
TABLE 9-2	YOUYI COAL MINE — 2010 PRELIMINARY DESIGN ESTIMATED
	OPERATING COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-93
TABLE 10-1	SHAOYAOHUA COAL MINE — CAPITAL EXPENDITURE FOR 2008
	AND 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-94
TABLE 10-2	SHAOYUAOHUA COAL MINE — 4 MTPA EXPANSION
	PROJECT CAPEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-95
TABLE 10-3	YOUYI COAL MINE — DEVELOPMENT CAPITAL COSTS . . . . . . . . . . . .	.	IV-96
TABLE 10-4	YOUYI COAL MINE — EXPANSION INVESTMENT BUDGET . . . . . . . . .	.	IV-96
TABLE 12-1	COMBINED MINES — OVERALL RISK ASSESSMENT . . . . . . . . . . . . . . . .	.	IV-105
TABLE 12-2	COMBINED MINES — RISK SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-106
TABLE 16-1	SHAOYUOHUA JORC RESERVE CHECKLIST . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-121
TABLE 16-2	YOUYI JORC RESERVE CHECKLIST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-122
TABLE 17-1	SHAOYAOHUA MINING SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-123
TABLE 17-2	YOUYI MINING SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-124
	LIST OF FIGURES
FIGURE 2-1	GENERAL LOCATION PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-22
FIGURE 2-2	DETAILED LOCATION PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-23
FIGURE 5-1	SHAOYAOHUA RESOURCE CONFIDENCE AND SEAM THICKNESS . . .	.	IV-46
FIGURE 5-2	YOUYI RESOURCE CONFIDENCE AND SEAM THICKNESS . . . . . . . . . . .	.	IV-50
FIGURE 6-1	SHAOYAOHUA LONGWALL PANEL LAYOUT AND SPECIFIC ENERGY		IV-57
FIGURE 6-2	YOUYI LONGWALL PANEL LAYOUT AND SPECIFIC ENERGY . . . . . . .	.	IV-58
FIGURE 7-1	SHAOYAOHUA AND YOUYI PROJECT TOP LONGWELL COAL CARVING		IV-62
FIGURE 7-2	SHAOYAOHUA AND YOUYI PROJECT PLAN VIEW . . . . . . . . . . . . . . . . . .	.	IV-63
FIGURE 7-3	SHAOYAOHUA MINE LAYOUT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-73
FIGURE 7-4	YOUYI MINE LAYOUT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.	IV-85

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APPENDIX IV

1. INTRODUCTION

Runge Asia Limited, trading as Minarco-MineConsult (‘‘MMC’’), has been engaged by King Stone Energy Group Limited (‘‘King Stone’’ or the ‘‘Client’’ or ‘‘Company’’) to carry out an Independent Technical Review (‘‘ITR’’) of the Shaoyaohua Coal Mine (‘‘Shaoyaohua’’) and the Youyi Coal Mine (‘‘Youyi’’), collectively referred to as the ‘‘Projects’’, located in Shanxi Province, China. The Projects are conditionally being acquired by King Stone.

Shaoyaohua is an underground coal mine with a current licenced capacity of 1.2 Mtpa of raw coal. The mine predominately produces long flame coal which is sold as thermal coal. A Preliminary Design report for a mine upgrade to install mechanised machinery was approved by the Coal Industrial Bureau of Shanxi Province on May 22nd, 2008. The Preliminary Design Report specified upgrading of the major production systems and installation of a longwall unit. The mining system upgrade was completed, and trial production commenced on December 29th, 2008. Shaoyaohua has current safety and production licences permitted by the provincial government, and a mining licence issued by the Department of Land and Resource of Shanxi Province on October 14th of 2009.

Youyi mine is located 17 km to the southwest of Shaoyaohua. Youyi was originally operated as two separate mines, Youyi and Boafeng which operated under separate licences. Youyi and Boafeng mines previously had licence capacities of 0.45 Mtpa and 0.3 Mpta respectively. The mines consolidated in 2008 and have a current mining licence capacity of 1.2 Mtpa. Youyi is currently being upgraded to mechanised production. A Preliminary Design report has been completed and outlines the upgrading of major production systems and installation of a longwall unit to achieve an annual production of 3 Mtpa. The Preliminary Design report, associated approvals and licences have not yet been issued.

1.1 Scope of Work

MMC carried out the following scope of work for the Independent Technical Review:

. Gathered relevant information on both mines including Chinese resources and reserves, life of mine production schedules, operating and capital cost information;
. Reviewed resources and reserves, including quantity and quality of drilling, reliability of historic data, adequacy of resource estimation methods;
. Reviewed the categorisation of Chinese coal resource and coal reserve estimates;
. Completed Coal Resource and Coal Reserve estimations in compliance with the recommendations of the JORC Code;
. Completed mining schedules;

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APPENDIX IV

. Reviewed and commented on the appropriateness of planned mining methods and mine design in the relevant technical studies;
. Reviewed and commented on forecast operating and capital expenditure in the relevant technical studies; and
. Reviewed the company’s short and long term development plans.

1.2 Relevant Assets

The Relevant Assets are the Shaoyaohua Coal Mine and Youyi Coal Mine located about 30 km north and 25 km northwest of the Shanyin County Town respectively.

1.3 Review Methodology

MMC’s ITR methodology included the following:

Prepared for the study by translating and reviewing existing reports. The lists of reports reviewed are given in Information Sources below.
A site visit was conducted by a senior Chinese geologist, an international mining engineer and an international geologist. The International technical experts are both Competent Persons under the requirements of JORC and HKEx. Technical issues were discussed with technical project personnel. The site visit occurred from the 11–13th June 2010.
Project information was reviewed.
MMC prepared this Report and provided drafts to the Company and its specialist advisers.

The comments and forecasts in this report are based on information compiled by enquiry and verbal comment from the Company. Where possible, this information has been cross checked with hard data or by comment from more than one source. Where there was conflicting information on issues, MMC used its professional judgment to assess the issues.

1.4 Site Visits and Inspections

MMC’s technical team (‘‘the Team’’) consisted of two international senior mining consultants (Mr. Michael Johnson and Mrs. Merryl Peterson) and a senior consulting geologist (Mr. Hong Zhao). The site visit was conducted in June 2010. During the site visit, the team inspected the mine surface, production areas, access roads and completed general inspections of the surrounding countryside.

Open discussions were held with the project owner’s personnel and associated design institutes’ experts on technical aspects relating to the technical issues of the projects. Technical personnel were found to be co-operative in facilitating MMC’s work.

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APPENDIX IV

1.5 Information Sources

The following information sources were provided for review:

1.5.1 Shaoyaohua

Reports

. ‘‘Geology Report for Mechanising Mining Upgrade and Reformation of Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd’’ Shanxi Keruitong Industry Co., Ltd., August 2007.
. ‘‘The Geological Report (Daft) of Shanxi Shanyin Shaoyaohua Coal Industry Co., Lt’’ Shanxi No. 3 Exploration Institute, September 2010.
. ‘‘Preliminary Design (1.2 Mtpa) for Mechanising Mining Upgrade and Reconstruction of Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd’’ Beijing Huayu Engineering Co., Ltd, May 2008.
. ‘‘Safety Special Chapter of Preliminary Design for Mechanizing Mining Upgrade and Reconstruction of Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd’’ Beijing Huayu Engineering Co., Ltd, May 2008.
. ‘‘Environment Comment Report on Mechanizing Mining Upgrade and Reconstruction of Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd’’ Datong Environmental Protection Research Institute, November of 2008.

Licences

. Business Licence No. 140000105941961, Shanxi Province ICAB, December 31, 2006.
. Production Licence No. 201406211980, Coal Industry Bureau of Shanxi Province, July 14, 2010.
. Safety Licence No. MK (2010) D062, Coal Mine Safety Supervision Bureau of Shanxi Province, June 23, 2010.
. Mining Licence No. C1400002009101220038759 (1.2 Mtpa), Department of Land and Resources of Shanxi Province, October 14, 2009.

Approvals

. ‘‘Approval Reply of Geology Report for Mechanizing Mining Upgrade and Reconstruction of Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd’’ Coal Industry Bureau of Shanxi Province, October 23, 2007.

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. ‘‘Approval Reply for Preliminary Design (1.2 Mtpa) for Mechanizing Mining Upgrade and Reconstruction of Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd’’ Coal Industrial Bureau of Shanxi Province, May 22, 2008.
. ‘‘Approval Reply for Safety Special Chapter of Preliminary Design for Mechanizing Mining Upgrade and Reconstruction of Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd’’ Safety Supervision Bureau of Shanxi Province, September 1, 2008.
. ‘‘Record Certification for Environment Comment Report on Mechanizing Mining Upgrade and Reconstruction of Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd’’ Environmental Protection Bureau of Shanxi Province, January 21, 2009.
. ‘‘Approval Reply for Trial Operating of Mechanizing Mining Upgrade and Reconstruction Project of Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd’’ Coal Industrial Bureau of Shanxi Province, December 19, 2008.

1.5.2 Youyi

Reports

. ‘‘Geology Report for Integration of Merger and Acquisition of Shanxi Shanyin Youyi Coal Industry Co., Ltd’’ Shanxi Geological Prospecting Bureau No. 211 Team, April 2010.
. ‘‘Additional Geological Report (Draft) of Shanxi Shanyin Youyi Coal Industry Co., Ltd.’’ Shanxi No. 3 Exploration Institute, September 2010.
. ‘‘Preliminary Design (3.0 Mtpa) of Shanxi Shanyin Youyi Coal Industry Co., Ltd’’ Shanxi Weidemufang Coal Mine Design and Consultant Co., Ltd, October 2010.
. ‘‘Safety Special Chapter of Preliminary Design (3.0 Mtpa) of Shanxi Shanyin Youyi Coal Industry Co., Ltd’’ Shanxi Weidemufang Coal Mine Design and Consultant Co., Ltd, October 2010.
. ‘‘Environment Comment Report on Shanxi Shanyin Youyi Coal Industry Co., Ltd’’ Environment Protection department of Shanxi Coal Mine Administration College, October 2010.

Licences

. Mining Licence No. C1400002009101220038759 (1.2 Mtpa), Department of Land and Resources of Shanxi Province, October 14th of 2009.

Approvals

The client did not provide any approval documents relating to the previously mentioned reports during the site visit or the period of ITR report preparation.

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1.6 Competent Person and Responsibilities

1.6.1 JORC Requirements

The estimation and reporting of Coal Resources and Coal Reserves in this Competent Person’s Report complies with the recommendations in the Australian Code for Reporting of Mineral Resources and Ore Reserves (2004) by the Joint Ore Reserves Committee (JORC). Therefore it is suitable for public reporting.

The information in this report that relates to Coal Resources is based on information compiled by Merryl Peterson, a full time employee of MMC and a Member of the Australasian Institute of Mining and Metallurgy. Merryl Peterson has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which she has undertaken to qualify as a Competent Person as defined in the 2004 Edition of the Australasian Code For the Reporting of Coal Resources.

The information in this report that relates to Coal Reserves is based on information compiled by Michael Johnson, a full time employee of MMC and a Member of the Australasian Institute of Mining and Metallurgy. Michael Johnson has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he has undertaken to qualify as a Competent Person as defined in the 2004 Edition of the Australasian Code For the Reporting of Coal Reserves.

1.6.2 HKEx Requirements

Michael Johnson meets the requirements of a Competent Person, as defined by Chapter 18 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. These requirements include:

. Greater than five years experience relevant to the type of deposit.
. Member of the Australian Institute of Mining and Metallurgy (‘‘AUSIMM’’).
. Does not have economic or beneficial interest (present or contingent) in any of the reported assets.
. Has not received a fee dependent on the findings outlined in the Competent Person’s Report.
. Is not an officer, employee of proposed officer for the issuer or any group, holding or associated company of the issuer.
. Assumes overall responsibility for the Competent Person’s Report.

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1.7 Limitations and Exclusions

The review was based on various reports, plans and tabulations provided by the Client either directly from the mine sites and other offices, or from reports by other organisations whose work is the property of the Client. The Client has not advised MMC of any material change, or event likely to cause material change, to the operations or forecasts since the date of asset inspections.

The work undertaken for this report is that required for a technical review of the information, coupled with such inspections as the Team considered appropriate to prepare this report. It specifically excludes all aspects of legal issues, marketing, commercial and financing matters, insurance, land titles and usage agreements, and any other agreements/contracts that the Company may have entered into.

MMC has specifically excluded making any comments on the competitive position of the Relevant Asset compared with other similar and competing coal producers around the world. MMC strongly advises that any potential investors make their own comprehensive assessment of both the competitive position of the Relevant Asset in the market, and the fundamentals of the coal products market at large.

1.7.1 Limited Liability

The contents of this report have been created using data and information provided by or on behalf of the Company. MMC accepts no liability for the accuracy or completeness of data and information provided to it by, or obtained by it from, the Company or any third parties, even if that data and information has been incorporated into or relied upon in creating this report. The report has been produced by MMC using information that is available to MMC as at the date stated on the cover page. This report cannot be relied upon in any way if the information provided to MMC changes. MMC is under no obligation to update the information contained in the report at any time.

1.7.2 Responsibility and Context of this Report

All copyright and other intellectual property rights in this report are owned by and are the property of MMC. MMC grants the Client a non-transferable, perpetual and royalty-free Licence to use this report for its internal business purposes and to make as many copies of this report as it requires for those purposes.

1.7.3 Intellectual Property

All copyright and other intellectual property rights in this report are owned by and are the property of MMC.

MMC grants the Client a non-transferable, perpetual and royalty-free Licence to use this report for its internal business purposes and to make as many copies of this report as it requires for those purposes.

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1.7.4 Mining Unknown Factors

The findings and opinions presented herein are not warranted in any manner, expressed or implied. The ability of the operator, or any other related business unit, to achieve forwardlooking production and economic targets is dependent on numerous factors that are beyond the control of MMC and cannot be fully anticipated by MMC. These factors included sitespecific mining and geological conditions, the capabilities of management and employees, availability of funding to properly operate and capitalise the operation, variations in cost elements and market conditions, developing and operating the mine in an efficient manner, etc. Unforeseen changes in legislation and new industry developments could substantially alter the performance of any mining operation.

1.8 Capability and Independence

MMC provides advisory services to the mining and finance sectors. Within its core expertise it provides independent technical reviews, resource evaluation, mining engineering and mine valuation services to the resources and financial services industries.

MMC has independently assessed the Relevant Assets of the Client by reviewing pertinent data, including resources, reserves, manpower requirements and the life of mine plans relating to productivity, production, operating costs and capital expenditures. All opinions, findings and conclusions expressed in this Report are those of MMC and its specialist advisors.

Drafts of this report were provided to the Client, but only for the purpose of confirming the accuracy of factual material and the reasonableness of assumptions relied upon in this Report.

MMC has been paid, and has agreed to be paid, professional fees based on a fixed fee estimate for its preparation of this Report. None of MMC or its directors, staff or specialists who contributed to this report has any interest or entitlement, direct or indirect, in:

. the Company, securities of the Company or companies associated with the Company; or
. the Relevant Assets; or
. the outcome of the acquisition.

This ITR was prepared on behalf of MMC by the signatories to this letter, details of whose qualifications and experience are set out in Annexure A of this ITR. The Specialists who contributed to the findings within this Report have each consented to the matters based on their information in the form and context in which it appears.

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APPENDIX IV

2. PROJECT OVERVIEW

2.1 Project Location

The Projects are located in the Shanxi Province, of the People’s Republic of China. Details of the Projects’ location are shown in Figure 2-1 and Figure 2-2.

Shaoyaohua is located approximately 30 km north of the Shanyin County Town, Shanxi Province. The licence area is 5.3132 km[2] and approximate coordinates of the mine are:

˚ ˚
. Longitude 112 45'01" – 112 46'48"; and,
˚ ˚
. Latitude 39 44'03" – 39 45'38".

The mine is 20 km from the Dayun highway (Datong to Yuncheng) and 80 km from Datong City. Close access to established roads and rail infrastructure provides convenient transport of coal which is trucked from the mine. The mine road connects to a local highway (Maying Town Rd). Maying Town is 20 km from Beizhouzhuang Railway station and 35 km to Shanyin railway station on the Beitongpu railway line.

The Youyi mine is located about 25 km northwest of Shanyin County Town, Shuozhou City, and to the east of Dangjiagou Village, Yujing Town. The licence area is 8.5079 km[2] and approximate coordinates of the mine are:

. Longitude: 112°36'07" – 112°39'38"; and,
. Latitude: 39°38'28" – 39°40'09".

The administrative region is under the jurisdiction of Yujing Town. The mine is about 30 km from Dayun Highway in the east and is well connected to local highways.

2.2 Regional Environment

The Projects are located in a warm temperate zone with a continental climate. The climate features large temperature variations between seasons with cold winters, hot summers, high winds in spring and cool autumns.

The average annual temperature is 7.2˚C, maximum temperature is approximately 37˚C in July with minimum temperatures of approximately -30˚C in January.

The annual average precipitation is approximately 400 mm. Total annual evaporation is approximately 2,050 mm and the frost-free period is about 150 days per year.

Shaoyaohua is located to the west of Hongtao Mountain. The topography is relatively complex with hills and valleys over the mining area. The surface elevation ranges from +1,150 mRL to +1,250 mRL.

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Youyi is located to the east of Guancen Mountain. The area is mostly covered by loess (windblown dust of Pleistocene age), with a hilly topography due to years of erosion and incision of the soft material. Ravines and high mountains are spread around the licence area which creates complicated topography and landforms. The highest point is the ridge at the borderline to the east with 1,712 mRL elevation, while the lowest point is a ravine at the borderline in the northwest with 1,500 mRL elevation.

Several seismic events have been recorded in the Project area. According to the Code for Seismic Design of Buildings (GB50011-2001), ‘‘seismic fortification intensity’’ of the site is ‘‘Ms VII’’; meaning seismic peak ground acceleration is 0.15g. The following major earthquakes (above ‘‘Ms V’’) have been measured since 1949:

. 1952 — Ms 5.5 earthquake (epicentral intensity Ms VIII) occurred in Guo County (latitude 39.0°, longitude 112.7°);
. 1989 — Yanggao earthquake (Ms VIII) which occurred between Datong County and Yanggao County; and
. 1996 — Dayang area (Ms 5.8).

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==> picture [435 x 615] intentionally omitted <==

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

Salween
Huang
Mekong
Irtysh Ganges
N
1000
FIGURE 2-1
500
International boundary Provincial boundary Rivers Highways Kilometres
General Location Plan
LEGEND Shaoyaohua and Youyi Projects
0
Kingstone Energy Group Limited
50ûN 140ûE 40ûN 30ûN 130ûE 20ûN
140ûE JAPAN
Sea of Japan
(East Sea)
Sea
East China
Seoul SOUTH KOREA PHILIPINES
� �� NORTH KOREA Pyongyang
130ûE �� Harbin Changchung Yellow Sea Shanghai Shanghai Taipei Taiwan Manila 021Eû
Jilin Shenyang Liaoning Jiangsu Nanjing Hangzhou Zhejiang Fuzhou Project No : ADV-HK-03624
Fujian
Tianjin Tianjin Jinan Shandong Hefei Anhui Nanchang Jiangxi Hong Kong Hong Kong South China Sea
120ûE Beijing Beijing Shijiazhuang Hebei Henan Wuhan Guangdong Guangzhou
Nei Mongol Taiyuan Shanxi Zhengzhou Hubei Changsha Hunan Haikou 011Eû
Shaoyaohua and Youyi Projects Hohhot Guangxi Nanning Hainan
110ûE Xian Shaanxi
L. Baykal Guizhou Guiyang
Ulaanbaatar
Yinchuan Ningxia VIETNAM Hanoi
Lanzhou Gansu Chengdu Sichuan
MONGOLIA Kunming Yunnan LAOS Vientiane
100ûE RUSSIA AN Xining THAILAND 001Eû
I Qinghai
H Rangoon
90ûE MYANMAR
C
Lhasa
Urumqi g Thimbu BHUTAN Dhaka
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80ûE ijiXgnan iXaz BANGLADESH BayofBengal 90ûE
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NEPAL
70ûE Astana L. Balkhash INDIA
Bishkek
KAZAKHSTAN KYRGYZSTAN
New Delhi
PAKISTAN Islamabad 80ûE
50ûN 40ûN 70ûE 30ûN 20ûN
Yangtze
Amur
----- End of picture text -----

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APPENDIX IV

==> picture [401 x 583] intentionally omitted <==

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2.3 Licences and Approvals

2.3.1 Shaoyaohua

The Shaoyaohua Coal Mine is an operating mine with a ROM coal production licence capacity of 1.2 Mtpa. In 2008, the mine was upgraded from a small local operation to a higher capacity operation. The mine reformation was approved by the Shanxi Province government. The current licences and approvals held for the Shaoyaohua Coal Mine are summarised in the Table 2-1, Table 2-2 and Table 2-3.

Table 2-1 Shaoyaohua Coal Mine — Licence Details

Mine/Project Shaoyaohua Coal Mine

Name of certificate P.R.China Mining License Certificate No. C1400002009101220038759 Mine right holder Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd Location Shanyin County, Shuozhou City, Shanxi Province Name of minefield Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd Company category Co., Ltd Mine Method Underground mining Production Scale 1.2 Mtpa Minefield acreage 5.3132 km[2] Mining Seam Coal, No. 1 to No. 11 seams Excavation depth 1,520-1,300m Period Valid October 14th of 2009–October 14th of 2011 Issue Date October 14th of 2009 Issuer Department of Land and Resources, Shanxi Province

Table 2-2 Shaoyaohua Coal Mine — Mining Licence Coordinates

Point	X	Y
1	4,404,436.00	19,650,056.00
2	4,404,478.00	19,652,545.00
3	4,402,978.00	19,652,570.00
4	4,401,686.00	19,650,090.00
5	4,403,936.00	19,650,052.00

Source: MMC viewed a copy of the document.

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Table 2-3 Shaoyaohua Coal Mine — Approvals

		Valid	Period
Approvals	No.	From	To
Business	140000105941961	October 31st of 2010	December 31st of 2011
Coal Production	201406211980	July 14th of 2010	July 31st of 2040
Safety Production	MK (2010) D064	June 23rd of 2012	October 14th of 2013
Environment	—	—	—

Source: MMC viewed a copy of the documents

MMC provides this information for reference only and recommends that land titles and ownership rights be reviewed by legal experts.

2.3.2 Youyi

The Youyi mine is owned by Shanxi Shuozhou Shanyin Youyi Coal Mining Industry Co., Ltd. The current Youyi mine was formed following a merger between the former Baofeng Coal Mine in Shanyin County of Shuozhou City and Shanxi Shuozhou Shanyin Youyi Coal Mining Industry Co., Ltd.

Following the merger, the area of the mine expanded to 8.5079 km[2] . On November 3, 2009, the Department of Land Resources of Shanxi Province issued the Mining License approving the underground exploitation of the No. 4, No. 9, No. 10 and No. 11 coal seams at production rate of 1.2 Mtpa. The current licences held for the Youyi Coal Mine are summarised in Tables 2-4 and Table 2-5.

The client did not provide any approval documents relating to the previously mentioned mining licence during the site visit or during the period of ITR report preparation (Table 2- 6). The outstanding licences and approvals are required prior to the commencement of construction and include:

. Business Approvals;
. Trial Production Approvals;
. Coal Production Approvals;
. Safety Approvals; and
. Environment Approvals.

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Table 2-4 Youyi Coal Mine — Key Characteristics

Mine/Project Youyi Coal Mine

Name of certificate P.R.China Mining License Certificate No. C1400002009111220042845 Mine right holder Shanxi Shuozhou Shanyin Youyi Coal Industry Co., Ltd Location Shanyin County, Shuozhou City, Shanxi Province Name of minefield Shanxi Shuozhou Shanyin Youyi Coal Industry Co., Ltd Company category Co., Ltd Mine Method Underground mining Production Scale 1.2 Mtpa Minefield acreage 8.5079 km[2] Latitudinal extent 4.16 km Longitudinal extent 3.27 km Mining Seam Coal, No. 4 to No. 11 seams Excavation Elevation 1,660-1,380 mRL Period Valid November 3rd of 2009 — November 3rd of 2011 Issue Date November 3rd of 2009 Issuer Department of Land and Resources, Shanxi Province

Source: MMC viewed a copy of the document.

Table 2-5 Youyi Coal Mine — Mining Licence Coordinates

Point	X	Y
1	4,394,158.29	19,639,313.72
2	4,394,146.29	19,641,643.76
3	4,393,165.28	19,641,659.76
4	4,390,991.24	19,640,727.75
5	4,390,926.23	19,638,196.71
6	4,391,220.23	19,637,603.70
7	4,392,693.26	19,638,568.71
8	4,392,707.26	19,639,605.73

Source: MMC viewed a copy of the document.

MMC provides this information for reference only and recommends that land titles and ownership rights be reviewed by legal experts.

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2.4 History of Exploration

2.4.1 Shaoyaohua

Exploration has been undertaken at Shaoyaohua in various stages since 1959. The exploration results, particularly the recently completed exploration programme, have provided a significant geological basis for mining of Shaoyaohua Coal mine. The relevant history of exploration is described as below.

1959 — The General Exploration Report of the Middle Portion of Datong Basin was submitted by Team 115 of Shanxi Province Coal Exploration Company. The report was approved by Shanxi Coal Industrial Administration Bureau in August, 1962.

1970 — Yanbei District Shanyin County Pianling Coal Field Geological Report was issued by Shanxi Coal Field Geological Exploration Team. 5 boreholes were drilled southeast of the Shaoyaohua mining area. The exploration proved the existence of coal seam deposits.

1971–1973 — Team 228 of Shanxi Province Coal Exploration Company conducted a geological survey at a scale of 1:10,000. A topographic drawing at a scale of 1:5,000 was completed over a 200 km[2] which included the Shaoyaohua mining area.

1985–1987 — Team 115 of Shanxi Province Coal Exploration Company conducted detailed exploration in Zuoyun Southern Exploration Area over a total area of 880 km[2] . 27,323 m of exploration holes were drilled of which 22,743 m were surveyed and logged with geophysics. A hydrological borehole was also drilled. The ‘‘Geological information of Datong Coal Field Zuoyun Southern detailed Exploration Area’’ report was issued.

1986 — Team 228 of Shanxi Province Coal Exploration Company drilled 6 boreholes (S1, S2, S3, S4, S5 and S6). The ‘‘Datong Coal Field Shanyin County Shaoyaogou Mine Geological Report’’ was issued.

2007 — Shanxi Keruitong Industry Co., Ltd compiled the ‘‘Mine Geological Report for Mining Mechanized Reforming and Upgrading’’ of Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd. The purpose of the report was to establish a geological basis for the upgrade to mechanised mining with a production capacity of up to 1.2 Mtpa. No material geological exploration was done at this time. However, the historic geological information was comprehensively reviewed and the coal reserves were estimated according to the Chinese code.

2010 — An additional exploration programme had taken place on the mining area of Shaoyaohua mine. A total of 11 drilling holes (ZK1-11) including a borehole (ZK6) for hydrology were completed. A draft report for the additional exploration of Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd. was released by Shanxi Province No. 3 Geological Engineering Exploration Institute on September.

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2.4.2 Youyi

Since 1985, six stages of exploration have occurred in the location of the current Youyi licence. 1985 — Datong Coal Field Geological Exploration Team conducted a series of exploration close to Youyi mining area. The boreholes reached through No. 4. No. 9, No. 11 and No. 12 coal seams were:

. 3 boreholes (Zhu1, Zhu2, and Zhu3), for a total of 505 m drilled, over the original Baofeng mining area,
. 3 boreholes (No. 1, No. 2, and No. 3), for a total of 566 m drilled, over the original Xialaba Village mining area, and
. 3 boreholes (Zhuang1, Zhuang2, and Zhuang3), for a total of 536 m, over the Youyi mining area.

2006 — Shanxi Yanbei Geological Team drilled 3 boreholes (Bao1, Bao2, and Bao3) in total of 399 m over the Youyi mining area. The boreholes accessed No. 9 and No. 11 coal seams.

2006 — Shanxi Geological Exploration Bureau No. 211 Team drilled 3 boreholes (ZK001, ZK002, and ZK003), for a total of 263 m drilled, over the Youyi mining area. Only ZK001 met the coal, another 2 boreholes drilled in the no coal area. 2010 — An additional exploration programme had taken place on the mining area of Youyi mine. A total of 20 drilling holes including a borehole (ZK3-2) for hydrology were completed. A draft report for the additional exploration of Shanxi Shanyin Youyi Coal Industry Co., Ltd. was released by Shanxi Province No. 3 Geological Engineering Exploration Institute on September.

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2.5 History of Mining

2.5.1 Shaoyaohua

Construction began at Shaoyaohua in April 1987. In 1999, it commenced production as a joint-stock operation with a permitted (production licence) capacity of 0.15 Mtpa.

In 2008, a Preliminary Design Report was completed and approved. The Preliminary Design planned for longwall top coal caving to be implemented and associated infrastructure constructed with a planned coal production capacity of 1.2 Mtpa.

A renewed production licence was issued on October 14th of 2009 for 1.2 Mtpa. Coal production for the past 3 years is shown in Table 2-6.

Table 2-6 Shaoyaohua Coal Mine — Product Coal Production 2007–2009

								Production
Year								(ktpa)
2007								445
2008								1,367
2009								1,212
Source:	Independently	Audited	Sale	Tonnes	(Ernst	and	Young)

Three mining operations are adjacent to the Shaoyaohua mine:

. Yuanbaowan Coal Mine to the south is permitted to mine the Shan-2, No. 4, No. 9 and No. 11 coal seams with a licence capacity of 0.9 Mtpa;
. Qingyangling Coal Mine is located to the east and mine the No. 3, No. 4, No. 6 and No. 9 coal seams at a capacity of 0.9 Mtpa; and,
. Nanyangpo Coal Mine is located to the west and mine the No. 3, No. 4, No. 6 and No. 9 coal seams at a capacity of 0.9 Mtpa.

Historically the Shaoyaohua Mine has predominately mined the No. 4 coal seam. The majority of reserves in the Shan-2 seam have been depleted over the years or sterilised by under-mining in the lower No. 4 seam. Due to the depletion and undermining at the Shaoyaohua Mine, the Shan-2 seam is not planned to be mined.

2.5.2 Youyi

It is currently planned for Youyi to be upgraded to mechanised production. The Preliminary Design specifies upgrading of the major production systems and installation of 2 longwall units. The mine currently has a licenced production capacity of 1.2 Mtpa. An upgraded licence capacity of 3 Mtpa, along with relevant project approvals are required prior to construction of the new operation. Originally two mines had operated at what is now

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APPENDIX IV

known as Youyi Mine. They were Youyi (0.45 Mtpa) and Boafeng (0.3 Mtpa). The newly merged licence will keep the Youyi name and will operate out of the Boafeng industrial area. The Youyi Mine area has been mined extensively in past years by the previous operations. As a result of the previous mining, some areas of the deposit have been sterilised. The new mine designs are quite complex as they need to take into account all sterilised and protected areas from old workings, goaf areas, industry yards, along with geological structures, such as seam thinning (seam thinner than is deemed mineable), faults and sink holes.

3. GEOLOGY

3.1 Regional Geology

Both project areas lie within the Datong Coal Basin and share the same regional geology. The surface is generally covered by Quaternary loess and red clay with occasional outcrops of Upper and Lower Permian Shihezi Formation scattered on the hills or in the valleys. The structure of the coal field is characterized by a monocline with an approximate east-west strike, dipping at an angle of 10°. The stratigraphy is summarised in Table 3.1.

Table 3-1 Combined Mines — Regional Stratigraphic Sequence

		Stratigraphy Unit
Erathem	System	Series	Formation	Symbol	Thickness (m)
Kz	Quaternary	Holocene		Q4	4～18
		Upper Pleistocene	Malan	Q3m	0～120
	Tertiary	Pliocene		N2	85
Pz	Permian	Upper	Shiqianfeng	P2sh	＞170
			Shangshihezi	P2s	300
		Lower	Xiashihezi	P1x	120
			Shanxi	P1s	60
	Carboniferous	Upper	Taiyuan	C2t	60
					25
	Ordovician	Middle	Majiagou	O2m	100
		Down	Liangjiashan	O1l	＞125
			Yieli	O1y	50

The main coal-bearing measures are the Upper Carboniferous Taiyuan Formation (C3t) and the Lower Permian Shanxi Formation (P1s):

. Lower Permian Shanxi Formation (P1s); this unit is referred to as the Upper Coal Bearing Unit, and has an average thickness of approximately 107 m. There are 5 coal seams; No. 1, 2, 3, 4 and 5 hosted within this unit.

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. Upper Carboniferous Taiyuan Formation (C3t); is the main coal-bearing unit within the deposits. It has an average thickness of approximately 55 m, and contains seven coal seams. It has been divided into two sections based on lithological composition:
Upper Section. Composed of mudstone, sandy mudstone, and clay, and contains two coal-bearing units, namely the Middle and the Lower.
- The Middle Coal Bearing Unit contains three coal seams; No. 6 (upper), 6 (inferior) and 6.

The Lower Coal Bearing Unit contains four coal seams; No. 7, 8, 9 and 10. The mid-burden between No. 8 Seam and No. 9 Seam is a layer of stable marl, with thickness around 1 m. This stratigraphic unit can be used as a marker layer for correlation between the coal seams.

Lower Section. Overlies the Ordovician, and has an average thickness of approximately 20 m. It is composed predominantly of bauxite, bauxite clay, sand and shale, mudstone, and sandstone. There are also two layers of lenticular limestone and marl that can be found within the section.

Total thickness of the coal-bearing strata is 155 m which includes 11 coal seams. The main coal bearing formation is the Taiyuan Formation which includes seams No. 4, No. 6, No. 9-1 and No. 9-2. The mineable coal seam characteristics are shown in Table 3.2.

3.2 Structure of Deposit

3.2.1 Shaoyaohua

The mining area has a simple geological structure, which has been determined based on drilling data and coal seams exposed in underground roadways. The morphology of the structure is a northward dipping monocline with dip angle of 2° to 8°. On the monocline, there are a slightly broad anticline and two synclines. Three faults are developed, including two normal faults at the south-east portion of the mine, and another normal fault in the north. The main geological structures in the mine are described as follows:

. Anticline: located in the middle of the mine, plunging to the north. The western limb dips at an angle of 4° to 8°, and is slightly steeper in the north than in the south.
. Syncline A: located in the western area of the licence, plunging to the north-west, with a dip of 3° to 7° degrees on both limbs.
. Syncline B: located in the east of the mine area, plunging south, with a dip of 6° to 8° on both limbs.

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. F1 — normal fault: located in the south-eastern part of the mine, strike is northwest, dip north-east at 65°, the throw is about 0-5 m, extending 370 m then disappearing. The fault has been exposed in underground mining. The throw increases outside the licence area.
. F2 — normal fault: occurs 240 m east of and parallel to F1, strike northwest, dips south-west at an angle of 70°, with a throw of 0-10 m, extending about 300 m in the mine area and then disappearing. The fault has not been identified in mine workings, and is estimated based on geological data. The throw increases outside the licence area.
. F3 — normal fault: is located in the north of the mine area, striking to the northwest, dipping north-east at 65°, throw is 0–45 m. It has been mapped for a distance of 1,165 m in the mine area, and extends beyond the mine limits with increasing throw.

3.2.2 Youyi

The mining area has a relatively simple geological structure, based on data from bore holes and excavation of the existing shaft. The overall structure of the seams is a monocline dipping to the west with an angle of dip of 2°–11°; the monocline develops with one wide anticline and one syncline. The structures within the mine area can be described as follows:

. Anticline: The anticline is in the north of the mine, with an east-west trending axis. The dip is 14° on the northern limb, and 4° to 7° on the southern limb.
. Syncline: The syncline is in centre of the mine, with a north-south trending axis. The dip is 14° on the eastern limb, and 4° on the western limb.
. Three major faults (with displacement greater than 10 m), and four minor faults (with displacement less than 10 m) occur in the mine, as listed in Table 3.2.

Table 3-2 Youyi Coal Mine — Fault Characteristics

				Extent
		Throw		(into the		Dip	Angle
No.	Class	(m)	Type	mine)	Trend	direction	of dip	Remarks
F1	Major	0–20	Normal	1,100 m	NE23°	NW291°	70°	Inferred
F2	Major	0–10	Normal	300 m	NE75°	SE163°	70°–75°	As seen
F3	Major	0–30	Reverse	1,170 m	NW304°	NE50°	70°–75°	As seen
F4	Minor	0–10	Reverse	760 m	NW320°	NE38°	78°	As seen
F5	Minor	2	Normal	180 m	NW300°	NE30°	65°	As seen
F6	Minor	5	Normal	100 m	SN	E90°	72°	As seen
F7	Minor	4.5	Normal	140 m	SE15°	NW345°	60°	As seen

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Two collapsed sinkholes were encountered at the bottom of the main and auxiliary shafts during construction. The first is oval in shape with average diameter of 105 m. The second is an irregular kidney shaped pillar with an average diameter of 180 m. Both sinkholes have a funnel shaped body, with angle of 70° to 80° to the horizontal. All seams have collapsed into the sinkhole in this area.

4. COAL SEAMS AND COAL QUALITY

4.1 Shaoyaohua

The 2010 Geological Report indicates there are seven mineable coal seams at Shaoyaohua. A structural description of the seams and their lithologic order from highest to lowest are shown in Table 4-1.

Table 4-1 Shaoyaohua Coal Mine — Seam Structure

Seam	Structure		Partings	Variation	Mineable
Shan-2	Simple		0–4	Stable	Wholly
4	Complex		0–5	Stable	Wholly
6	Simple		0–3	Stable	Wholly
9U	Relatively	Simple	1–3	Stable	Wholly
9L	Simple		0–2	Stable	Mostly
10	Simple		0–1	Stable	Wholly
11	Relatively	Simple	0–2	Relatively	Wholly
				Stable

Source: 2010 Geology Report

The coal seam roofs consist of siltstone, mudstone, and argillaceous siltstone; the floors consist of Sandstone, argillaceous siltstone and mudstone. Carbonaceous mudstone and mudstone also occur in the partings of No. 4, 6, 9-1, 9-2 and 11 seams.

The physical properties of each coal seam in Shaoyaohua Coal Mine are relatively similar. The coal appears black and becomes brown after weathering. A description of the coal seam qualities, as defined by the Chinese coal quality guidelines, are summarised in Table 4-2.

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Table 4-2 Shaoyaohua Coal Mine — Seam Properties

Seam Type Ash Sulphur Phosphorous Shan[-2] Long Flame mod-high mod extremely low 4 Long Flame mod-high extremely low extremely low 6 Long Flame mod-high extremely low-low extremely low-low 9U Long Flame low-high extremely low-mod extremely low-low 9L Long Flame extremely low low-mod extremely low-low 10 Long Flame low-high low-mod extremely low-low 11 Long Flame & Gas low-mod low-mod low

Source: 2010 Geology Report

4.2 Youyi

The 2010 Geology Report indicates there are four mineable coal seams at Youyi. These are seam No. No. 4, No. 9, No. 10 and No. 11. Seam No. 4 is partially minable, as some areas have been oxidised as it is close to the surface. Seams No. 1, No. 2, No. 3, No. 5, No. 6, No. 7, No. 8, and No. 12 are present but not minable. The mineable seams, as well as basic seam structure information, are shown in Table 4-3.

Table 4-3 Youyi Coal Mine — Seam Structure

Seam	Structure	Partings	Variation	Mineable
4	simple-complex	0–6	Stable	Partially
9	simple-complex	0–12	Stable	Wholly
10	simple	0–1	Stable	Partially
11	simple-complex	0–6	Stable	Mostly

Source: 2010 Geological Report

The physical properties of each minable coal seam at Youyi are similar to each other; the seams are black to brownish black with weak vitreous luster, low hardness levels, medium specific gravity and high ductility.

The classification of the coal from coal seams is determined with ‘‘China’s National Standard Coal Classification’’ (GB5751-86) as the basis, the use of floating coal volatile fuel-based (Vdaf), Bond Index (GRI) and identified several indicators into account. Coal quality classification based on ‘‘Coal Quality Rating’’ (GB/T15224-2004) standards.

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A description of the coal seam qualities, as defined by the Chinese coal quality guidelines, are summarised in Table 4-4.

Table 4-4 Youyi Coal Mine — Seam Properties

Seam	Type				Ash		Sulphur		Phosphorous
4	Long	Flame			mod-high		extremely	low-mod	extremely low
9	Long	Flame	&	Gas	extremely	low-low	low-mod		extremely low-low
10	Long	Flame	&	Gas	mod-high		mod-high		extremely low-low
11	Long	Flame	&	Gas	low-mod		mod-high		low

5. COAL RESOURCE ESTIMATE

A standalone detailed Coal Resource Report (October 2010) has been prepared by MMC for the Relevant Assets, for which JORC Coal Resources have been estimated. The report entitled ‘‘King Stone Energy Group — ITR Report Coal Resource Report’’ has been compiled with the relevant ‘‘Competent Person Sign off’’ by Mrs. Merryl Peterson. This ITR Report contains extracts from the standalone detailed JORC Coal Resource Report (October 2010).

5.1 JORC Code Resource Requirements

The JORC Code provides minimum standards for public reporting of Resources and Reserves to the investment community. For coal deposits, the JORC Code is supplemented by the Australian Guidelines for Estimating and Reporting of Inventory Coal, Coal Resources and Coal Reserves (referred to as ‘‘the Guidelines’’). The Code and the Guidelines provide a methodology which reflects best industry practice to be followed when estimating the quality and quantity of Coal Resources and Reserves. A Coal Resource is defined as that portion of a coal deposit in such form and quantity that there are reasonable prospects for economic extraction. The location, quantity, quality, geologic characteristics and continuity of a Coal Resource are known, estimated or interpreted from specific geological evidence and knowledge. Coal Resources are subdivided into three categories:

. Measured — for which quantity and quality can be estimated with a high degree of confidence. The level of confidence is such that detailed mine plans can be generated, mining and beneficiation costs, and washplant yields and quality specifications, can be determined;
. Indicated — for which quantity and quality can be estimated with a reasonable degree of confidence. The level of confidence is such that mine plans can be generated and likely product coal quality can be determined; and
. Inferred — for which quantity and quality can be estimated with a low degree of confidence. The level of confidence is such that mine plans cannot be generated.

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Resources are estimated based on information gathered from Points of Observation. Points of Observation include surface or underground exposures, bore cores, geophysical logs, and/or drill cuttings in non-cored boreholes. It should be noted that Points of Observation for coal quantity estimation need not necessarily be used for coal quality estimation.

The estimate is calculated using the area, thickness and in situ density of the coal seam. The basis from which the in situ density is derived should be clearly stated. It is important to note that in-situ density is not the same as the density reported by the standard laboratory measurement.

If the coal seams in the deposit are faulted, intruded, split, lenticular, or have significant lateral variations in thickness or quality, then the distance between Points of Observation should be decreased.

The table of estimation of Coal Resources should be accompanied by a report, and a statement by the Estimator that the Resources comply with the JORC Code. The Estimator should state their qualifications and experience.

5.2 Geological Data

Separate geological models and Coal Resource estimates were completed for the Shaoyaohua and Youyi geological datasets. Geological data was provided in the form of Excel spreadsheets, containing drillhole collars, downhole lithology and quality data. Downhole depths in the spreadsheets had already been corrected using geophysical logs.

Three sets of drillholes were provided for each resource estimate.

Table 5-1 Combined Mines — Drillhole Information

Parameters	Shaoyaohua	Youyi
Cored Holes	S1 to S6	13 holes
Cored holes Prefixed ZK	ZK 1 to ZK 11	20 holes prefixed ZK
Underground Holes	J1–J8 (intersecting 4 seam)	8 holes (intersecting
		seams 9 and 11)

The Shoayoahua dataset provided downhole depths for coal plies and stone bands within the seam. For the S series holes, the stone bands were labelled with a rock type of ‘‘MD’’ (mudstone), whilst for the ZK series holes, the stone bands were labelled ‘‘CB’’ (carbonaceous). It has been assumed that the stone bands within the seam are mainly carbonaceous shale or mudstone.

The Youyi dataset provided listing downhole depths for coal plies and stone bands within the seam. For the S series holes, the stone bands were labelled with a rock type of ‘‘MD’’ (mudstone), whilst for the ZK series holes, the stone bands were labelled ‘‘CB’’ (carbonaceous). It has been assumed that the stone bands within the seam are mainly carbonaceous shale or mudstone.

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In China typically seams are sampled on a ply by ply basis, but only the coal bands are analysed. This has been the case for the Shaoyaohua and Youyi projects. In order to create a composite value for the complete seam, default stone values have been used as shown in Table 5-2.

Table 5-2 Combined Mines — Default Stone Values

Parameter	Applied Value
Relative Density	2.2
Moisture	1.50%
Ash	85% (ad)
Volatile Matter	2% (ad)
Total Sulphur	0.4% ad
Specific Energy	2 MJ/kg (ad)

The drillhole data was reformatted to a form suitable for loading into Mincom’s modelling package, Minescape. Table 5-3 to Table 5-6 summarise structural and quality statistics for each seam from the drillhole data.

Table 5-3 Shaoyaohua Coal Mine — Seam Thickness and Interburden

			Thickness (m)	Thickness (m)		Interburden (m)	Interburden (m)	Interburden (m)
Seam	No.	holes	Mean	Minimum	Maximum	Mean	Minimum	Maximum
SH2		19	2.70	1.01	3.35
4		19	7.56	4.93	13.50	26.97	15.89	38.42
6		19	2.83	0.10	6.98	15.38	5.78	32.65
9U		13	3.01	1.01	7.29	13.15	1.08	29.40
9L		19	3.19	1.00	7.25	2.20	0.88	8.15
10		18	1.14	0.80	1.32	4.64	2.50	8.46
11		18	3.41	0.51	5.31	10.85	7.41	15.22

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Table 5-4 Shaoyaohua Drillhole Statistics — Quality Data

			Raw				Clean
		No.				No.
Seam	Parameter	holes	Min	Max	Mean	holes	Min	Max	Mean
4	Moisture %	17	0.47	2.98	1.71	17	0.42	3.86	2.22
	Ash % dry	17	26.19	58.30	37.33	17	14.51	33.65	22.47
	Volatile matter % daf	17	28.02	37.95	33.64	17	27.81	37.01	33.05
	Total Sulphur %	17	0.35	1.77	0.58	17	0.36	1.07	0.57
	Specific energy MJ/kg dry	17	6.74	23.66	18.89	11	21.37	26.69	24.44
	Specific energy MJ/kg daf	17	12.96	30.08	27.12	11	23.49	29.67	26.80
	Apparent relative density	9	1.48	2.00	1.59
6	Moisture %	16	0.76	2.95	1.77	16	0.97	3.49	2.07
	Ash % dry	16	16.67	54.33	32.36	16	7.36	34.70	17.13
	Volatile matter % daf	16	25.96	41.39	34.75	16	2.33	41.11	32.41
	Total Sulphur %	16	0.34	1.84	0.70	15	0.38	2.01	0.61
	Specific energy MJ/kg dry	16	12.60	26.66	20.42	10	22.29	30.55	26.32
	Specific energy MJ/kg daf	16	23.43	31.99	29.18	10	24.19	33.22	28.92
	Apparent relative density	8	1.36	1.68	1.53
9U	Moisture %	17	0.93	3.00	1.80	17	1.12	4.08	1.96
	Ash % dry	17	15.24	45.39	31.89	17	5.90	43.99	22.18
	Volatile matter % daf	17	2.14	40.18	30.61	17	23.54	39.45	33.21
	Total Sulphur %	17	0.39	2.13	0.85	17	0.33	1.26	0.69
	Specific energy MJ/kg dry	17	16.21	27.96	21.41	11	18.32	29.80	24.28
	Specific energy MJ/kg daf	17	23.11	32.98	28.30	11	19.78	32.43	26.58
	Apparent relative density	8	1.32	1.61	1.49
9L	Moisture %	17	0.76	2.64	1.63	17	0.84	3.62	1.86
	Ash % dry	17	17.82	56.54	33.63	17	6.38	38.61	22.58
	Volatile matter % daf	17	22.88	43.98	33.80	17	24.23	42.95	33.46
	Total Sulphur %	17	0.35	3.83	1.31	16	0.40	1.27	0.76
	Specific energy MJ/kg dry	17	12.05	26.38	20.52	11	20.51	27.49	23.28
	Specific energy MJ/kg daf	17	23.11	32.43	27.86	11	22.44	29.35	25.13
	Apparent relative density	7	1.34	1.75	1.60
10	Moisture %	17	0.60	2.11	1.50	17	1.24	3.79	2.07
	Ash % dry	17	19.40	51.59	32.58	17	6.96	36.59	12.27
	Volatile matter % daf	17	26.64	50.09	39.97	17	2.79	45.52	37.04
	Total Sulphur %	17	0.31	3.42	1.64	16	0.44	1.79	0.96
	Specific energy MJ/kg dry	17	14.42	28.99	21.64	11	21.36	31.91	28.98
	Specific energy MJ/kg daf	17	16.04	39.26	30.54	11	16.04	35.86	30.20
	Apparent relative density	7	1.28	1.62	1.46
11	Moisture %	16	1.21	2.41	1.58	16	0.80	3.34	1.86
	Ash % dry	16	26.81	54.43	41.98	16	6.90	45.89	28.88
	Volatile matter % daf	16	2.02	42.10	28.79	16	24.47	42.63	32.03
	Total Sulphur %	16	0.40	3.19	1.74	15	0.44	1.62	1.20
	Specific energy MJ/kg dry	16	14.00	23.38	17.95	10	17.18	25.40	20.43
	Specific energy MJ/kg daf	16	22.26	31.94	26.90	10	17.26	28.13	22.25
	Apparent relative density	5	1.34	1.78	1.63

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Table 5-5 Youyi Coal Mine — Seam Thickness and Interburden

			Thickness (m)	Thickness (m)		Interburden (m)
Seam	No.	holes	Mean	Minimum	Maximum	Mean
4		12	6.01	1.30	17.9
9		27	6.82	1.10	24.45	17.24
10		17	1.23	0.70	1.78	3.70
11		27	4.15	0.79	9.23	7.42

Table 5-6 Youyi Drillhole Statistics — Quality Data

			Raw				Clean
		No.		No.		No.		No.
Seam	Parameter	holes	Min	holes	Min	holes	Min	holes	Min
4	Moisture %	9	1.37	14.58	3.73	7	1.47	2.93	2.34
	Ash % dry	9	21.21	51.55	43.93	7	5.92	9.33	7.92
	Volatile matter % daf	9	31.39	55.88	40.04	7	31.88	40.31	37.51
	Total Sulphur %	9	0.32	2.21	1.27	7	0.47	2.47	1.29
	Specific energy MJ/kg dry	9	10.19	24.59	18.65	7	28.05	31.10	29.87
	Specific energy MJ/kg daf	9	20.06	31.21	25.00	7	30.94	33.89	32.43
	Apparent relative density	0	—	—	—
	Yield %					7	22.84	82.09	42.73
9	Moisture %	20	0.90	12.39	2.11	17	0.41	2.44	1.73
	Ash % dry	20	22.40	64.24	39.73	17	7.40	11.41	8.76
	Volatile matter % daf	20	28.71	47.78	35.02	17	14.78	44.41	37.51
	Total Sulphur %	19	0.39	2.32	1.49	16	0.39	2.37	1.54
	Specific energy MJ/kg dry	20	9.82	28.56	21.45	16	20.63	30.62	29.03
	Specific energy MJ/kg daf	20	22.01	34.62	26.70	16	22.30	33.17	31.88
	Apparent relative density	2	1.60	1.72	1.66
	Yield %					15	17.46	76.18	36.46
10	Moisture %	17	0.96	2.16	1.62	16	1.20	4.04	2.21
	Ash % dry	17	16.97	59.24	38.45	16	4.68	13.41	8.67
	Volatile matter % daf	17	28.33	41.01	35.08	16	32.38	46.03	39.75
	Total Sulphur %	17	0.64	3.37	2.23	16	0.73	2.98	1.67
	Specific energy MJ/kg dry	17	15.69	26.99	21.08	16	22.55	30.95	29.48
	Specific energy MJ/kg daf	17	22.84	31.98	27.31	16	24.94	33.43	32.27
	Apparent relative density	2	1.64	1.69	1.67
	Yield %					15	17.49	74.78	39.24
11	Moisture %	21	0.45	4.12	1.44	18	0.35	2.87	1.72
	Ash % dry	21	18.71	62.25	37.68	18	7.03	14.81	9.33
	Volatile matter % daf	21	26.28	49.29	33.53	18	32.37	43.46	40.23
	Total Sulphur %	20	0.53	7.33	2.59	17	0.51	2.27	1.77
	Specific energy MJ/kg dry	21	9.28	28.77	22.52	17	27.60	30.59	29.64
	Specific energy MJ/kg daf	21	21.50	35.60	26.95	17	32.11	32.98	32.65
	Apparent relative density	2	1.55	1.62	1.58
	Yield %					8	5.18	69.62	32.24

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5.2.1 Structural Models

Geological models were constructed for the two models using the Stratmodel module of Mincom’s Minescape system. This software is particularly suited to modelling stratigraphic deposits.

Topographic data was provided as an Autocad drawing file (dwg), and gridded in Minescape using the FDM (finite distance method) interpolator, using a grid cell size of 25 m. This interpolator is suitable for gridding contour data.

The structure was modelled using Minescape stratigraphic modelling system, Stratmodel. Seam nomenclature for the models are shown in Table 5-7.

Table 5-7 Combined Mines — Nomenclature for Structural Models

		Nomenclature
Seam	Name	Shaoyaohua Model	Youyi Model
Shan	-2	SH2	—
Seam	4	4	4
Seam	6	6	—
Seam	9	—	9
Seam	9 Upper	9U	—
Seam	9 Lower	9L	—
Seam	10	10	10
Seam	11	11	11

A description of the structure models for both deposits are outlined below.

Shaoyaohua

Seam SH2 — (also named Shan 2) averages about 2.7 m thick, and contains stone bands up to 0.4 m thick. Total thickness of stone bands within the seam ranges from 0 m to 0.9 m, averaging 0.45 m.

Seam 4 — is the main seam and is currently being mined. It ranges from 5 m to 13 m thick, and contains several stone bands ranging from less than 0.1 m thick to 0.77 m thick. Total thickness of stone bands within the seam ranges from 0.5 m to 3.2 m, averaging 1.2 m. In general the seam is cleaner at the base, with the stone bands developing in the upper part of the seam, however in the north of the licence area, the stone bands are spread more evenly throughout the whole seam.

Seam 6 — averages about 3 m thick, and contains stone bands up to 0.5 m thick. Total thickness of stone bands within the seam ranges from 0 m to 1 m, averaging 0.3 m. In the north-west, in hole ZK2 the seam is absent, and the interburden between 4 Seam and the 9 Seam thins dramatically, from around 30–35 m to 15 m.

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Seam 9 — splits into an Upper (9U) and Lower (9L) ply. Where the seam has been logged as one entity it has been modelled as the lower ply. The upper ply is thus discontinuous in the model, occurring in the centre and to the west, and being absent in the north, south and east of the mine area. The interburden between the two plies is less than 1 m thick in a zone in the centre of the licence. It thickens to the south-east to up to 2.4 m thick, whilst in the north-west it reaches up to 8 m thick.

Seam 11 — dip gently to the south, at an average of 4 to 6 degrees. The planned mining height is upto 3.2 m. The remaining coal in areas where the seam is thicker than 3.2 m will be recovered using longwall top caving. This method will be predominantly used in Seam 4, but will also be employed in any of the mines where the seam is thick enough to support this method.

Coal quality was modelled in Minescape software using proximate analysis results for raw and clean coal. Ply by ply data was loaded and composited to a seam basis, using the defaults listed above for stone bands within the seam.

Youyi

Seam 4 — which is the main seam at the Shaoyaohua Mine, is only developed sporadically at Youyi; however where it is present it is quite thick ranging up to 17.9 m.

Seams 9 and 11 — are the main seams, which past mining has also affected. Seam 9 ranges from 4 m thick in the west of the licence to over 24 m thick in the southeast, and contains several stone bands ranging from less than 0.1 m thick to 1.4 m thick. Seam 11 averages about 4 m thick, and contains stone bands up to 0.7 m thick.

Seam 10 — has also been mined in places, but is quite thin, averaging only 1.2 m thick.

The area is a synclinal basin; on the western limb the seams dip gently at 2 to 4 degrees, but on the eastern limb the dip increases to up to 10 degrees. The planned mining height is 3.2 m. The remaining coal in areas where the seam is thicker than 4.5 m will be retrieved using longwall top caving.

The modelling parameters for both models are listed in Table 5-8, interpolators used are those recommended by Mincom.

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Table 5-8 Coal Mines — Modelling Parameters

Parameter	Shaohaoyua	Youyi
Schema	Kingstone1	Youyi
Topography model	Topo_mine1	Topo_mine2
Topo model cell size	25	25
Geology model cell size	25	25
Interpolator — thickness	Planar	Planar
Interpolator — surface	FEM	FEM
Parting modelled	Yes	Yes
Conformable sequences	Fresh	Fresh
Upper limit for seams	Topo	Topo
Control points	None	None
Constraint file	No	No
Mask polygons	No	No
Faults	None	None
Modelling method	elemental	elemental
Quality Interpolator	Inverse distance,	Inverse distance,
	power 2	power 2
Quality model type	Table	Table

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5.3 JORC Resource Estimates

The Points of Observation used to define the Coal Resources at Shaohaoyua and Youyi are those drillholes with a reliability type of 1 or 2, as shown in Table 5-9.

Table 5-9 Combined Mines — Points of Observation

==> picture [402 x 182] intentionally omitted <==

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

Type Point of Observation Description Value and Use of Point of Observation
1 Cored and analysed intersection of seam with
wireline log, may or may not have lithology
log TYPES 1–2
TYPES 1–3 Required for
2 Cored and analysed intersection of seam Reliable for quality
without wireline log, may or may not have structure and confirmation
lithology log thickness
3 Non cored intersection of seam with wireline Type 3 May
log, may or may not have lithology log support
quality
4 Non cored intersection of seam without Type 4
wireline log, may or may not have lithology Supportive of
log structure and
thickness
----- End of picture text -----

The following drillhole spacing has been used to define the Resources categories:

. Measured — Points of Observation less than 500 m apart;
. Indicated — Points of Observation less than 1,000 m apart; and
. Inferred — Points of Observation less than 2,000 m apart.

5.3.1 Shaoyaohua

Apparent relative density is available for the S holes, but only for a few of the ZK holes. Since the density is on an in situ basis, it is not necessary to apply the Preston-Sanders equation. No coal thickness cut-off has been used for resource estimation. In general the seams are thicker than 0.5 metres, except at the crop. No quality cut-offs have been used.

Table 5-10 shows the estimation of resources for the Shaoyaohua mine by seam. Table 5-11 shows the estimate of resources by classification.

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APPENDIX IV

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

Raw Clean Seam JORC Classification Average Thickness Volume Mass ARD Moisture Ash VM Sulphur SE Ash SE Parting (m) M cu.m. M tonnes % % dry % daf % MJ/kgdaf % dry MJ/kgdaf Mcu.m. 4 Measured 7.73 11.23 18.61 1.66 1.53 40.23 32.36 0.65 26.25 9.21 32.87 2.68 4 Indicated 6.86 7.92 12.53 1.58 1.81 36.15 33.81 0.58 27.45 8.36 32.88 0.80 4 Inferred Total 19.14 31.13 1.63 1.64 38.59 32.94 0.62 26.73 8.86 32.87 3.48 6 Measured 2.71 5.46 8.28 1.52 1.74 32.41 34.47 0.74 29.18 9.06 33.05 0.59 6 Indicated 2.76 6.21 9.52 1.53 2.00 30.93 35.63 0.70 29.55 8.61 33.15 0.55 6 Inferred 2.19 1.34 2.05 1.52 2.37 27.48 36.75 0.71 30.36 8.17 33.20 0.00 Total 13.01 19.84 1.52 1.93 31.19 35.26 0.72 29.48 8.75 33.11 1.14 9 Measured 2.93 11.37 1.68 1.48 1.56 21.90 38.94 1.31 31.57 7.72 33.01 2.72 9 Indicated 3.44 8.49 12.57 1.48 1.68 22.63 39.20 1.24 31.65 7.76 33.01 1.87 9 Inferred 3.44 2.07 3.02 1.46 1.97 21.89 40.08 1.18 31.76 7.54 33.04 0.36 Total 21.93 17.27 1.48 1.72 22.43 39.33 1.24 31.66 7.72 33.02 4.95 10 Measured 1.13 2.89 4.17 1.45 1.51 31.47 40.03 1.60 30.66 9.55 31.48 0.08 10 Indicated 1.03 2.16 3.19 1.48 1.54 33.48 40.49 1.84 30.38 8.96 31.61 0.14 10 Inferred 1.05 0.48 0.73 1.52 1.75 31.37 44.21 2.38 31.34 8.89 30.92 0.00 Total 5.52 8.10 1.47 1.54 32.25 40.59 1.77 30.61 9.26 31.48 0.21 11 Measured 3.66 7.06 11.82 1.67 1.49 43.70 29.74 1.63 26.48 9.57 32.75 2.53 11 Indicated 2.80 4.53 7.47 1.65 1.58 42.18 27.03 1.76 26.73 9.31 32.93 1.34 11 Inferred 1.69 0.70 1.09 1.57 1.86 36.36 24.66 1.89 28.80 8.25 32.91 0.08 Total 12.29 20.38 1.66 1.54 42.75 28.47 1.69 26.70 9.40 32.83 3.95 Grand Total 71.91 96.72 1.56 1.69 34.53 34.26 1.07 28.49 8.78 32.82 13.73	3.48	0.59 0.55 0.00	1.14	2.72 1.87 0.36	4.95	0.08 0.14 0.00	0.21	2.53 1.34 0.08	3.95	13.73

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APPENDIX IV

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

Raw Clean JORC Classification Seam Average Thickness Volume Mass ARD Moisture Ash VM Sulphur SE Ash SE Parting (m) M cu.m. Mtonnes % % dry % daf % MJ/kgdaf % dry MJ/kgdaf Mcu.m. Measured 4 7.73 11.23 18.61 1.66 1.53 40.23 32.36 0.65 26.25 9.21 32.87 2.68 6 2.71 5.46 8.28 1.52 1.74 32.41 34.47 0.74 29.18 9.06 33.05 0.59 9 2.93 11.37 1.68 1.48 1.56 21.90 38.94 1.31 31.57 7.72 33.01 2.72 10 1.13 2.89 4.17 1.45 1.51 31.47 40.03 1.60 30.66 9.55 31.48 0.08 11 3.66 7.06 11.82 1.67 1.49 43.70 29.74 1.63 26.48 9.57 32.75 2.53 Total 38.01 44.56 1.57 1.56 38.19 33.02 1.04 27.47 9.25 32.75 8.60 Indicated 4 6.86 7.92 12.53 1.58 1.81 36.15 33.81 0.58 27.45 8.36 32.88 0.80 6 2.76 6.21 9.52 1.53 2.00 30.93 35.63 0.70 29.55 8.61 33.15 0.55 9 3.44 8.49 12.57 1.48 1.68 22.63 39.20 1.24 31.65 7.76 33.01 1.87 10 1.03 2.16 3.19 1.48 1.54 33.48 40.49 1.84 30.38 8.96 31.61 0.14 11 2.80 4.53 7.47 1.65 1.58 42.18 27.03 1.76 26.73 9.31 32.93 1.34 Total 29.31 45.28 1.54 1.76 32.11 35.04 1.07 29.15 8.44 32.89 4.69 Inferred 4 — — 6 2.19 1.34 2.05 1.52 2.37 27.48 36.75 0.71 30.36 8.17 33.20 0.00 9 3.44 2.07 3.02 1.46 1.97 21.89 40.08 1.18 31.76 7.54 33.04 0.36 10 1.05 0.48 0.73 1.52 1.75 31.37 44.21 2.38 31.34 8.89 30.92 0.00 11 1.69 0.70 1.09 1.57 1.86 36.36 24.66 1.89 28.80 8.25 32.91 0.08 Total 4.59 6.89 1.50 2.05 26.86 37.08 1.28 30.83 7.99 32.84 0.44 Grand Total 71.91 96.72 1.56 1.69 34.53 34.26 1.07 28.49 8.78 32.82 13.73	8.60	0.80 0.55 1.87 0.14 1.34	4.69	0.00 0.36 0.00 0.08	0.44	13.73

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APPENDIX IV

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APPENDIX IV

5.3.2 Youyi

Apparent relative density is available for the S holes, but only for a few of the ZK holes. Since the density is on an in situ basis, it is not necessary to apply the Preston-Sanders equation.

No coal thickness cutoff has been used for resource estimation. In general the seams are thicker than 0.5 metres, except at the crop. No quality cut-offs have been used.

Table 5-12 shows the estimation of resources for the Youyi mine by seam. Table 5-13 shows the estimate of resources by classification.

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APPENDIX IV

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

	Parting	Mcu.m.	0.88	0.41	3.04	4.33	3.04	3.97	0.2	7.22	0.36	0.05	0	0.41	0	2.07	0.49	2.56	14.51
	Yield	%	39.59	41.07	35.08	39.84	37.42	37.38	34.1	37.28	39.25	38.42	38.2	38.93	35.76	32.33	28.45	33.39	36.39
	SE	MJ/kgdaf	32.22	32.31	32.8	32.27	32.02	31.98	32.71	32.02	32.05	32.37	32.61	32.19	32.66	32.58	32.68	32.62	32.26
Clean	Ash	% dry	7.52	7.63	7.65	7.56	8.96	8.72	8.23	8.82	8.96	7.99	7.44	8.54	9.21	8.94	8.31	8.99	8.70
	SE	MJ/kgdaf	26.61	25.69	24.26	26.26	26.50	25.97	26.92	26.27	26.85	27.74	28.59	27.28	26.92	26.42	25.95	26.58	26.43
	Sulphur	%	1.21	1.13	0.82	1.17	1.58	1.46	1.4	1.52	2.24	2.14	2.13	2.2	2.3	2.67	1.97	2.46	1.83
Raw	VM	% daf	41.15	42.27	34.72	41.22	36.12	34.75	34.74	35.42	34.55	35.4	36.18	34.96	32.67	32.96	32.2	32.77	35.24
	Ash	% dry	44.87	43.78	43.1	44.49	40.49	39.67	37.38	39.99	39.73	37.99	36.06	38.84	37.8	38.87	36.5	38.22	39.91
	Moisture	%	5.89	5.04	1.98	5.5	2.25	2.26	1.81	2.24	1.59	1.65	1.66	1.61	1.37	1.59	2	1.54	2.38
	ARD		1.65	1.65	1.65	1.65	1.68	1.67	1.64	1.67	1.67	1.66	1.65	1.67	1.6	1.59	1.62	1.6	1.64
	Mass	Mt	9.01	3.79	0.51	13.31	25.21	24.14	1.85	51.2	3.63	1.18	0.79	5.6	14.43	17.6	3.15	35.18	105.29
	Volume	Mcu.m.	5.46	2.3	0.31	8.07	14.97	14.5	1.12	30.59	2.17	0.71	0.48	3.36	9.03	11.05	1.95	22.03	64.05
	Thickness	(m)	6.68	3.87	2.96		8.75	6.79	2.83		1.07	0.75	2.11		3.97	4.57	4.09
	Status		Measured	Indicated	Inferred		Measured	Indicated	Inferred		Measured	Indicated	Inferred		Measured	Indicated	Inferred
	Seam		4	4	4	Total	9	9	9	Total	10	10	10	Total	11	11	11	Total	GrandTotal

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APPENDIX IV

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

Raw Clean Status Seam Thickness Volume Mass ARD Moisture Ash VM Sulphur SE Ash SE Yield Parting (m) Mcu.m. Mt % % dry % daf % MJ/kgdaf % dry MJ/kgdaf % Mcu.m. Measured 4 6.68 5.46 9.01 1.65 5.89 44.87 41.15 1.21 26.61 7.52 32.22 39.59 0.88 9 8.75 14.97 25.21 1.68 2.25 40.49 36.12 1.58 26.50 8.96 32.02 37.42 3.04 10 1.07 2.17 3.63 1.67 1.59 39.73 34.55 2.24 26.85 8.96 32.05 39.25 0.36 11 3.97 9.03 14.43 1.60 1.37 37.8 32.67 2.30 26.92 9.21 32.66 35.76 0 Total 31.63 52.28 1.65 2.59 40.45 35.93 1.76 26.66 8.78 32.23 37.46 4.28 Indicated 4 3.87 2.30 3.79 1.65 5.04 43.78 42.27 1.13 25.69 7.63 32.31 41.07 0.41 9 6.79 14.50 24.14 1.67 2.26 39.67 34.75 1.46 25.97 8.72 31.98 37.38 3.97 10 0.75 0.71 1.18 1.66 1.65 37.99 35.40 2.14 27.74 7.99 32.37 38.42 0.05 11 4.57 11.05 17.60 1.59 1.59 38.87 32.96 2.67 26.42 8.94 32.58 32.33 2.07 Total 28.56 46.71 1.64 2.22 39.66 34.70 1.91 26.16 8.70 32.24 35.80 6.50 Inferred 4 2.96 0.31 0.51 1.65 1.98 43.1 34.72 0.82 24.26 7.65 32.80 35.08 3.04 9 2.83 1.12 1.85 1.64 1.81 37.38 34.74 1.40 26.92 8.23 32.71 34.10 0.20 10 2.11 0.48 0.79 1.65 1.66 36.06 36.18 2.13 28.59 7.44 32.61 38.20 0 11 4.09 1.95 3.15 1.62 2.00 36.50 32.20 1.97 25.95 8.31 32.68 28.45 0.49 Total 3.86 6.30 1.63 1.90 37.24 33.65 1.73 26.43 8.12 32.69 31.87 3.73 GrandTotal 64.05 105.29 1.64 2.38 39.91 35.25 1.82 26.42 8.70 32.26 36.39 14.51	4.28	0.41 3.97 0.05 2.07	6.50	3.04 0.20 0 0.49	3.73	14.51

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APPENDIX IV

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INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

APPENDIX IV

6. COAL RESERVE ESTIMATE

A standalone detailed Coal Reserve Report and Statement (November 2010) has been prepared by MMC for the Relevant Assets, for which JORC Coal Reserves have been estimated. The report entitled ‘‘King Stone Energy Group — ITR Report Coal Reserves Report’’ has been compiled with the relevant ‘‘Competent Person Sign off’’ by Mr. Michael Johnson. This Report contains extracts from the standalone detailed JORC Coal Reserve Report (November 2010).

6.1 Background

The JORC code defines Coal Reserves as the economically mineable portion of a JORC Compliant Measured and/or Indicated Coal Resource, taking into account any diluting materials and allowances for losses, which may occur when coal is mined. To enable the estimation of Coal Reserves MMC has:

. Characterised the deposit;
. Reviewed the applied mining method and current life of mine designs;
. Estimated appropriate rates of mining, coal loss and stone dilution;
. Verified the applied cut off grades and design parameters in the Preliminary Design report as suitable for use in an Coal Reserve estimate; and
. Completed an operating cost assessment to determine the economic viability of extraction of the Coal Reserves.

This process and the findings are outlined in more detail below.

6.2 Description of Mining Method

Determination of the applied mining method is governed by the lateral extensiveness of the seam and the seam thickness. In the thicker seams (1.6 m and greater) longwall and longwall top coal caving methods will be employed using mechanised hydraulic roof supports (shields) and a shearer to mine the coal. In thinner seams (0.8–1.6 m) and where the coal seam is less laterally extensive and subsequently limits the possibility of large longwall blocks, the longwall mining will be carried out with the use of props to support the roof, and drill and blast mining methods. The mines will use road headers and drill and blast units to extract coal from the development roadways.

Currently at Shaoyaohua there is only one mechanised longwall unit operating. This is in the developed seam No. 4. There are plans for a second set of longwall equipment to be purchased to help aid in the planned increase in the mine’s production capacity. The coal clearance system from the working faces to the surface comprises of a series of chain conveyors (Armoured Face Conveyor (‘‘AFC’’) in the case of the Longwall, and scrapper chain conveyors in the gate roads and development districts) which then load onto a network of belt conveyors to be hauled to the surface stockpile. The current Shaoyaohua haul distances are relatively short.

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APPENDIX IV

6.3 Reserve Estimation Parameters

The Coal Reserve estimates are based on the mine design and mining parameters set out in the relevant Preliminary Design Reports (Pre-feasibility Studies). Mine layouts were optimised from the original; this included changing some longwall panel orientations and widths. This resulted in an increase to the resource recovery (by limiting the quantity of development roads required) and limiting coal sterilisation.

MMC has used a base price of 282RMB/t for saleable coal at Shaoyaohua (based on audited accounts from the first 9 months of 2010 from the Shaoyaohua Mine). For the Youyi Mine, MMC has applied a premium to this base price due to a higher quality coal product. An average base price of 314RMB/t has been applied to the Reserve Model used for the Youyi Mine, based on the prevailing market price for similar coal types in Shanxi Province. The volume sale forecast were based on the Company’s mine plans, which were adjusted by MMC for reasonableness.

MMC has been supplied with historical operating data for Shaoyaohua as well as the Shaoyaohua and Youyi Preliminary Design Reports. A site visit was undertaken in order to assist in determining suitable operating parameters to apply to the Coal Reserve estimation, and to qualify the extent of the current operations.

The following mining parameters have been applied to the Coal Reserve estimate for both the Shaoyaohua and Youyi mines:

. Mechanised Longwall (standard and top coal caving (‘‘LTCC’’)) — optimal face operating heights of between 1.6–3.2 m
. Mechanised Longwall — Top Coal Caving Profile. Greater than 3.2m. Different recovery rates were applied to caving profiles and listed below. These values were based on historical caving recoveries at the operating mine, and theoretical yields;
0–2 m: 60–70%;
2–4 m: 70%; and
4 m: 70–80%.
. Longwall block dimensions;
LTCC 100–150 m, >400 m long
Standard LW 150–220 m, >400 m long
Drill and blast LW 300 m long
. Roadway dimensions are from 4 to 5.5 m wide, and have been modelled to a maximum of 3.5 m high. This is in line with the roadway areas that were obtained from the Preliminary Designs. A mining recovery factor of 95–100% and a dilution factor of 5% has been applied to the working faces.

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APPENDIX IV

. Stone waste yield is based on current practise at Shaoyaohua. Stone partings greater than 80 mm are hand-picked, dilution from stone partings are modelled with an estimated 90% efficiency in removal of total stone. Stone in the 80 mm size fraction is estimated at approximately 70%.

6.3.1 Mining Assumptions and Layout

For both Projects the mine layout has been prepared in areas defined as Measured and Indicated Resources. The proposed layout extends beyond these areas into Inferred Resources. Under the JORC Code only Measured and Indicated Resources can be considered for conversion to Coal Reserves, therefore no reserves have been estimated within the Inferred Resource area. The mine layouts take into consideration the conditions and constraints such as protection pillars for pre-existing mining areas, drifts, inclines and shafts locations, goaf protection pillars, surface protection pillars for rivers, roads, and industry yards, and identified geological anomalies, such as faults, sink holes, seam thinning, partings and seam convergence. All mine plans are illustrated in Figures 6.1 and 6.2.

Mine geology and coal quality data has been modelled in a MineScape computerised software database. Mine planning has been carried out in a CAD software package. The MineScape data and mine plan have then been exported into Runge’s mine planning and scheduling software package (XPAC) for subsequent reserve estimation.

Typical parameters used for the mine plan layout are shown in Table 6-1.

Table 6-1 Typical Mine Plan Parameters

Item	Units	Value
Main heading roadways	No.	3
Gateroad panel roadways	No.	2
Gateroad pillar length	m	100
Main headings pillar width	m	41.7 – 42.0
Gateroad pillar width	m	20 – 30
Roadway width	m	3.5 – 4.6
Roadway height	m	3.0 – 3.5
Longwall panel width	m	130 – 200
Longwall extraction height	m	0.8 – 3.2
Licence boundary barrier	m	20
Goaf boundary barrier	m	20
All Surface Barrier	m	20

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APPENDIX IV

6.4 Reserve Estimation Procedure

Coal Reserves were estimated using Runge’s XPAC mine planning software and CADopia and XPAC UG mine design software. The Coal Reserve estimation applied the life of mine design parameters to the 3-D geological model created for the Coal Resource estimate. The following steps were completed to estimate Coal Reserves:

All mine designs were modelled using gridded values supplied from the MineScape 3D geological modelling program. These included, seam thickness, stone parting thickness, relative density, raw and product qualities, including ash, total sulphur, volatile matter, moisture and specific energy.
Grids were registered to the mine plans. Mine plans were imported into XPAC and modelled. Mining recoveries, loses and dilutions, were applied to the mine plan in XPAC to produce ROM (run of mine) tonnes.
Hand picking factors were applied to the stone dilution, and then added to the product quantities and weighted accordingly to produce qualities and product tonnes in XPAC.
The mine designs (including longwall layouts) from the Preliminary Design Reports were imported into the mine planning software. They were then checked to determine whether the designs were appropriate for the new geological model. In most cases they were appropriate. Where they were not, the layouts were redesigned to optimise recovery based on the data from the new geological model.
Tonnages and grades of coal contained within the final mine design were estimated using Runge’s XPAC mine planning software.
A mining schedule was developed using Runge’s XPAC mining and scheduling software. This schedule assumes base yearly production rates in accordance with current licence capacity. Base production rates of historical values for development units were modelled for each mine. A planned increase in production for each mine was also modelled. Realistic schedules were created providing positive float for all producing faces, in line with the planned increase in production capacity, and at the same time ensuring not to mine too quickly so as to put stress on the ventilation, coal clearance and other essential mine systems.
The estimated Coal Reserves were classified as Proved and Probable based on consideration of Mineral Resource Classification and additional operating considerations. MMC has classified all Coal Reserves as either Proven or Probable.

The JORC Coal Reserves estimate for the Shaoyaohua Coal Mine and Youyi Coal Mine are summarised in Table 6-1 and Table 6-2 respectively. All tonnes have been modelled and reported at in situ moisture.

A JOBC Reserve estimate checklist is shown in ANNEXURE D.

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INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

Table 6-2 Shaoyaohua Coal Mine — MMC Estimated JORC Coal Reserves

SEAM 4
Proven
Probable
Sub Total
SEAM 6
Proven
Probable
Sub Total
SEAM 9U
Proven
Probable
Sub Total
SEAM 9L
Proven
Probable
Sub Total
SEAM 11
Proven
Probable
Sub Total
TOTAL
Proven
Probable
Grand
Total

Quantity
Ash
Moisture
Specific
Energy
Specific
Energy
Total
Sulphur
Volatile
Matter
kt
%
%
(MJ/Kg)
(MJ/Kg)
daf
%
%
8,319
31%
1.9%
22.70
24.91
0.63%
30%
6,154
26%
2.2%
23.07
25.33
0.57%
32%
14,473
29%
2.0%
22.86
25.09
0.60%
31%
6,070
24%
2.0%
24.39
26.84
0.64%
29%
4,896
23%
2.2%
23.99
26.31
0.63%
31%
10,966
23%
2.1%
24.17
26.54
0.63%
30%
1,207
15%
2.0%
27.84
30.30
0.78%
35%
2,863
15%
1.8%
27.81
30.24
0.88%
36%
4,070
15%
1.9%
27.83
30.28
0.81%
35%
7,023
14%
1.6%
28.11
30.39
0.92%
36%
4,042
15%
1.6%
27.94
30.39
0.91%
36%
11,065
15%
1.6%
28.05
30.39
0.91%
36%
3,851
33%
1.7%
20.01
21.81
1.20%
30%
7,993
32%
1.8%
19.89
21.71
1.17%
31%
11,844
33%
1.7%
19.97
21.77
1.19%
30%
kt
%
%
(MJ/Kg)
(MJ/Kg)
daf
%
%
26,470
24%
1.8%
24.37
26.60
0.80%
32%
25,949
25%
1.9%
23.55
25.73
0.85%
32%
52,418
24%
1.9%
23.96
26.17
0.82%
32%

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APPENDIX IV

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

Table 6-3 Youyi Coal Mine — MMC Estimated JORC Coal Reserves

SEAM 4
Proven
Probable
Sub Total
SEAM 9
Proven
Probable
Sub Total
SEAM 10
Proven
Probable
Sub Total
SEAM 11
Proven
Probable
Sub Total
TOTAL
Proven
Probable
Grand
Total

Quantity
Ash
Moisture
Specific
Energy
Specific
Energy
Total
Sulphur
Volatile
Matter
kt
% (ad)
% (ad)
(MJ/Kg)
(MJ/Kg)
daf
% (ad)
% (ad)
2,758
41%
7.30%
20.25
27.43
0.80%
43%
2,016
39%
6.50%
19.86
27.41
0.87%
44%
4,774
40%
6.90%
20.09
27.43
0.83%
43%
13,539
37%
1.90%
22.38
28.09
1.63%
39%
4,289
34%
1.70%
23.18
28.46
1.50%
37%
17,827
36%
1.90%
22.57
28.18
1.60%
38%
1,618
35%
1.50%
21.55
27.01
2.16%
34%
304
31%
1.50%
20.82
29.08
2.15%
37%
1,923
34%
1.50%
21.44
27.34
2.16%
35%
7,059
32%
1.40%
25.46
29.33
2.38%
35%
5,511
34%
1.50%
23.7
27.75
2.56%
34%
12,570
33%
1.40%
24.69
28.64
2.46%
34%
kt
%
%
(MJ/Kg)
(MJ/Kg)
%
%
daf
24,974
36%
2.33%
22.96
28.3
1.8%
38%
12,120
35%
2.40%
22.81
28.0
1.9%
37%
37,095
36%
2.35%
22.91
28.19
1.82%
38%

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7. MINING

The underground coal mining methods currently used at Shaoyaohua and the proposed mining methods for Youyi are similar. A description of the Shaoyaohua’s applied and Youyi’s proposed mining methods are outlined below.

7.1 Description of Operations

The mining operations for each mine, as described in the Preliminary Design Reports and based on current operating practices at Shaoyaohua include:

. The use of two associated high production underground coal mining methods. These are longwall (LW) and longwall top coal caving (LTCC).
. Tunnelling for the mine development occurs mainly in coal and the surrounding waste rock. A conveyor system will transport coal from underground to the surface.
. The mining coal seams will be accessed by a development system of a main inclined shaft, an auxiliary inclined shaft and a ventilation inclined shaft.
. The raw coal produced from the mine will be conveyed to the surface where it will undergo de-stoning. Although the coal is currently washed, washing currently occurs after the point of sale.

7.2 Coal Mining Processes

Mining operations planned for each mine can be broken into the following key areas:

. Mine Development;
. Longwall Mining;
. Longwall Top Coal Caving;
. Coal Handling and Stockpiling;
. Transport.

Each of these areas is described below.

7.2.1 Mine Development Process

Mine development includes the development of inclines, main headings and gate roads. These developments are known as primary extraction, as they represent the first stage of mining.

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Inclines

Inclines provide access to and from the surface and the mining level of the mine for transport, conveyors, and mine services. They may be developed in stone (rock) or coal. The incline is designed to last for the life of the mine, or the life of the district they are required to service.

Main Headings

Main Headings are a network of roads that support all the mines services. They connect coal conveyors from the mining areas to the main conveyor for transport to the surface. The various roadways are used for storage of consumables. Main mine services such as underground power, and pumping stations are all managed from the main headings. They may be driven in stone (rock) or coal. The life of the main headings is for the life of the mine, or as long as it is required to supply services to the working faces they are connected to.

Both inclines and main headings also provide supplies and services (such as fresh air, water, and compressed air) for mining activities as well as return air roadways, waste water management (pumping lines and systems).

Gate Roads

Gate roads are developed on either side of a planned longwall panel. The gate roads are connected to each other by a ‘‘face’’ road. The gate roads supply services to the longwall, such as conveyors, fresh air, water, consumables, power, compressed air and transport, and also provide an escape way for the for the ‘‘return’’ air (fresh air that has been contaminated by dust and gas as part of the mining process) to pass.

Gate roads may be driven in stone (rock) or coal. The life of the gateroad is for as long as it is required by the longwall panel it is servicing.

Inclines, main headings and gate roads may be developed either in stone or coal. Development in stones is performed by drill and blast techniques which are very common and used throughout China. Development in coal will be performed with the aid of machines known as ‘‘road headers’’. The use of road headers is an effective method of extracting the coal.

7.2.2 Longwall Mining

A longwall mining system is a high production mining method which utilises a shearer to cut coal across a mining face. Mining faces can vary from 30 to 400 m in width and approximately 1 to 5 m in height. Coal extracted from a longwall face is conveyed along the face and transported to the surface via a system of belt conveyors.

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7.2.3 Longwall Top Coal Caving

LTCC is utilised in thick seams, to enable the recovery of coal in the roof above the upper height range of the longwall shearer. LTCC utilises a trailing conveyor to capture coal as it caves once the longwall supports are removed. Caving occurs as a result of longwall extracting of the bottom section of the coal seam. There are a number of different designs of LTCC systems. These systems utilise similar mining processes, although the operations may vary slightly.

7.2.4 Coal Handling and Stockpiling

The coal is transported underground via a network of conveyors, eventually being loaded into an underground storage bin, and transported directly to the surface. A conveyor will be used to transport coal to the surface, where it will be loaded onto a Run of Mine (ROM) Stockpile to be de-stoned loaded into a storage bin and will then await transport to point of sale destinations.

7.2.5 Coal Processing

A number of coal processing methods are available, depending on the nature of the raw coal and the product required. Options include:

. No coal washing — coal is sold in its raw form.
. Hand picking of stone — this is common in China, where medium to large (approximately +50 mm) stone fragments are removed by hand.
. Vibratory screen — these are used to remove stone included in the raw coal, perhaps from stone bands or dilution from the roof and floor.
. Coal washing and separation using dense medium cyclones or froth flotation.
MMC has not been provided any information for coal washing plants.

7.2.6 Transportation to Market

The coal is delivered to stockpiles located within the surface facilities of each mine, where it is sold and transported via truck (supplied by the customer).

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FIGURE 7-1
COMPACT STRESS Kingstone Energy Group Limited Shaoyaohua and Youyi Project Top Longwall Coal Caving
Goaf
2nd PRESSURE PEAK
Project No : ADV-HK-03624
Caving
DROP Rear AFC
STRESS ABRUPT
Broken Coal
S
S
E
R
T
S
W
O
L
TOP LONGWALL COAL CAVING
Front AFC
Pressure curve of top coal seam
Fractured Coal
r
1st PRESSURE PEAK
Roof Floo
S
S
E
R
T
S
K Virgin Coal
C
O
R
Caving Section Working Section
Preesurs
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7.3 Shaoyaohua

The Shaoyaohua review is based on the 2008 Preliminary Design Report (1.2 Mtpa) and current mining operations.

7.3.1 Mining Method

The Shaoyaohua mine is of simple geological structure, based on drilling data and coal seams exposed during underground development. The seams dip to the north with dip angle of 2°~8°. Three faults are developed including two normal faults at the east south portion of the mine and another normal fault in the north.

The Shaoyaohua deposit has up to six mineable coal seams with seam No. 4 currently being mined, the Shan-2 seam has already been depleted. The mining of the seams in sequential order begins with the top seam (No. 4 seam) and concludes with the bottom seam (No. 11). During the period covered by scheduling completed in the Preliminary Design, the top two seams are mined in descending order (No. 4 and 6 Seams).

The mine plan categorises the seams to be mined into three thickness categorisations: thin, moderate and thick. The thin seams are No. 10 and No. 11. The moderate seams are No. 6, No. 9-1 and No. 9-2. The thickest seam is the No. 4 seam with an average mineable thickness of 6.44 m.

The mine design is based on the Chinese design code. In applying this code, the thick No. 4 seam is considered appropriate for the LTCC method. The other mineable seams will be extracted using the LW method, and where applicable LTCC will be employed to optimise recovery. The following methods are employed to extract the coal:

. LW mining method has been selected for the No. 6, No. 9-1, No. 9-2, and No. 11 seams; and
. LTCC mining method has been selected for the No. 4 seam. Some areas of seams No. 6, No. 9-1, No. 9-2, and No. 11 will also be suitable for LTCC.

These mining methods have been implemented successfully in China and MMC consider that these methods are appropriate for coal extraction at the Shaoyaohua mine.

7.3.2 Mining Areas

The pit bottom facility consists of a system of three main roadways developed to provide access to the headings in each mining district. Each mining district is an independent production unit with full production infrastructures.

Headings can reach longwall gate roads for the coal haulage conveyor, men and materials and ventilation. The belt, rail, and ventilation headings are separately deployed in each seam. The set of three main headings is planned to access all areas. Longwall panels will run off the main headings through link roadways to access all coal seams.

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7.3.3 Mine Development

The mine is accessed by means of an inclined drift system. The inclined drifts are developed by reforming the original inclined drifts. The pit bottom of the drifts and shaft reach the main mineable coal of No. 4 seam and will ultimately reach the No. 6 seam.

Main (Belt Conveying) Inclined Drift

The main drift is intended to serve as the sole means of conveying coal to the surface and will also serve as an air intake. The relevant design parameters of this drift are given in Table 7-1.

Table 7-1 Shaoyaohua Coal Mine — Main Inclined Drift Design Parameters

Design Parameters	Units	Values
Roadway Width	m	3.6
Finished Section	m2	9.71
Length	m	477
Inclined Angle	˚	23˚
Supporting	—	Stone/Concrete Lining
Drift Equipment	—	Fire-resistance Belt, Width = 1.1 m.

Auxiliary Inclined Drift

The auxiliary drift is utilised for the hoisting of underground personnel, mine materials and equipment. The hoist servicing the auxiliary drift is required to be of sufficient capacity to hoist the longwall shields and most assembled units of mining equipment. The auxiliary drift will eventually need to service all mineable coal seams. The relevant design parameters of this drift are given in Table 7-2.

Table 7-2 Shaoyaohua Coal Mine — Auxiliary Drift Design Parameters

Design Parameters	Units	Values
Roadway Width	m	3
Finished Section	m2	7.74
Length	m	446
Inclined Angle	˚	25
Supporting	—	Stone/Concrete Lining
		30kg/m, 900 mm
Hoist	—	Dual Track Railway

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Ventilation Inclined Drift

The ventilation inclined drift is intended to serve as the return air shaft for the mine. The auxiliary and main drifts will serve as intakes. The drift must have sufficient cross-sectional area to ventilate the mine while maintaining a ventilation velocity of less than 15 m/sec (Chinese code), and provide a minimum of surface resistance to minimise turbulence and thus reduce power costs. The preliminary plan is to extract all mineable seams. The relevant design parameters of this shaft are given in Table 7-3.

Table 7-3 Shaoyaohua Coal Mine — Ventilation Shaft Design Parameters

Design Parameters	Units	Values
Shaft Diameter	m	4.0
Finished Section	m2	12.16
Length	m	430
Inclined Angle	˚	25
Supporting	—	Stone/Concrete Lining

7.3.4 Production Schedule

The Shaoyaohua Preliminary Design report does not provide a detailed mining schedule; this is typical of Chinese Preliminary Design reports. A general schedule is provided based on the planned mining production capacity of 1.2 Mtpa. However, raw coal production is estimated to be approximately 2 Mt for 2010. The mine is currently operating at a higher production rate than the designed and licenced production rate.

King Stone has informed MMC that it plans to increase raw coal production to approximately 4 Mtpa in the next two years. The additional production capacity will reportedly be attained through the purchase and commissioning of additional mining equipment (including a second long wall unit) as well as upgrades to coal handling and ventilation systems which is scheduled to commence in December 2010. A Preliminary Design for the expansion has not been completed and, as such, a detailed review of the expansion has not been completed. Based on the information provided to MMC, it is estimated that the total expanded production capacity of the mine will be closer to 3.5 Mtpa.

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Current Production

The main production units to be implemented in the Shaoyaohua mine plan are given below. These are based on the production assumptions outlined in the 2008 Preliminary Design (with one longwall unit). The longwall unit can produce approximately 1.3 Mtpa coal.

Table 7-4 Shaoyaohua Coal Mine — No. 4 seam Longwall Unit Operating Design Parameters

Design Parameters	Units	Values
Shifts Per Day	No.	4
Hours Per Shift 9	Hours	6
Operating Days Per Year	Days	330
Panel Width	m	130
Mining Height	m	2.5
TCC Height	m	4.62
Retreat Rate Per day	m/d	3.6
Annual Advance Rate	m	1045
Mining recovery	%	93
Output per day	t	3,927
Output per year	Mt	1.296

Source: 2008 Shaoyaohua Preliminary Design Report

MMC notes that during the site visit mine management quoted 80% as the total panel recovery. The Preliminary Design estimates a recovery of 93% from the lower working section.

Shaoyaohua Production Expansion Plan

The Company has developed an internal plan to increase coal production to approximately 4 Mtpa. This expansion will consist of an additional longwall unit in the No. 4 seam and an upgrade to the coal handling, underground drainage and ventilation system. The requirements for achieving the increased coal production are outlined in Section 8 — Project Development.

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Forecast Mining Schedule

Based on the King Stone’s plans to increase production to 4 Mtpa, MMC has completed a mining schedule to estimate a potential increase in coal production. An abridged schedule is shown in Table 7-5, the full schedule is shown in Annexure E. This schedule is based on the following:

. An updated Preliminary Design is required to be approved for the 4 Mtpa mine plan. Additionally, the relevant operating licence and approvals will need to be updated to enable the increase in capacity.
. Coal production above the current licence capacity has been delayed until 2013, which is the earliest forecast period (5 years of coal production following receipt of the current mining licence) that the mine is likely to receive an increased mining capacity. A production rate of 1.3 Mtpa has been modelled from 2011 to 2013.
. The forecast schedule takes into consideration the substantial amount of mine development required in the early years of the schedule to enable the longwall units to operate efficiently.
. Although the Company plans to apply for a 4 Mtpa licence, MMC has modelled a maximum coal mining capacity of 3.5 Mtpa due to the following considerations:
Based on the mine plans used in the Reserve estimations, MMC does not believe there is sufficient planned mine development capacity to sustain a mining rate of greater than 3.5 Mtpa.
A production rate of 4 Mtpa requires a higher level of mine planning which has not been currently been completed to ensure the rate is technically achievable and sustainable.
Mine ventilation modelling is required to be completed to ensure ventilation is sufficient for a 4 Mtpa production rate.

The mine reserves are technically too low to enable an increase to the approved mine capacity; however, MMC notes that this rule has not recently been applied in the Shanxi Province. The application of this rule in the future may impact the increased mine production capacity being granted.

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7.3.5 Site Infrastructure

Industrial Yard

The Shaoyaohua Coal Mine industrial yard is located in the southern area of the mine. The main facilities are listed below:

. Main and auxiliary inclined drift haulage system for material and personnel transportation;
. ROM stockpile, coal surface processing system, coal load-out, and stone rejects load-out;
. Machinery repair and timber prop workshops, and material and equipment storage;
. Underground wastewater treatment plant and underground water supply system;
. Power substation and power supply system; and,
. Management building, operations (dispatch) building, bath house, and employee dormitory.

Coal Handling

Coal is transported underground via a 1.0 m wide (700 tph) conveyor to an underground bin of 500 m[3] . A 1.2 m wide (2.5 m/s) enclosed conveyor will then be used to haul coal to the surface.

Once on the surface coal is conveyed from the mine via a 1.0 m wide (2.0m/s) enclosed conveyor system into a surface vibrating screen system. Through processing, the product mix will be:

. Fine coal (size: 0–80 mm); and
. Lump coal (size: ≥80 mm).

Lump coal will be hand sorted to remove stone, then stored in a storage bin for sale as local domestic thermal coal. The fine coal will be transported to two surge bins or a ground stockpile for either subsequent loading into trucks or further processing in a washing plant. MMC has not reviewed estimated yields or throughputs for the planned fines washery. MMC are informed that a Washery Preliminary Design Report is being prepared.

Men and Materials Transport

Men and materials transport underground will be via a rail heading system in the Mining District. It will be mainly responsible for lifting personnel, materials, equipment, large equipment and waste rock.

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2032	3,044	45.1	1.37	17.2	26.4	1.61	2,134	33.5	1.72	19.9	21.8	1.19
2031	3,095	46.8	1.37	16.3	25.2	1.70	2,044	38.5	1.60	20.1	21.8	1.12
2030	3,400	41.4	1.64	18.0	27.4	1.82	2,818	26.3	2.14	19.9	21.7	1.23
2029	3,500	45.7	1.51	17.2	26.6	1.56	2,392	35.0	1.63	19.5	21.4	1.25
2028	3,481	38.9	1.45	19.0	26.8	1.59	2,614	31.6	1.44	21.5	23.3	1.13
2027	3,580	23.9	1.43	24.1	31.1	1.98	2,597	15.4	1.47	27.8	29.8	1.02
2026	3,464	20.1	1.40	25.7	32.0	1.30	2,520	14.6	1.32	28.2	30.5	0.80
2025	3,440	25.6	1.47	23.5	31.2	1.59	2,556	14.4	1.73	28.0	30.3	1.00
2024	3,450	27.7	1.46	22.5	30.5	1.27	2,446	15.5	1.81	27.7	30.3	0.85
2023	2,942	24.7	1.74	23.9	31.5	1.13	2,266	14.5	2.11	27.8	30.4	0.82
2022	3,403	18.4	1.45	26.4	32.2	1.01	2,560	15.8	1.78	27.7	30.1	0.80
2021	3,549	28.1	2.16	22.4	30.0	0.72	2,961	21.4	2.40	23.9	26.1	0.57
2020	3,500	31.5	1.90	20.2	29.8	0.72	2,978	20.3	2.35	24.8	27.3	0.71
2019	3,500	34.3	1.55	20.0	28.8	0.65	3,013	23.6	1.76	24.9	27.5	0.63
2018	3,386	36.1	1.59	19.6	27.6	0.71	2,576	28.1	1.90	22.9	25.0	0.56
2017	3,500	36.5	1.64	19.4	27.5	0.45	2,792	26.9	2.06	23.1	25.3	0.54
2016	3,500	35.1	1.79	20.0	27.8	0.67	2,838	26.0	2.23	23.2	25.5	0.61
2015	3,502	41.1	1.40	17.6	26.7	0.76	2,747	30.2	1.90	22.7	25.2	0.70
2014	3,500	41.8	1.49	17.4	26.5	0.61	2,638	31.0	1.87	22.4	24.9	0.63
2013	1,300	40.9	1.60	17.9	26.8	0.60	985	31.2	1.78	22.5	24.6	0.60
2012	1,300	44.3	1.37	14.8	23.2	0.56	952	32.1	1.99	22.8	24.2	0.55
2011	1,300	44.2	1.35	15.6	24.7	0.53	992	30.7	1.83	23.2	24.7	0.59
	kt	%	%	(MJ/Kg)	(MJ/Kg)daf	%	Kt	%	%	(MJ/Kg)	(MJ/Kg)daf	%
Shaoyaohua	ROM Tonnes	Ash Content	Moisture	SE	SE (dry ash free)	Total Sulphur	Prod Tonnes	Ash Content	Moisture	SE	SE (dry ash free)	Total Sulphur

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Transport from underground to surface for both men and materials will be via the auxiliary inclined drift. Of note is that in the Youyi 3.0 Mtpa Preliminary Design Report plans an additional inclined shaft so that men and materials are transported via separate inclined shafts. This is due to loss of production from expected congestion if men and materials share the same shaft.

Water Supply

There are several possible sources of water for the mine:

. Water from the mine underground Ordovician limestone aquifer; and
. Underground water from mine drainage system.

Mine water used in the mine, predominantly for dust management and fire fighting system, will be sourced from the mine waste water treatment plant. Underground Ordovician limestone aquifer water is suitable for domestic applications.

Power supply

A 35 kV substation has been built at the industrial yard. Due to Chinese regulations, dual power line circuit have been installed, one from Yujing 35 kV substation and another one from Yuanbaowan 35 kV substation. The mine will reduce the voltage, as necessary, for supply to the mine.

Underground Mine Water Drainage System and Pumping

The normal water and maximum water discharge has been calculated in the Preliminary Design. The normal water discharge is 1,200 m[3] /d; and the maximum water discharge is 2,400 m[3] /d.

Three mine pumps are planned to be installed. During a normal water discharge period, it is anticipated that one will be operational, one pump on standby, and one pump undergoing maintenance. The maximum water discharging period is to incorporate ‘‘double redundancy’’ for pumping capacity. This requires the installation of the three pumps, each capable of independently handling the mine pumping requirements. This ensures pumping continuity in the event of maintenance and/or pump failure.

Ventilation

In order to ensure a high rate of productivity, the longwall will need a face velocity of approximately 1.4 m/sec to effectively control the face methane emissions and minimize dust exposure to the personnel operating at the coal face. It is expected that the mine will need a total of three roadway developing faces to match the planned

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rate of longwall/shortwall retreat. Combining the requirement of ventilation for the underground explosives magazine, transformer stations, stores etc. The total ventilation requirements (1.2 Mtpa) for outbye use are 73 m[3] /sec (4,380 m[3] /min).

The 1.2 Mtpa Preliminary Design recommends a centralized exhaust ventilation system with the main and auxiliary inclined shafts as air intakes and the ventilation inclined shaft as an air return. Chinese regulations require the installation of a standby or backup ventilation fan, so preliminary design further recommends the use of two axial flow fans (FBCDZ-8-No. 23B) each sufficient of 73 m[3] /sec capacity.

MMC are of the opinion that the proposed ventilation system should be sufficient to satisfy the needs of Shaoyaohua Coal mine for a 1.2 Mtpa production rate.

Monitoring system

The Preliminary Design has planned the installation of environmental monitoring sensors at strategic locations throughout the mine. All monitored data is to be transmitted to the surface for monitoring by site personnel. Finally, all mine monitoring systems are required to incorporate the capability of transmitting data to the city or provincial safety bureau.

The mine monitoring system for Shaoyaohua Mine is to be designed for monitoring airflows, carbon monoxide (CO), carbon dioxide (CO2) and methane (CH4) in the mine atmosphere at multiple (and often remote) locations throughout the underground mine. Preset alarms are to be programmed into the system to warn designated personnel for immediate response purposed and to automatically de-energize power when gas concentrations exceed the statutory limits. In addition, the mine monitoring system is to monitor the performance of numerous pieces of equipment and assemblies of components of the mine via a fiber optic interface. MMC also consider that the proposed monitoring system is consistent with Chinese standards and is appropriate for Shaoyaohua Coal mine.

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7.4 Youyi

The Youyi 2010 Preliminary Design proposes a mining rate of 3.0 Mtpa and lists the No. 4, No. 9, No. 10 and No. 11 seams as suitable to be mined. The No. 9 seam is the main seam, and has been mined in some areas in the past. The mine design is based on the Chinese design code. The following methods are proposed to extract the coal:

. LTCC mining method to be applied to the No. 4 and No. 9 seams as they average a thickness of 4.0 and 5.1 m respectively.
. LW mining method to be applied to the No. 11 seam as it has an average thickness of 2.5 m (ranges from 0.8–7.3 m) in thickness. Longwall is also proposed for the thin No. 10 seam.

MMC has noted that the No. 10 seam and areas of the No. 11 seam are too thin to be mined with the longwall equipment proposed for the site. Areas in general, where the lateral extent of the seam average thickness is less than 1.6 m (adopted minimum height limit of shearer and longwall supports proposed) will require an alternative mining method. MMC suggests the use the longwall drill and blast (‘‘LWDB’’) mining method to extract the coal from the No. 10 seam and certain areas of the No. 11 seam. LWDB is an accepted mining method for extracting coal in China. It is a low capital, low production rate method for extracting coal that cannot be extracted by the proposed LW and LTCC mining methods.

It is recommended that further detailed planning and scheduling be undertaken to assess the most suitable method of mining from these thin seams. The Preliminary Design has selected the LW and LWTCC mining methods based on the following criteria:

. The dip of the coal is less than 15 degrees;
. The depth of cover is 120 m or greater;
. The stone partings in the seams are low strength, and will not limit the caving capability of the coal;
. The coal is jointed sufficiently to allow LTCC; and,
. The spontaneous combustion period of the coal is 6 months, which is higher than the 3 months required for LTCC.

Despite the seemingly favourable conditions there are risks associated with the implementation of the LTCC mining method. One risk outlined in the Preliminary Design report is related to the immediate roof (called a ‘‘false roof’’) above seam No. 9. The roof is weak and has a tendency to cave. It has a thickness of 0.16–1.14 m, with an averaging thickness of 0.43 m, the lithology is generally a mudstone and mudstone-sandstone.

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As a result of this roof, there may be issues associated with dilution as well as coal recovery. No allowance has been made in the Preliminary Design for reduced recovery of LTCC due to these roof conditions. The roof above this is competent sandstone.

7.4.1 Development

By economic and technical comparison, it was determined that the mine will be developed via a main inclined shaft, auxiliary inclined shaft, inclined personnel/ ventilation shaft, vertical ventilation shaft and inclined ventilation shaft, as it provided a separate means of access for personnel and materials (auxiliary) shaft, which should increase safety and decrease delays. The new Youyi mine is a merger of the old Baofeng and Youyi mines. The location of the new Youyi mine is the site of the old Baofeng mine, as the existing infrastructure at Baofeng is superior to that of Youyi. A summary of the existing and required infrastructure is given in Table 7-6.

Table 7-6 — Youyi Coal Mine — Summary of Existing and Required Infrastructure at Youyi

Name	Source	Use
Main inclined shaft	Existing	Coal haulage
Auxiliary Inclined Shaft	New	Hauling stone, material and
		equipment
Inclined Personnel/	Expand Existing	Personnel transport
Downcast Shaft
Vertical Upcast Shaft	Expand Existing	Upcast ventilation
Inclined Upcast Shaft	Expand Existing	Upcast ventilation
Source: 2010 Youyi Preliminary	Design.

All inclined shafts are also downcast shafts, and all shafts are emergency exits which contain steps or ladder ways.

Main (Belt Conveying) Inclined Shaft

The main inclined shaft is intended to serve as the sole means of conveying coal to the surface and will also serve as an air intake. The relevant design parameters of this inclined shaft are given in Table 7-7.

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Table 7-7 Youyi Coal Mine — Main Inclined Shaft Design Parameters

Design Parameters	Units	Values
Roadway Width	m	3.8
Finished Section	m2	10.04
Length	m	216
Inclined Angle	˚	20
Supporting	—	Tiled/Masonary
Drift Equipment	—	Fire-resistant Belt, Width = 1.4 m.

Source: 2010 Youyi Preliminary Design.

Auxiliary Inclined Drift

The auxiliary drift will be utilised for the hoisting of mine materials and equipment. The hoist servicing the auxiliary drift is required to be of sufficient capacity to hoist the longwall shields and most assembled units of mining equipment. The auxiliary drift will eventually need to service all mineable coal seams. The relevant design parameters of this drift are given in Table 7-8.

Table 7-8 Youyi Coal Mine — Auxiliary Drift Design Parameters

Design Parameters	Units	Values
Roadway Width	m	5
Finished Section	m2	16.8
Length	m	226
Inclined Angle	˚	22
Supporting	—	Concrete/rockbolts and shotcrete
Hoist	—	30kg/m, 900mm Dual Track Railway

Source: 2010 Youyi Preliminary Design.

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Personnel/Downcast Inclined Shaft

The personnel inclined shaft will be utilised for the transport of underground personnel. It will also be the main downcast ventilation shaft for the mine The relevant design parameters of this drift are given in Table 7-9.

Table 7-9 Youyi Coal Mine — Personnel/Downcast Shaft Design Parameters

Design Parameters	Units	Values
Roadway Width	m	4.5
Finished Section	m2	14.3
Length	m	182
Inclined Angle	˚	25
Supporting	—	Tiled/masonary
Hoist	—	Overhead cage
Source: 2010 Youyi Preliminary Design.

Ventilation Shaft

This shaft is intended to serve as the return air shaft for the mine. The inclined shafts will serve as intakes. The shaft must have sufficient cross-sectional area to ventilate the mine while maintaining a ventilation velocity of less than 15 m/sec (Chinese code), and provide a minimum of surface resistance to minimise turbulence and thus reduce power costs. The relevant design parameters of this shaft are given in Table 7-10.

Table 7-10 Youyi Coal Mine — Ventilation Shaft Design Parameters

Design Parameters	Units	Values
Shaft Diameter	m	6.5
Finished Section	m2	33.2
Depth	m	99
Supporting	—	Reinforced Concrete Lining/
		Concrete Lining

Source: 2010 Youyi Preliminary Design.

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Ventilation Inclined Shaft

This shaft is intended to serve as the return air shaft for the mine in the later stages of mine life, when mining occurs in the north of the licence. The inclined shafts will continue to serve as intakes.

The relevant design parameters of this shaft are given in Table 7-11.

Table 7-11 Youyi Coal Mine — Ventilation Inclined Shaft Design Parameters

Design Parameters	Units	Values
Roadway Width	m	6.0
Finished Section	m2	26.1
Length	m	229
Inclined Angle	˚	18
Supporting	—	Concrete/rockbolts and shotcrete

Source:2010 Youyi Preliminary Design.

Pit Bottom Facility

The pit bottom facility is located at the base of the inclined shafts. It will contain the transformer, main pump station, coal surge bunker, sumps, fire fighting equipment, communications chamber, medical care and rescue chamber, and explosives storage chamber. In total 765 m of roadway are required for the pit bottom area. Currently only the coal bunker exist, with the remainder to be constructed.

The sumps will be located at the base of the main and auxiliary shafts and can store more than 8 hours of water yield from the mine.

Mining Areas

From the pit bottom facility a system of three or four main headings will be developed to provide access to the longwall gateroads, the coal haulage conveyor, for men and materials, and for ventilation. The belt, rail, and ventilation headings are separately deployed in each seam. Longwall panels will run off the main headings through link roadways to access all coal seams. Roadheaders will be used for developing the headings, with roof support by resin anchored bolts. Stone will be removed from the mine via rail and 1.5 t cars, coal will be moved by rail to the coal bin located at the base of the main coal haulage shaft.

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7.4.2 Production Schedule

Youyi will implement two longwall units. The Preliminary Design provides a schedule by longwall panel for each of these units at a production rate of 1.5 Mtpa. One longwall will start in the No. 4 seam, and the other in the No. 9 seam. There is less than two years life in the No. 4 seam if mining at 1.5 Mtpa, as such the first longwall will also move into the No. 9 seam within the first two years.

MMC understands that the current planning is consistent with Chinese standard requirement, however it is recommended that a more stringent and detailed mining schedule be completed which will better reflect the likely mining and development sequences.

MMC considers that there may be some upside potential at the mine due to the relatively simple geological mining condition, low gas, controllable water conditions, moderate or thick coal seams in earlier years, and modern mechanised mining and production processing equipment. Therefore, with careful management, in view of similar mining in practices in China, the desired production capacity could potentially be higher than 3.0 Mtpa.

MMC has completed high level scheduling targeting a production rate of 3 Mtpa. The schedule considers appropriate mine development and ramp up scheduling for the Youyi Mine. A schedule summary is presented in Table 7-14 with the full schedule shown in Annexure F.

Estimated Longwall Productivity

The main production units to be implemented in the Youyi mine plan are given below. These are based on the production assumptions outlined in the Preliminary Design. A full list of mining equipment for the Youyi coal mine is provided in Annexure E. The longwall unit will produce approximately 1.5 Mtpa coal.

Table 7-12 Youyi Coal Mine — Longwall Design Parameters Summary

Design Parameters	Units	Values
Operating Shifts Per Day	No.	3
Hours Per Shift	Hours	6
Operating Days Per Year	Days	330
Panel Width	M	180
Mining Height	M	2.8
TCC Height (average)	M	2.33
Retreat Rate Per day	m/d	4.8
Annual Advance Rate	M	1188
Mining recovery	%	91%
Output per day	T	4,416
Output per year	Mt	1.46

Source: 2010 Youyi Preliminary Design Report

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There is a potential opportunity that the longwall unit production will be greater than 1.5 Mtpa as the utilisation selected in the Preliminary Design is at the low end of the range given for Chinese mines. Including development, estimated at 5% of production capacity in the Preliminary Design; two longwalls and four development roadheaders will meet or exceed 3.0 Mtpa.

Estimated Coal Handling System Productivity

The productivity of the coal handling system as stated in the Preliminary design, using 40% of maximum cutting capacity of shearer to give an average cutting rate. However the maximum instantaneous cutting rate may be up to double the average production rate, as coal shearing can be stop start process. The average, peak, and actual capacities are shown in Table 7-13.

It appears that the haulage roadway conveyor is not able to meet peak production requirements, and will act as a bottleneck in the system. It is recommended that the roadway conveyor capacity is increased to match the peak output from the longwall system, or a surge bin be installed to smooth haulage rates.

Table 7-13 Youyi Coal Mine — Coal Handling System Productivity

		Equipment Capacity	Equipment Capacity	Actual
		Required		Equipment
Item	Units	Average	Peak	Capacity
Longwall	tph	300	600
AFC capacity	tph	360	720	1,000
Stage loader capacity	tph	432	864	1,000
Gateroad crusher capacity	tph	432	864	1,000
Gateroad Conveyor
extensible belt	tph	432	864	1,000
Haulage Roadway
Conveyor	tph	500	864	500
Inclined Conveyor to
Surface	tph	unknown	unknown	1,600

Source: Average and Actual capacity is from 2010 Youyi Preliminary Design. Peak is calculated at 2x average.

The haulage roadway conveyor in the Preliminary Design appears undersized. MMC recommends additional planning to work to estimate the required haulage roadway conveyor. It also appears from the Preliminary Design that only the initial haulage roadway conveyor length has been estimated and costed.

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2027	1,677	38.3	1.58	24.62	29.67	2.92	1,570	33.4	1.54	26.29	31.68	3.04
2026	3,076	40.9	1.22	22.10	25.71	2.89	2,891	36.1	1.15	23.51	27.34	3.00
2025	2,908	37.6	1.42	23.74	26.71	2.32	2,715	32.3	1.36	25.22	28.36	2.38
2024	3,000	39.2	1.77	22.05	25.98	1.76	2,788	34.1	1.73	23.37	27.55	1.78
2023	2,925	37.5	1.70	22.33	26.21	1.95	2,711	32.4	1.65	23.67	27.79	1.99
2022	2,923	38.4	3.78	22.01	27.78	1.90	2,699	33.4	3.91	23.38	29.53	1.93
2021	3,060	41.1	1.89	21.34	25.55	1.56	2,826	36.5	1.87	22.76	27.20	1.58
2020	3,000	49.5	1.37	17.30	24.49	1.94	2,790	45.5	1.31	18.43	26.13	1.99
2019	3,000	43.4	1.42	20.13	25.88	1.76	2,790	38.8	1.37	21.47	27.62	1.80
2018	2,896	34.7	1.50	24.19	27.66	1.63	2,712	29.6	1.46	25.82	29.53	1.66
2017	3,007	36.6	1.54	22.80	27.56	1.42	2,816	31.6	1.49	24.34	29.42	1.44
2016	2,941	40.7	3.03	20.70	27.00	1.32	2,764	35.8	3.07	22.02	28.72	1.33
2015	2,827	46.7	8.56	18.55	26.83	0.87	2,694	41.6	8.84	19.47	28.15	0.84
2014	1,237	41.8	2.53	20.76	24.95	1.01	1,176	36.5	2.50	21.80	26.20	0.98
2013	731	40.5	2.14	20.32	24.21	0.86	637	36.8	2.11	22.12	26.12	0.81
2012	150	36.1	2.68	12.31	17.12	0.72	98	41.4	3.51	16.61	23.06	0.90
2011	0	0	0	0	0	0	0	0	0	0	0	0
	Kt	%	%	(MJ/Kg)	(MJ/Kg)daf	%	Kt	%	%	(MJ/Kg)	(MJ/Kg)daf	%
Youyi	ROM Tonnes	Ash Content	Moisture	SE	SE (dry ash free)	Total Sulphur	Prod Tonnes	Ash Content	Moisture	SE	SE (dry ash free)	Total Sulphur

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7.4.3 Site Infrastructure

Industrial Area

The Youyi industrial area will be is located in the south-western portion of the licence. Day to day maintenance will be carried out onsite, equipment rebuilds will be carried out by contractor. Surface service facilities include a main equipment maintenance workshop, longwall equipment store and timber workshop.

The former Baofeng mine industrial area have been has been chosen as the new industrial area because it is relatively wide and flat, the inclined shafts are well supported and shallow and not much new shaft length is required to be sunk to access the lower seam No. 11. This compares favourably in comparison to the Youyi industrial area.

Coal Handling

After coal is sheared from the working face, it is transferred via a number of conveyors to the surface. At the surface stone is removed it is loaded into an 800 t capacity coal bin (lump coal). Trucks may be loaded from this bin. Additional storage is in four 21 m diameter silos 50 m tall, with a capacity of 10,000 t. It is unclear in the Preliminary Design whether this infrastructure currently exists or is due to be installed.

Men and Materials Transport

A rail transport system is used for material transport. This includes equipment, waste stone, and loose materials. Cars will run on 900 mm gauge track. A total of 225 cars will be installed with carrying capacity generally 1.5 t, but with some cars able to transport 18 t. The auxiliary shaft will be used to transport materials to and from the surface.

Personnel transport from the surface is via a suspended rail car in the personnel inclined shaft. The transport method for personnel underground is not mentioned.

Water Supply

Domestic water is originated from groundwater; mine water is used for dust and fire control in production after sedimentation.

Power supply

One 35 kV transformer station is to be constructed at the site, the power is supplied from the Qianjing 110 kV transformer substation and Xiashijing 110 kV transformer substation; the power supply distance is 10km from both sites. Construction of these power lines is required. It is estimated that the mine will required 0.9 MVa of capacity and use 41 GWh per annum. Due to the redundancy of the power system, power supply to the mine is reliable.

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10 kV will be reticulated underground, via the auxiliary inclined shaft. Twin cables will be used for redundancy. One substation will be located in the No. 11 seam level, the other in the No. 9 seam level.

Underground Mine Water Drainage System and Pumping

The pump station is located at the bottom of the auxiliary inclined shaft. Three pumps sets will be installed, one for general operations, one for standby requirements and one for maintenance. Sumps are located at the base of the main and auxiliary inclined shafts, with total capacity of 950 m[3] , which exceeds statutory storage requirements (8 hours capacity). The water is pumped to a water treatment plant on the surface. Normal pump requirements are estimated to be 81 m[3] /h, with a peak of 107 m[3] /h. Each pump set installed (MD155-30×4) will be capable of pumping 155 m[3] /h. Auxiliary pumps will be installed underground to pump water to the main sumps where required.

Ventilation

Primary ventilation at Youyi will be provided by twin 630 kW surface located fans. Secondary fans will be used to provide additional ventilation to dead end areas, such as development faces. The primary ventilation fan requirements have been estimated at two stages of the mine life; early in the mine life, when there is low resistance, and later in the mine life when there is higher resistance in the ventilation circuit.

The ventilation requirements estimated in the preliminary design are 207 m[3] /s, and actual fan capacity is 201 m[3] /s. It appears that the ventilation requirements have been underestimated, due to an oversight made when adding the ventilation requirements estimated in the preliminary design. MMC estimates that 265 m[3] /s are required, based on the methodology in the Preliminary Design.

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Table 7-15 Youyi Ventilation Fan Capacity Estimation

Area Required Ventilation Number of Areas (m3/s) Production Longwall 36 2 Standby Longwall 18 2 Development Heading 15 4 Substation 3 2 Explosives Magazine 3 1 Other areas 15 2 Total Ventilation	Total Comment (m3/s) 72 Limitation is CO2 produced from face 36 Estimated at half production heading 60 Limitation is CO2 produced from face 6 3 30 207

Source: 2010 preliminary design, November 2010 update.

Monitoring and Management System

A comprehensive system for monitoring and management of gas, air velocity, pressure, smoke, temperature, coal levels, water levels, flow rate and voltage is planned for the Youyi mine. The system will be capable of starting and stopping auxiliary fans, operating ventilation doors, gas and air-electricity locks at the development face, and monitor start-up and shut-down of fixed equipment, mining equipment, the power supply system and conveyor system.

The gas measurement system will be able to measure explosive gas concentrations and detect gas produced from spontaneous combustion. Sampling points will be at key areas of the mine, including the longwall, development areas, inside the goaf areas, and at fixed infrastructure locations. At the longwall, the system will measure O2, N2, CO, CO2, CH4, C2H6, C2H4 and C3H8. Portable carbon monoxide sensors will be carried at production and development faces by gas inspectors and the shift boss. Smoke sensors will be installed along conveyor belt routes.

A weightometer will measure the mined tonnages of coal and stone leaving the mine.

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==> picture [386 x 560] intentionally omitted <==

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7.5 Mine Characteristics

7.5.1 Gas

Both Shaoyaohua and Youyi coal mines have been described as low gas in the Preliminary Design Report, May 2008 and October 2010 respectively. The results are based on the gas classification of coal mines in Shouzhou city in 2006. The following table shows the main results:

Table 7-16 Estimated Gas Emissions from Shaoyaohua and Youyi

Mine		CH4	Emission			CO2	Emission
	Relative,	m3/t	Absolute,	m3/min	Relative,	m3/t	Absolute,	m3/min
Shaoyaohua		4.61		1.60		7.52		2.61
Youyi		5.45		1.60		7.52		2.61

At Youyi gas testing has occurred on the No. 4, No. 9 and No. 11 seams. Seam 9 contains the highest content of gas, with CH4 of 0.89 ml/gram, and CO2 of 1.73 ml/gram.

It has been determined in the Youyi Preliminary Design that gas outflow determines the ventilation requirements. If actual emissions are different from estimated, then ventilation systems may not be sized accordingly. It is recommended that more detail is collected on the gas content of each seam (particularly seam 9) to ensure ventilation systems are suitable with a factor of safety included.

7.5.2 Spontaneous Combustion

Both Shaoyaohua and Youyi coal mine has been described as having spontaneous combustion propensity in the Preliminary Design Report, May 2008 and October 2010 respectively. The conclusions are based on the testing results on the No. 4 seam sample respectively from a mining face of Shaoyaohua Mine in May 16th 2007 and current Youyi Mine in January 17th, 2005. Both mines have a ‘‘Level I’’ spontaneous combustion rating.

Spontaneous combustion occurs when coal is exposed to the atmosphere for extended periods and undergoes self heating. This may occur in goaf areas (extraction of coal is at most 80% for LTCC), coal pillars or other exposed areas. Areas and pillars which have previously combusted may be structurally weakened and can also fill with water, which can lead to risk of water inrush if breached.

7.5.3 Coal Dust

Both Shanyaohua and Youyi coal mine has explosive risk due to the generation of coal dust. Mitigation measures should be adopted to reduce the risk of coal dust explosions.

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This is a common risk for many underground coal mines and will require careful management to ensure that the associated risks are controlled. The high gas content of the seam increases the likelihood of methane explosions, which in turn will increase the likelihood of coal dust explosions.

Standard mitigating measures such as stone-dusting, and or water bags (common in Chinese mines) will need to be adopted to reduce the risk of coal dust explosions.

7.5.4 Hydrogeology

The hydrogeological conditions of the Shaoyaohua Mine and Youyi Mine are generally of a simple nature. Both Shaoyaohua Mine and Youyi Mine have similar hydrogeological conditions.

. Main water filling aquifer in deposit strata with extremely weak water capacity;
. No surface water body in the mining are or adjacent to both mines;
. No water-conductive fractures like large faults; and
. Due to lower water level elevation of Ordovician limestone aquifer, no risks while mining at the lowest No. 11 coal seam in both mines.

Over time water may have collected in the old working areas of previously mined seams, or collapsed pillars.

Subsidence may breach the weak overlying aquifer, leading to higher amounts of water inflow. Additionally subsidence may lower the water table in the aquifer, resulting in a local loss of water supply for the local population.

8. PROJECT DEVELOPMENT

8.1 Shaoyaohua

Shaoyaohua began construction in April 1987. In 1999, it commenced production as a jointstock operation with permitted capacity of 0.15 Mtpa. The mine was reformed through a mechanised upgrading in 2008.

The current operations are based on a 2008 Preliminary Design report and associated licences and approvals provided based on the Preliminary Design report. The current licenced capacity is 1.2 Mtpa. The mine has plans to increase the production capacity to 4 Mtpa.

The Company have completed some high level planning to forecast the additional work required to increase the current mine capacity, schedule the work as well as estimate the required capital costs.

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8.1.1 Licences and Approvals

The current licences and approvals for Shaoyaohua are listed in Table 8-1.

Table 8-1 Shaoyaohua Coal Mine — Current Licences and Approvals

Item	Completed	Approved	Comment
Geology Report (2010)	Y	N
Preliminary Design (1.2 Mtpa)	Y	Y	Approval copy shown to MMC
Mining License (1.2 Mtpa)	Y	Y	Approval copy shown to MMC
Safety Chapter (1.2 Mtpa)	Y	Y	Approval copy shown to MMC
Environment Report (1.2 Mtpa)	Y	Y	Approval copy shown to MMC

Source: Information Provided by the Company

In order to officially increase licence capacity to 4 Mtpa, the following reports and licences need to be updated and approved prior to an increase in coal production capacity being approved:

. Geology Report;
. Preliminary Design (outlining 4 Mtpa capacity);
. Mining license (based on approval of Geology Report and Preliminary Design) with a coal production capacity of 4 Mtpa;
. Updated Environmental licence; and
. Updated Safety licence.

Although the mine has commenced internal planning for an increase in coal production, the mine has not commenced updating the formal reports and approvals required for a higher capacity mining licence.

Currently the mine has the required approvals for a coal production of 1.2 Mtpa. A coal mine will typically be required to operate for five years prior to receiving an increase in licence capacity. Based on this requirement the mine will not receive an updated licence until 2013.

This requirement is based on a document (‘‘Notice for Further Strengthening the Safety Management of Coal Mine Construction Project’’) issued jointly by the National Development and Reform Commission, National Energy Bureau, National Safety Supervision General Bureau, and National Coal Mine Safety Supervision Bureau on 10 April 2010.

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A minimum mine life may be taken into consideration prior to the granting of increased coal production capacity; however, MMC notes that this rule has not been applied in the Shanxi Province to amalgamated coal projects (such as Shaoyaohua). The application of this rule to the Shaoyaohua project may impact the increased mine capacity being granted.

8.1.2 Production Expansion Plans

The Company has completed internal planning to determine the additional infrastructure required to increase ROM coal production capacity. The following requirements have been identified to increase the mine production rate:

. Air Intake Shaft; 5 m in diameter and 182 m in length;
. Air Return Shaft; 6 m in diameter and 179 m;
. Additional longwall unit for the No. 4 seam;
. 2 road headers (originally, a road header and drill and blast);
. Heading and main roadway development (1,158 m);
. Gateway development (2,210 m);
. Enlarge the underground bin.

MMC considers the current high level expansion plans likely to be suitable to consistently achieve an annual ROM coal production rate of 3.5 Mtpa. However, a more comprehensive mine planning report for the mine design and associated services are required to increase mine production, including (amongst others):

. Reserve and mine life;
. Auxiliary inclined lifting;
. Power supply;
. Underground auxiliary haulage system; and
. Surface production system.

These consideration should be addressed in an updated Preliminary Design Report.

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8.1.3 Proposed Project Timeline

The Company has indicated that formal government approval will commence in December 2010, with permitting expected to be completed by July 2011. Following the approval of the project permitting, construction of the underground infrastructure and equipment installation will commence with trial production of the second longwall estimated to occur in February 2012.

The Company’s schedule appears optimistic based on licencing limitations. King Stone is unlikely to receive an increased licence capacity prior to 2013. Although King Stone may choose to operate above the current licenced capacity, this presents risks associated with the investment of capital to achieve an unlicenced and unapproved mining capacity.

Additionally, there remains a risk that an increase to the current mining capacity will not be granted.

8.2 Youyi

8.2.1 Licences and Approvals

The mine currently has a mining licence for 1.2 Mtpa. In order to increase the licence capacity to 3 Mtpa (as outlined in the Preliminary Design Report) various reports, licences and approvals are required. These are shown in Table 8-2.

Table 8-2 Youyi Coal Mine — Required Licenses and Approvals (3.0 Mtpa)

Item	Completed	Approved	Comment
Geology Report (2010)	Y	N	Approval not shown to MMC
Preliminary Design (3.0 Mtpa)	Y	N	Approval not shown to MMC
Mining Licence (3 Mtpa)	N	N	Approval not shown to MMC
Safety Chapter	Y	N	Approval not shown to MMC
Environment Chapter	Y	N	Approval not shown to MMC

Following the approvals and licences being granted, the mine may commence construction of the new mine. Although a detailed mine development schedule has not been provided to MMC it has been estimated that the construction period will take 2 years before commencement of a trial production period. MMC considers two years to be an achievable construction timeline, however, recommends that detailed construction planning and construction management is implemented.

Major underground works required to achieve the Preliminary Design mine plan includes development of:

. Auxiliary inclined shaft;
. Main mine developments;

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. Main roadway of #11 coal seam;
. Expansion of vertical upcast shaft;
. Main return airway; and
. Numerous roadways.

The current project construction timeline is dependent on the granting of project approvals. The Company is targeting the following approval timelines:

. Geological Report — October 2010;
. Preliminary Design Report — November 2010;
. Safety Chapter — December 2010, and
. Government Construction Permitting Report — December 2010.

If the forecast approvals timeline is achieved, construction may commence at Youyi from January 2011.

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9. OPERATING COSTS

9.1 Shaoyaohua

The 2008 Preliminary Design estimated total direct and indirect production costs. The estimate is based on a number of operating assumptions. The operating cost assumptions and the operating cost estimation methods are consistent with Chinese Standards, the estimates are shown in Table 9-1.

Table 9-1 Shaoyaohua Coal Mine — 2008 Preliminary Design Estimated Operating Costs

Cost Element Materials Power Salary Welfare Repair Charge Subsidence Compensation Others Maintenance (Renovation and Reformation) Sales Fee Production Sustaining Fund Environmental and Rehabilitation Fund Mine Transforming Development Fund Direct Operating Cost Safety Cost Depreciation Amortization Resource price fee Total Operating Cost per ROM Tonne	RMB/ROM t 15.00 8.86 18.21 3.25 3.11 1.00 12.5 3.00 1.00 14.00 10.00 5.00 94.93 11.00 7.95 1.43 12.00 127.31	USD/ROM t 2.21 1.30 2.68 0.48 0.46 0.15 1.84 0.44 0.15 2.06 1.47 0.74 13.96 1.62 1.17 0.21 1.76 18.72	% 12% 7% 14% 3% 2% 1% 10% 2% 1% 11% 8% 4% 75% 9% 6% 1% 9%
			100%

Source: 2008 Shaoyaohua Preliminary Design Report

MMC has been provided independently audited operating costs for January to September 2010 which indicate operating costs are approximately RMB 117/Prod t. These costs are lower than the cost estimated in the Preliminary Design report (Table 9-1). Due to a planned increase in mine development in the next few years to facilitate a higher production rate, the operating costs are likely to increase. Following the additional mine development, the implementation of a second long wall unit will result in a lowering of the unit operating costs. MMC considers the long term average operating costs for Shaoyaohua to be approximately RMB120/ROM t.

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9.2 Youyi

The estimated unit operating costs in the 2010 Preliminary Design are shown in

Table 9-2 Youyi Coal Mine — 2010 Preliminary Design Estimated Operating Costs

Cost Element Materials Power Salary Welfare Repair Charge Subsidence Compensation Others Maintenance (Renovation and Reformation) Production Sustaining Fund Environmental and Rehabilitation Fund Mine Transforming Development Fund Shaft Sinking and Drifting Fund Direct Operating Cost Safety Cost Depreciation Amortization Resource Price Fee Total Operating Cost per ROM Tonne	RMB/ROM t 15.00 8.86 18.21 3.25 3.11 1.00 12.50 3.00 14.00 10.00 5.00 1.00 94.93 11.00 13.28 1.43 12.00 132.64	USD/ROM t 2.21 1.30 2.68 0.48 0.46 0.15 1.84 0.44 2.06 1.47 0.74 0.15 13.96 1.62 1.95 0.21 1.76 19.51	% 11% 7% 14% 2% 2% 1% 9% 2% 11% 8% 4% 1% 72% 8% 10% 1% 9%
			100%

Source: 2010 Preliminary Design Operating Costs (updated).

Due to the more complicated mine layouts and the greater amount of mine development required per tonne of coal produced using the longwall extraction at the Youyi mine, MMC considers the operating costs at Youyi likely to be higher than the operating costs at Shaoyaohua.

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10. CAPITAL COSTS

10.1 Shaoyaohua

The mine was reformed through the mine’s mechanised upgrading in 2008 and 2009. The reforming construction was completed in 2009. The mine management provided the capital cost of the reforming construction as shown in Table 10-1.

Table 10-1 Shaoyaohua Coal Mine — Capital Expenditure for 2008 and 2009

Area Underground Surface Equipment Installation Other Total	RMB M 35.51 43.57 93.69 33.99 12.61 219.37	USD M 5.22 6.41 13.78 5.00 1.85
		32.26

NB: Assumed exchange rate of RMB6.8 : USD1

The current mining operation is licenced to a production rate of 1.2 Mtpa. The increase in mining capacity from approximately 0.5 Mtpa to 1.2 Mtpa results in a cost of mine development of 312 RMB/t per annum of capacity. This is within a typical capital intensity range of mines of this type.

The mine currently forecasts a further expansion to a total capacity of 4 Mtpa. This forecast includes two ventilation shafts, development of additional mining area in the No. 4 seam, LTCC mining equipment, conveyor belts, an underground bin and an upgrade to the main inclined belt. The following capital expenditure has been estimated for the upgrade (Table 10-2). This equates to 45 RMB/t of capacity, assuming an increase from 1.2 Mtpa to 4 Mtpa capacity. Compared to the initial development cost per tonne of capacity, this figure appears low. It is noted, however, that the mine is reportedly operating above the capacity production rate of 1.2 Mtpa and closer to 2 Mtpa.

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Table 10-2 Shaoyuaohua Coal Mine — 4 Mtpa Expansion Project Capex

Item Air Intake Shaft Air Return Shaft Main Roadway Mining District LTCC Belts Main Inclined Belt Underground Bin Others Total	Capital Cost (M RMB) 3.70 2.68 5.15 21.42 51.72 7.10 3.98 0.26 8.40 104.41	Capital Cost (M USD) 0.54 0.39 0.76 3.15 7.61 1.04 0.59 0.04 1.24
		15.35

NB: Assumed exchange rate of RMB6.8 : USD1

The estimated costs allows for the increases to mining and coal handling facilities. A Preliminary Design for the expansion has not been completed and the above capital estimate is considered to be a high level estimate. No further detail has been provided to MMC on the breakdown of this capital, as such MMC is unable comment on the accuracy of this estimate.

MMC recommends that a detailed mine plan and capital estimate be completed for the expansion to ensure all appropriate capital cost items are correctly estimated. A more detailed mine expansion study, such as a Preliminary Design report, may result in a significant increase to the forecast capital expenditure for the mine expansion.

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10.2 Youyi

The 2010 Preliminary Design has estimated the direct project construction capital investment to be 587 M RMB, including capital of underground project, surface project, equipment and installation, other capital expense, and preparation costs items, but excluding capital overrun contingency. This equates to 196 RMB/t of capacity.

Table 10-3 Youyi Mine — Development Capital Costs

Development Project Underground Engineering Works Civil Engineering Works Equipment Installation Other Capital Costs Preparation Costs Construction Total Capital Loan Interest Working Capital Total Capital Costs	Budget 111.26 103.78 186.05 40.15 111.15 34.77 587.16 15.1 21.11 623.37	Budget 16.36 15.26 27.36 5.90 16.35 5.11 86.35 2.22 3.10 91.67	% 18% 17% 30% 6% 18% 6%
			94%
			2% 3%
			100%

NB: Assumed exchange rate of RMB6.8 : USD1

MMC has received the Project’s investment schedule in the preliminary design The Company plans to commence the construction from January 2011. Based on the preliminary design, the construction period is estimated to be 2 years. The Development Capital Investment schedule is outlined in Table 10-4.

Table 10-4 Youyi Coal Mine — Expansion Investment Budget

Development Project Underground Engineering Works Civil Engineering Works Equipment Purchase and Installation Other Capital Costs Total	Budget (M RMB) 2011 2012 59.52 59.52 55.52 55.52 121.02 121.02 57.51 57.51 293.57 293.58	Total 119.04 110.04 242.03 115.03
		587.15

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MMC considers the total construction budget to be lower than expected for a mine capacity of 3 Mtpa. This is likely due to the use of some existing facilities at the mine. As a detailed breakdown of costs has not been provided MMC cannot comment on whether the quantity of the forecast savings associated with the use of existing facilities and equipment are reasonable.

11. SAFETY AND ENVIRONMENT

11.1 Mine Safety Overview

The Chinese government mandates that a part of a Preliminary Design for a new mine it must establish a separate safety chapter, which must be independently reviewed by an experts organised by the government safety regulatory agency. As identified in the Safety Chapters of the Preliminary Design reports, both Shaoyaohua and Youyi have similar operating conditions, and hence will require similar safety management systems and controls in order to control the risks to personnel safety. The key safety risks are listed as follows:

. Coal dust explosion;
. Gas explosion;
. Water inrush;
. Spontaneous combustion;
. Underground fire;
. Roof fall; and
. Dust.

The following table contains a summary of the likely operating risks as well as some of the safety controls outlined in the Preliminary Design Report planned in order to control these risks.

Risk Recommend control Coal dust explosion — Hanging water bags from roof to control explosion — Regular cleaning of coal dust from roof and walls. MMC suggests stone dusting on walls to minimise proportion of coal dust in mix
— Explosion proof electrical apparatus — Non sparking materials underground — Water sprays at faces and other dust generating points — Minimum ventilation requirements at working faces to dilute dust

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Risk

Recommend control

Spontaneous combustion	—	Seal old mining areas within 45 days of finishing mining
		to limit spontaneous combustion
	—	Ventilation setup to limit pressure differentials
	—	Shotcrete on coal pillars where high pressure differentials
		occur
	—	Gas monitoring to detect spontaneous combustion
	—	Gas analysis system onsite for quick analysis of gas
	—	Nitrogen fire fighting system onsite (if spontaneous
		combustion detected)
	—	Grouting of goaf
	—	Gel injection system onsite to seal areas with spontaneous
		combustion
Inrush from old workings	—	Pillars (min 20 m) between mining areas and old workings
filled with water	—	Water drilling ahead of development near old working
		areas (drilling depth up to 200m)
Inrush from connection to	—	Detailed inspection of mine surface area before each wet
surface		season, with backfill with clay and compaction of all
		fissures, especially when mining beneath gullies
	—	Regular monitoring of water levels entering mine, more
		frequent in the wet season, investigation of abnormal
		inflows
	—	Daily observation of surface cracks when raining during
		wet season, and backfill with clay and compaction
Underground flooding	—	3 mine pumps, all able to handle normal water
		requirements (one operating, one standby, one
		maintenance)
	—	2 operating at maximum water inflow (one on
		maintenance)
	—	Sump able to contain >8 hours normal water inflow
Flood from surface	—	Bunds around all mine entry exit points
Underground fire	—	Intrinsically safe sealed cables and electrical systems
	—	Large underground water tank, for fire fighting
	—	Explosives use and transport only by specially trained
		personnel
	—	Underground safety chamber
	—	Firewalls between mining districts
	—	Flame retardant electrical cables
	—	Fire extinguishers

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Risk

Recommend control

Conveyor belt fire — Flame resistant non-metallic belt — Belt lit with fixed lighting to allow easy inspection — Daily inspections — Belt emergency stop — Belt slip detection — Automatic sprinklers and fire detection system Roof fall — Rock bolting — Cable bolting as required — Management and monitoring Silicosis from rock dust — Adequate ventilation to dilute gas — Dust masks worn in dusty areas General — Safety education by dedicated mine safety department — Emergency evacuation procedures and emergency exits — Communication system underground — Dispatch system — Personnel positioning system — Personal Protective Equipment provided to miners

11.2 Environment

The Shaoyaohua and Youyi projects are regulated by national EHS laws and regulations, and local regulations and standards. Each new individual industrial operation registered in China and each process modification or installation upgrade must obtain initial environmental permits, as per the Environment Protection Law and the Environmental Impact Assessment Law (2003). These permits consist of a pre-construction Environmental Impact Assessment (EIA) approval, and Trial Production Permit to authorize trial production within 3 months after start up and valid for up to twelve months, and a Completion Acceptance Inspection approval. The Environmental Impact Assessment Law establishes that entities not complying with this requirement may be served with a RMB200,000 fine and a notification to shutdown operations. The degree of enforcement of these laws varies from province to province, however, a foreseeable strengthening of regulatory enforcement may increase the risk to these assets from any regulatory non-compliance that may occur.

11.2.1 Environmental Standards

Chinese regulations and standards exist for most significant environmental wastes. These standards contain differing levels which are applied based on the areas environmental significance and sensitivity. Standards exist for, but are not limited to the following areas: water emissions, noise, boiler air pollution and surface area air pollution.

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11.2.2 Environmental Impacts

The key unmitigated environmental impacts from the proposed mining operations during the construction phase include:

. Natural terrain: placement of waste rock from shaft construction in surface waste dumps;
. Air quality: Wind erosion of exposed soil and dust creation, demolition of some existing structures and construction of a new workshop, auxiliary facilities, Concrete dust from concrete mixing;
. Noise: Increased traffic noise, dust from delivery of construction materials and equipment, and increased personnel movement, demolition of some existing structures and construction of a new workshop, auxiliary facilities.

The key unmitigated environmental impacts from the proposed mining operations during the operations phase include:

. Air quality: coal dust from raw coal conveying and coal fired boiler chimney gas and particulate emissions;
. Groundwater: subsidence from the mining process which will damage the impermeable nature of the aquifers, leading to a leakage of surface groundwater and drainage of near surface aquifers which will produce long term adverse effects on the aquifer;
. Noise: ventilations fans, boiler fans, other fans, and saws used in the timber workshop;
. Natural terrain: subsidence from the mining process and waste rejects rock placement from coal sorting;
. Traffic: noise and dust from coal transport and increased local traffic, coal spillage during transport.

11.2.3 Shaoyaohua Environment

The current Shaoyaohua mine is a mining operation with a production license in capacity of 1.2 Mtpa. The actual production rate reported is much higher than the mining license permitted. The company has an internal expansion plan for 3.5-4 Mtpa, which will be applied for the governmental approval procedure in the coming future. There are differing environmental impacts forecast during the current production and expansion construction period (forecast to take two years) and the operations with upgraded rate which will last approximately 14 years.

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An Environmental Impact Assessment (‘‘Environment Comment Report on Shanxi Shanyin Shaoyaohua Coal Industry Co., Ltd’’ Datong City Environment Protection Research Institute, November 2008) has been completed and approved by Shanxi Province Environment Protection Bureau, January 2009. The EIA lists measures to comply with environmental legislation in excess of the Preliminary Design, which will increase the project capital cost.

Due to the nature of the project being less than 20 km[2] in area, and the biological reduction being less than 50% after the project is completed, less stringent environmental requirements are imposed than might otherwise be the case. Furthermore, the site is not located in a special protection area, with no endangered flora or fauna and no monuments or other items of cultural significance.

Current Environmental Situation

The current environmental situation at Shaoyaohua is as follows:

. The Project is located in a dry, very windy area, with highly erodible loess sediment, so there is a high propensity for dust generation of non-vegetated areas. The wind blows 70% of the time, the average wind speed is 2.6 m/s, and the maximum wind speed is 17 m/s;
. No village is located on the mining licence;
. There are five villages located off the mine licence, totalling 2,700 people;
. There are wells in the villages which currently have good water quality except for Liangjiadian well with a little higher ammonia;
. Much of the land on the licence is used for cropping;
. The temperature is continental semi-arid, with a dry sandy spring, long cold winter, and short wet summer. The extreme minimum temperate recorded is -40.4 degrees (1971);
. Baseline environmental readings show high TSP (total suspended particles) and high PM10 readings (very small particulate matter), while other readings are within compliance;
. There are three rivers over the environment measured area, Sanggan River with the maximum water flow, Mugua River with minimum water flow and Huangshui River that only flows in the wet season for short periods.

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11.2.4 Youyi Environment

The current Youyi mining lease is an amalgamation of two smaller mining licences, with no current mining operations occurring on the licence area. The mine is currently undergoing licensing prior to the commencement of construction in order to upgrade the infrastructure and install mechanised equipment to support an increased mining rate. Infrastructure from the previous mining operations currently exists on-site, which will lessen the environmental impact of the upgrade.

There are differing environmental impacts forecast during the construction period (forecast to take two years) and the operations which will last approximately 15 years.

An Environmental Impact Assessment (‘‘Environment Comment Report on Shanxi Shanyin Youyi Coal Industry Co., Ltd’’ Environment Protection department of Shanxi Coal Mine Administration College, October 2010) has been completed and submitted to the local regulatory authority and is awaiting approval. The EIA lists measures to comply with environmental legislation in excess of the Preliminary Design, which will increase the project capital cost.

Ongoing environmental management will be required to ensure compliance with the relevant environmental legislation. The operating requirements have been stated in the Environmental Impact Assessment prepared as part of the project approvals process. The requirements stated in the EIA require higher environmental standards compared to those employed at the previous operations of the Youyi mine.

Current Environmental Situation

The current environmental situation at Youyi is as follows:

. The Project is located in a dry, very windy area, with highly erodible loess sediment, so there is a high propensity for dust generation of non-vegetated areas. The wind blows 70% of the time, the average wind speed is 2.6 m/s, and the maximum wind speed is 17 m/s;
. Shen Zhuang Wo village is located on the mining licence, and a total of 350 people live in the village;
. There are three other villages off the mine licence, but located nearby;
. There are wells in the villages which currently have good water quality;

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. Much of the land on the licence is used for cropping;
. The temperature is continental semi-arid, with a dry sandy spring, long cold winter, and short wet summer. The extreme minimum temperate recorded is -40 degrees (1979);
. Baseline environmental readings show high TSP (total suspended particles) and high PM10 readings (very small particulate matter), while other readings are within compliance;
. According to historical data, there is approximately 400 m[3] of water in some of the old mining districts;
. Each of the old mines had deep wells, which could discharge 20m[3] /h for fire fighting and for mine water. These wells will need to be utilised as there is insufficient water from other sources;
. There are many eroded gullies on the licences, and a large ravine running north through the centre of the lease that only flows in the wet season for short periods;
. There is a poor past record of environmental standards on mine sites, with highly polluting coal fired boilers with no filtration, and untreated sewage discharge. Pollution control measures on the site in the past were grossly inadequate, and if the current mines were operating, they would not meet environmental standards.

Proposed Pollution and Control Measures

The following section lists the expected emissions from the mining operations, the source of the pollutant, the control measured proposed in the Preliminary Design and additional measures recommended/required in the EIA in order to meet environmental requirements and standards.

Air Quality

. Coal dust from the raw coal conveyors is proposed to be managed by water sprays and enclosing the conveyor. For effective dust control the conveyor needs to be enclosed all the way to the silos and regulatory checked to ensure there are no points of dust generation. Fine coal is to be stored in silos to limit dust generation. Enclosing the conveyor will also decrease noise generation.
. Coal and stone dust will also be emitted from the crushing and screening facility as there are no dust collection facilities mentioned in the preliminary design. The crushing and screening facility needs to be enclosed with a filter bag assembly with gas collection efficiency of ≥ 90% and ≥ 99% dust collection efficiency.

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. Sulphur-dioxide and particulate emissions are generated from burning highsulphur coal in the heating boilers, particularly during the cold winter months. The boiler currently onsite will not meet environmental approval and so is required by be demolished and a new boiler built with an efficient wet desulfurization precipitator (dust collection efficiency ≥95%; desulfurization efficiency ≥80%) and construction of a new chimney (>45 m in height) that is higher than current chimney. If these requirements are met emissions are forecast to be the limits specified in GB13271-2001.
. Dust from waste slag from the coal fired boilers will be generated from temporary storage in the industrial area and from final placement as landfill in low-lying gullies near the industrial area. In order to reduce dust, temporary storage bins are required to store slag till final disposal and final disposal sites must be selected to minimise water erosion, and suitably covered and finally vegetated to minimise wind erosion.
. Dust from the bare earth of the industrial area can be controlled by automatic sprinklers, and re-vegetation of areas of the old industrial area with trees, shrubs and grasses.
. Dust from coal transportation is required to be controlled by covering of loads and cleaning of undercarriages of vehicles when leaving site.

Water Quality

. Water pumped from the underground mine is currently proposed to settle in sedimentation ponds before use or release. This will not meet water quality standard for release so the EIA requires the installation of a water purification plant (with coagulation and sedimentation, filtration disinfecting,) so water can be released or stored.
. Sewerage treatment proposed in the Preliminary Design is basic treatment then discharge. This is not environmentally acceptable and the EIA requires installation of a sewage treatment system to convert water to greywater for watering of dusty areas and vegetated areas within and surrounding the industrial area.

Noise

. High levels of intermittent noise will be created by the saw located in the timber processing room. An enclosed room with some damping is proposed, and the EIA recommends full damping of the wall and roof.
. The mine ventilation fan will produce high levels of continuous noise. The current fan enclosure is partially enclosed, and so the EIA recommends the new fan be installed with a muffler to decrease noise and fully enclosed to reduce noise for surrounding residents.

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Subsidence

. Surface subsidence will occurs above areas of longwall extraction. Non-extraction zones have been left around the industrial area and most of the major gully that drains the area. Close monitoring and infill of cracks and crevices will reduce some of the surface water inflow, but will have no effect on subsurface aquifer destruction. This may lead to local village wells drying, in which case the mine may have to provide alternative water supply.

Rehabilitation

. The issue of mine rehabilitation is not covered in the Preliminary Design, and only briefly addressed in the EIA. MMC recommends the development of a closure plan to ensure that the company does not incur future environmental penalties.

12. RISK

12.1 Risk and Opportunity

Risk Summary Due to their proximity, similar geological settings and mining methods, the Projects share similar risks and opportunities. The comments below apply to both mines.

Mining is a relatively high risk business when compared to other industrial and commercial operations. Each coal mine has unique quality characteristic and response during mining and processing which can never be wholly predicted. MMC’s review of the assets indicate project risk profiles typical of mining projects at similar levels of resource estimation, mine planning and project development. During its review, MMC did not discover any critical or ‘‘fatal’’ project flaws.

MMC has classified Risks for the projects based on the general mining industry definition such as listed below. MMC notes that in most instances it is likely that through provision of further documentation and additional technical studies these risks will be mitigated.

Table 12-1 Combined Mines — Overall Risk Assessment

						Consequence of Risk	Consequence of Risk
Likelihood	of	Risk	(within	7	years)	Minor	Moderate	Major
Likely						Moderate	High	High
Possible						Low	Moderate	High
Unlikely						Low	Low	Moderate

H — High Risk: This implies that there are key project parameters as presented in the current documentation, which if uncorrected, will have a material effect (for example >15% to 20%) on the project cash flow and performance, and could possibly lead to project failure.

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M — Moderate Risk: This implies that there is a danger of failure of a critical project parameter as presented in the current documentation, which if uncorrected, may have a material effect (for example 10% to 15%) on the project cash flow and performance unless mitigated by some corrective action.

L — Low Risk: Implies that if some factors are uncorrected, they will have little or no effect (<10%) on project production rates or project economic performance.

Table 12-2 Combined Mines — Shaoyaohua and Youyi Project Risk Summary

Risk	Risk Description and Suggested
Ranking	Further Review	Mitigant	Area of Impact
H	Licencing: Shaoyaohua is currently	Ensure all relevant licences	All
	operating above its licenced coal	are granted prior to
	production capacity. Additionally, it	investing in additional
	plans to increase capacity by investing	increases to mine capacity.
	in expansion plans. Shaoyaohua may
	be limited to its current licenced
	capacity until an increased licence
	capacity is granted. Additionally, the
	granting of licences to support a 3.5
	Mtpa mine plan is not guaranteed.
H	Mine Development: The proposed	Preliminary Design Studies	Capex, Opex, Mine
	mine development of the Shaoyaohua	for the increase in coal	Production.
	mine to an increased production	production capacity at
	capacity is based on a high level	Shaoyaohua mine to be
	internal planning document.	completed.
M	Spontaneous Combustion: There is a	Careful monitoring and	All
	known history of spontaneous	management.
	combustion at both mines.
M	Water Inrush potential: Uncontrolled	Ongoing management will	Underground mining
	in-rush is a high risk due to water	be required to ensure that	and development
	known to have accumulated in the,	the current mine does not	area
	mining goaf area, spontaneous	breach the old mine
	combustion areas and historical small	workings.
	scale workings. Additionally water
	inrush may occur from surrounding
	Quaternary aquifers of the nearby river
	through faults and paleochannels.
M	Coal dust/gas explosion: A build-up	Adequate ventilation,	Underground mining
	of explosive gasses may lead to a gas	ongoing monitoring of gas	and development
	explosion. This may stir up coal dust	levels, limiting coal dust	area
	and lead to further coal dust	build-up, hanging water
	explosions.	bags, stone dusting.

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Risk	Risk Description and Suggested
Ranking	Further Review	Mitigant	Area of Impact
M	Incendive Sparking Potential: A	Complete appropriate	Mining and
	number of stone splits have been	testing to determine the	development area, as
	identified within the coal seams. If	level of risk, and develop	well as abandoned
	these splits have high concentrations of	monitoring and	roadways.
	silica, there is a potential for sparking	management plans to
	to occur as they are mined. This can	manage the risk.
	potentially ignite pockets of gas which
	may rapidly escalate.
M	Coal Seam Caving Potential: The	Better understanding of	LTCC face
	LTCC methods require the upper levels	lithological condition of the
	of the coal to cave to enable recovery	overburden, carefully
	of the coal. If the coal caving	control top coal caving
	properties are not favourable it may	procedures.
	affect coal production rates and overall
	coal recovery.
M	Roof Hang-ups: As the longwall units	Better understanding of	LW and LTCC
	progress in the coal seam, the coal roof	lithological condition of the	Faces
	should regularly cave behind the	roof, careful management
	advancing unit. If the coal roof does	of LW shields.
	not regularly cave, it may slow the
	longwall advance due to the increase
	stresses applied to the longwall
	supports by the competent roof strata
	acting as a counter lever above the roof
	supports.
M	Costs: The Preliminary Design	Completion of a detailed	All
	provided are not a detailed mine	mine planning, scheduling
	planning document according to	and costings studies will
	western standards and only consider	increase the confidence in
	costs on a life of mine basis. Increase	all aspects of this project.
	in operating costs will most likely
	come from unforeseen complexities in
	mining of the coal seams.
M	Mining recovery of LTCC would	Careful management and	LTCC mining
	appear to be the primary processing	technical study on the	production.
	risk with recovery estimated at 85%.	production procedure
	Based on MMC experience recoveries	during trial mining.
	range from 60% to 85%. This will only
	be confirmed during trial production.
M	High Gas Concentrations: Explosive	Adequate ventilation, gas	All
	gas has been identified as a	drainage and ongoing
	characteristic of the mines.	management will be
	Concentrations of gas in a mine’s	required.
	atmosphere may result in an explosive
	atmosphere.

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Risk	Risk Description and Suggested
Ranking	Further Review	Mitigant	Area of Impact
M	Schedule: The schedule is based on	Prepare a detailed mining	Underground
	broad planning assumptions without	plan.	mining.
	detailed analysis on mining block
	characteristics.
M	Licencing: Youyi requires licences and	Continue the approvals	Youyi mine plan
	approvals for the 3 Mtpa mine plan.	process.	and development.
L	Geological and Geotechnical issues:	Further study required for	All
	Unfavourable strata control conditions	ongoing management as the
	may cause mine development	mine is developed.
	complexity, multiple mining methods
	to be applied, investment capital and
	operating cost increase, production
	delays, sterilisation of resource, loss of
	life, and loss of machinery.
L	Thin Seams: Seams exist which are	Completion of a detailed	Quantity of coal
	below the height limit for the longwall	pre-feasibility and	mineable within the
	systems. These will require different	feasibility study will	thin seams.
	and potentially more costly mining	increase the confidence in
	methods, which have not been	all aspects of this project.
	considered as part of the Preliminary
	Designs.
L	Location: Area is located in dry cold	Better understanding of the	Project costs.
	climate zone and seismically active	operating conditions and
	area.	construction of suitable
		infrastructure to meet those
		conditions

Opportunity Summary

MMC has identified various opportunities which warrant further investigation in future studies.

. The current ROM to Product coal yields at the Shaoyaohua mine are currently higher than has been modelled in MMC’s mining schedule. This may result in lower product coal operating costs than currently forecast. MMC expects that, over the mine life, the average yield would be similar to that modelled.
. Coal seams within the deposit are moderately to highly banded by stone. MMC believes that if a detailed mine model was created, mining activities may be able to target coal only working sections. This would minimise stone dilution, optimising the coal recovery and could potentially increase the mine product coal tonnes produced.
. No washing of coal has been reviewed by MMC, Washing of some coal may produce higher value products.

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. The Company has reported that the stone removed from the mine can be sold. This opportunity is difficult to quantify due to limited stone quality testing during the geological reviews, however, if the stone can be sold, it presents an opportunity that some revenue can be gained from what would otherwise be a waste material.
. There may be an opportunity to develop a small open cut coal mining operation on the Youyi licence area. This opportunity requires further assessment as the shallow coal may be heavily oxidised and not suitable for sale.

13. ANNEXURE A — QUALIFICATIONS AND EXPERIENCE

Andrew Ryan — Runge Asia Limited — General Manger North Asia — Bachelor of Engineering, Mining — University of New South Wales, Master of Applied Finance and Investment (Finsia) — Member of Australasian Institute of Mining and Metallurgy — Associate of Financial Services Institute of Australasia

Andrew has worked with MMC over the past seven years and has been actively involved in all areas of mining consulting. Most recently, in 2009 has relocated to Hong Kong to establish Runge Asia Limited’s new office. Prior to this Andrew was in Beijing as MMC’s Chinese Business Manager responsible for the establishment and growth of MMC’s China business. During this time Andrew was involved with and/or project managed numerous mining related assignments in North Asia. This work has included the project management of due diligence studies, valuation reports, opportunity assessments, conceptual development studies, and feasibility assessments for both domestic and international clients. The projects that these studies have focused on have covered a variety of minerals including coal, iron ore, copper, nickel, gold and molybdenum. Andrew has also had significant experience with due diligences for capital raisings and IPO related projects. Andrew has travelled to and worked on mining projects in Australia, China, Mongolia, Russia, the Ukraine, the Democratic Republic of the Congo, and Papua New Guinea.

Philippe Baudry — General Manager — China and Mongolia, Bsc. Mineral Exploration and Mining Geology, Assoc Dip Geo science, Grad Cert Geostatistics, MAIG

Philippe is a geologist with over 14 years of experience. He has worked as a consultant geologist for over 6 years first with Resource Evaluations and subsequently with Runge after they acquired the ResEval group in 2008. During this time Philippe has worked extensively in Russia assisting with the development of 2 large scale copper porphyry projects from exploration to feasibility level, as well as carrying out due diligence studies on metalliferous projects throughout Russia. His work in Australia has included resource estimates for BHPB, St Barbara Mines and many other clients both in Australia and overseas on most styles of mineralisation and metals. Philippe furthered his modelling and geostatistic skills in 2008 by completing a Post Graduate Certificate in Geostatistics at Edith Cowan University. Philippe relocated to China in 2008 and has since project managed numerous Due Diligences and Independent Technical Reviews for private acquisitions and IPO listings purpose mostly in China and Mongolia.

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Prior to working has a consultant Philippe spent 7 years working in the Western Australian Goldfields in various positions from mine geologist in a large scale open cut gold mine through to Senior Underground Geologist. Before this time Philippe worked as a contractor on early stage gold and metal exploration projects in central and northern Australia.

With relevant experience in a wide range of commodity and deposit types, Philippe meets the requirements for Qualified Person for 43-101 reporting, and Competent Person (“CP”) for JORC reporting for most metalliferous Mineral Resources. Philippe is a member of the Australian Institute of Geoscientists

Dan Peel — Operations Manager — Beijing, Bachelor of Engineering, Mining — University of New South Wales, Unrestricted Quarry Manager (WA), Grad. Cert. Applied Finance - Kaplan, Diploma (Bus)

Dan has worked as a mining engineering consultant with MMC for three years. Since joining MMC, Dan has completed a range of projects including technical valuations, life-of-mine designs and scheduling, pit optimisation, development of economic models, mine reserves estimation and reporting.

Prior to joining MMC, Dan worked with an open cut mining contracting firm for five years where he gained significant open cut metal mining experience. During this period, Dan developed operational, engineering and project management expertise. Dan’s roles included Quarry Manager of the BHPB Jimblebar iron ore mine and Quarry Manager/Mining Superintendent of the Mt Gibson Koolan Island iron ore mine. Dan also worked at the Plutonic and Cuddingwarra gold mines and the Wodgina tantalum mine.

With relevant experience in a wide range of commodity and deposit types, Dan meets the requirements for Qualified Person for 43-101 reporting, and Competent Person (“CP”) for JORC reporting for both metalliferous and coal open cut Reserves. Dan is a member of the Australian Institute of Mining and Metallurgy.

Michael Johnson — Senior Mining Consultant — Beijing, Runge Ltd, BAppSci (geology), Grad Dip (Mining Engineering), Member of the Australian Institute of Mining and Metallurgy

Michael has 10 years experience working in the mining industry particularly in underground coal operations. He has held positions of Mine Geologist, Strata Control Engineer, Mine Planning Engineer and Mining Consultant. Michael has experience in longwall production optimisation, strata control, coal quality, reserve/resource reports, mine planning, mine design, mine scheduling, feasibility studies due diligence, resource evaluation and optimisation for mine expansions programmes. He has worked on numerous underground coal projects in Australia, China, Canada, New Zealand, Indonesia, Russia, China and Norwegian Territories.

With relevant experience in coal geology and underground engineering, Michael meets the requirements for Qualified Person for 43-101 reporting, and Competent Person (“CP”) for JORC reporting for coal Resources and underground Reserves. Michael is a member of the Australian Institute of Mining and Metallurgy.

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Kevin Qu — Senior Mining Engineer — B.E. Hebei Mining College, Handan City, China

Kevin is a senior coal mining engineer with more than 25 years experience on mining technology, project development and project management. He received his undergraduate B.E. degree in Mining Engineering from Hebei Mining Institute, Handan City, Hebei Province, P.R. of China. With more than 25 years of coal industrial experience, Kevin is very knowledgeable of the regulations and policies in coal mining industry of China.

Kevin recently participated in business development and management for quite a few mine projects in Chinese provinces of Shanxi, Henan, Guizhou, Inner Mongolia, and Xinjiang Uygur Autonomous Region etc. Particularly, he has worked as senior mining engineer and project manager in Gaohe Coal Mine, Chief Mining Engineer in Dengjiazhuang Coal Mine, as well as Mining Engineer of mining system designer in Jialequan Coal mine.

Company’s Relevant Experience

Minarco-MineConsult, part of the Runge Ltd, is a premier international consulting and engineering firm. It provides a full range of services from pure technical consulting through to strategic corporate advice. And undertake assignments on mining projects covering a range of commodities and countries, serving clients in most of the countries around the West Pacific Rim region.

Minarco-MineConsult maintains a full time staff of qualified specialists in the fields of mining engineering, geology, process and metallurgical engineering, environmental and geotechnical engineering, and environmental economics.

Minarco-MineConsult typically completes over 200 assignments per year and has over 300 professionals (through its parent Runge Group) available in disciplines including:

. Mining Engineering;
. Minerals Processing;
. Coal Handling and Preparation;
. Power Generation;
. Environmental Management;
. Geology;
. Contracts Management;
. Project Management;
. Finance;
. Commercial Negotiations.

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The roots of Minarco-MineConsult were established in the Australian mining industry. Minarco-MineConsult is committed to compliance with the codes which regulate Australian corporations and consultants and has established an International business which has continued to give its clients and those that rely on its work the confidence that can be associated by the use of the relevant Australian codes.

These codes include:

. The Australian Corporation Law;
. The Australian Institute of Company Directors Code of Conduct;
. The Securities Institute of Australia Code of Ethics;
. The Australasian Institute of Mining and Metallurgy Code of Ethics;
. The Australasian Code for Reporting of Exploration Results, Mined Resources and Ore Reserves (The JORC Code).

Minarco-MineConsult has conducted numerous mining technical due diligence programs and reporting for IPO’s and capital raisings over the past six years, with involvement in projects raising a total of over $US 10 billion of capital. This and other work is summarised in Table A1.

Table A1 Mining Related IPO and Capital Raising Due Diligence Experience

2010 China Precious Metals Holdings Co., Ltd: Competent Persons Report of Mineral Resources and Ore Reserves under JORC and Independent Technical Review for inclusion in a HKSE Circular to support multiple gold mining assets purchase by a listed Hong Kong Company.

2010 Century Sunshine Goup Holdings Limited: Competent Persons Report of Mineral Resources and Ore Reserves under JORC and Independent Technical Review for inclusion in a HKSE Circular to support a serpentinite mining asset purchase by a listed Hong Kong Company.

2010 Doxen Energy Group Limited: Independent Technical Review for inclusion in a HKSE Circular to support a coal mining asset purchase by a listed Hong Kong Company.

2010 Kwong Hing International Holdings (Bermuda) Limited: Independent Technical Review for inclusion in a HKSE Circular to support a Very Substantial Acquisition.

2009 Metallurgical Corporation Of China Ltd (“MCC”): Independent Technical Review for inclusion in a Prospectus to support a stock exchange listing on the Hong Kong Stock Exchange.

2009 Nubrands Group Holdings Limited, Guyi Coal Mine: Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by a listed Hong Kong Company.

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2008 China Blue Chemical Limited, Wangji and Dayukou Phosphate Mines: Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by a listed Hong Kong Company.

2008 Kenfair International (Holdings) Limited, Shengping Coal Mine: Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by a listed Hong Kong Company.

2007 China Railway Company Limited, African Copper/Cobalt Assets: Capital raising for mining assets on the Hong Kong Stock Exchange. Preparation of CPR for planned IPO on the HKSE.

2007 Ko Yo Ecological Agrotech (Group) Limited Sichuan Phosphate: Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by a listed Hong Kong Company.

2007 Prosperity International Holdings Limited, Guilin Granite Project: Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by a listed Hong Kong Company.

2007 China Primary Resources: Independent Technical Review for inclusion in a Stock Exchange Circular to support a mining asset purchase by China Primary Resources.

2007 China Railway Company Limited, African Copper/Cobalt Assets: Capital raising for mining assets on the Hong Kong Stock Exchange. Preparation of CPR for planned IPO on the HKSE.

2007 Gloucester Coal Limited: Independent Technical Review for Australian Stock Exchange Scheme of Arrangement.

2007 Confidential Hong Kong Private Equity Partners: Independent Technical Review to support private equity capital raising to purchase lead/zinc mining assets in Tibet.

2007 Confidential International Investor: Independent Technical Review to support private equity capital raising to purchase iron ore assets in Hubei. Preparation of ITR.

2007 Whitehaven Coal Limited: Independent Technical Review for Australian Stock Exchange IPO.

2007 Confidential Privately Owned Coke Producer: Capital raising for purchase of Coal Mines and downstream coal washing, coke production and chemical production facilities. Preparation of CPR for planned IPO on the HKSE.

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2007 China Molybdenum Group: Capital raising for large scale Molybdenum mine on the Hong Kong Stock Exchange. Preparation of CPR for IPO on the HKSE.

2007 Confidential International Investor: Independent Technical Review to support purchase of Gold Mine In Hubei Province.

2006 Excel Mining: Independent Technical Review for Australian Stock Exchange Scheme of Arrangement.

2006 Celadon Mining Investment Group (UK): Capital raising for coal mine purchase in China and planned subsequent listing on AIM.

2005 Yanzhou Coal Mining Company Limited: Independent Technical Review of coal projects to satisfy ongoing listing requirements of the HKSE and NYSE following IPO.

2004 Excel Mining: Independent Technical Review for Australian Stock Exchange IPO (current market capitalisation over $US1 billion).

2004 Excel Mining: Independent Market Review for Australian Stock Exchange IPO.

2003 New Hope: Independent Market Review for Australian Stock Exchange IPO.

2003 Confidential: Independent Market Review on 50 Mtpa operation in Kazakhstan for LSE listing (has not proceeded).

2003 Xstrata plc: Competent Person’s Report for London Stock Exchange Chapter 19 Report for Acquisition of MIM Assets including mines, rail and port review (US$2.5 billion).

2002 Xstrata plc: Competent Person’s Report for London Stock Exchange IPO (US$2.3 billion).

2002 Kaltim Prima, Indonesia: Independent Technical Review for advising project financiers to acquisition (US$445 million).

2001 Enex Resources: Independent Technical Review for Australian Stock Exchange IPO.

2001 Macarthur Coal Limited: Independent Technical Report and Market Review for Australian Stock Exchange IPO.

14. ANNEXURE B — GLOSSARY OF TERMS

The key terms used in this report include:

. $ refers to United States dollar currency
. Asset means the Shaoyaohua and Youyi Coal Mines
. AUSIMM stands for Australasian Institute of Mining and Metallurgy

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. CV stands for Caloric Value
. Company means King Stone Energy Group
. daf stands for dry ash free
. HKEX stands for Hong Kong Stock Exchange
. ITR stands for Independent Technical Review
. JORC stands for Joint Ore Reserves Committee
. JORC Code refers to the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves 2004 edition, which is used to determine resources and reserves, and is published by JORC of the Australasian Institute of Mining and Metallurgy, the Australian Institute of Geoscientists and the Minerals Council of Australia
. km stands for kilometre
. loess is a to a highly erodible sediment deposited by wind and consists mostly of silt. Areas with loess tend to be hilly
. LOM plan stands for Life of Mine Plan
. m stands for metres
. MMC refers to Minarco-MineConsult
. mine production is the total raw production from any particular mine
. mining rights means the rights to mine mineral resources and obtain mineral products in areas where mining activities are licensed
. Ml stands for mega litre which is equal to one million litres
. Mt stands for million tonnes
. RMB stands for Chinese Renminbi Currency Unit; 10[3] RMB means 1,000 RMB
. ROM stands for run-of-mine, being material as mined before beneficiation
. t stands for tonne
. tonne refers to metric tonne
. tph stands for tonnes per hour
. tpd stands for tonnes per day

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. VALMIN Code refers to the code and guidelines for technical assessment and or valuation of mineral and petroleum assets and mineral and petroleum securities for independent expert reports
. ¥ is the symbol for the Chinese Renminbi Currency Unit

Note: Where the terms Competent Person, Inferred Resources and Measured and Indicated Resources are used in this report, they have the same meaning as in the JORC Code.

15. ANNEXURE C — CHINESE AND OTHER INTERNATIONAL RESOURCE REPORTING STANDARDS

Chinese Resource Reporting Standards

In 1999, with a view to creating a standard that was comparable with international resource reporting standards, The Chinese National Land and Resource Department introduced its own national standard for the Classification of Resources/Reserves for Solid Fuels and Mineral Commodities (GB/T 17766-1999).

This code was to replace the previous code (China GB 13908-1992 — General rules for Geological Exploration of Solid Ore Resources) and was based upon the United Nations international code (UN Economic and Society Committee, UN document ENERGY/WP.1/R.70). Some elements of the American resource reporting standards were included and modifications made to suit Chinese conditions. All new resource estimates are reported under this new code and old estimates either re-estimated or converted to the new system.

The previous Chinese standard (GB 13908-1992) divided resources into four categories (A, B, C and D) which were loosely comparable to the JORC — (December 2004) classifications of Measured Resource (A–B), Indicated Resource (B–C) and Inferred Resource (D). The old standard was more prescriptive than JORC in that it specified minimum borehole spacings (see Table C1) for each category, along with implied levels of geological understanding.

Table C1 Borehole Spacing Comparison (Chinese, UN and JORC Codes)

		Classification
(Chinese		(Chinese		JORC	Minimum Borehole/
Reserve	Code)	Reserve Class)	UN Code	(Dec 2004)	Drill Line Spacing
A		111 – 121		Measured	<100 m
B		121 – 122	331	Measured	≦100 m x 100 m
C		122 – 2 M22	332	Indicated	≦200 m x 100 m
D		122	333	Inferred	>200 m

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The old code was essentially a geological classification, taking little account of the deposits economics or the level of mining studies that had been carried out on it. The new code (see Figure C1) attempts to address this by using a three component system (EFG) that considers the deposit economics (E), the level of mining feasibility studies that have been carried out (F) and the level of geological confidence (G) using a numerical ranking.

Figure C1 New Chinese Resource/Reserve Classification Matrix (1999)

==> picture [199 x 171] intentionally omitted <==

This system produces a three digit code for a deposit that reflects these three variables. For example a deposit classified as a 121 is economically viable (1), has had pre—feasibility studies carried out (2) and is well understood geologically (1). Various suffixes are used to distinguish Basic Reserves — essentially JORC Resources — (121b) from Extractable Reserves (121) and to identify the assumed economic viability (S or M). Certain categories are not allowed, for example pre-feasibility or feasibility level studies cannot be conducted on Inferred Resources, and so 123 and 113 are invalid classifications. Also Extractable Reserves are not estimated for marginally economic (or lesser) deposits so the (b) suffix is considered redundant. The term Intrinsically Economic indicates that while the deposit may be economic, insufficient studies have been carried out to clearly determine its status.

A tabulation of this concept is shown in Table C2.

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Table C2 New Chinese Resource/Reserve Categories (1999)

Economic Viability Economic (1) Marginally Economic (2 M) Sub-marginally Economic (2S) Intrinsically Economic (3)	Geological Confidence
	Identified Mineral Resource Measured (1) Indicated (2) Inferred (3) Basic Reserve Resource — 111b Proved Extractable Reserve — 111 Basic Reserve Resource 121b Basic Reserve Resource — 122b Probable Extractable Reserve — 121 Probable Extractable Reserve — 122 Resource 2 m11 Resource 2 M21 Resource 2 M22 Resource 2S11 Resource 2S21 Resource 2S22 Resource 331 Resource 332 Resource 333	Undiscovered Resource
		Reconnaissance (4) Resource 334

Note: First digit reflects Economic viability; 1 = Economic; 2 m = Marginally Economic; 2S = Sub-marginally Economic; 3 = Intrinsically Economic; 4 = Economic interest undefined.

Second digit reflects Feasibility assessment stage, 1 = Feasibility; 2 = Pre-feasibility; 3 = Geological study.

Third digit reflects Geological assurance, 1 = Measured, 2 = Indicated, 3 = Inferred, 4 = Reconnaissance.

b = Basic Reserve (prior to recovery factors, mining losses and dilution) — JORC Resource.

Unlike the old code, the new code does not specify required borehole spacings for each category. In the case of copper Cobalt and Gold (and other metals), there is an accompanying Chinese Professional Standard (DZ/T 0214-2002) that lays out rules for determining the level of geological confidence.

International Standards and the JORC Code for Resources

Two main styles of resource reporting codes exist internationally. These are the American style (USA and much of South America) and the JORC style (Australia, South Africa, Canada, and UK). This is further complicated by the listing and reporting requirements of different stock exchanges. It is generally true that a resource estimation that complies with the JORC code (or one of its sister codes) will meet the standards of most international investors.

The new Chinese code is a blend of the old Chinese Code and the codes in current use today, including JORC and the current United Nations (UN) standard, with some additional local components added.

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JORC is a non-prescriptive code, in that it does not lay out specific limits for resource classification in terms of such things as borehole spacing. Instead it emphasises the principles of transparency, materiality and the role of the Competent Person. Whilst some guidelines do exist (e.g. the Australian Guidelines for the Estimation of Coal Resources and Reserves) they are not mandatory and classification is left in the hands of the Competent Person. When combined with its Professional Standards (which are effectively mandatory), the Chinese code is much more prescriptive but does not include the role of the Competent Person.

An examination of the details of the Chinese code suggests that in terms of broad categorisation, the levels of geological confidence ascribed to Measured and Indicated resources are quite similar in both the codes. The ranges of borehole spacings, thickness cut-offs and quality limitations that are enforced by the Chinese system would generally result in the same resource classification under the JORC Code.

The JORC Code uses the following definitions for Mineral Resources and Ore Reserves:

Measured Mineral Resource is that part of Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a high level of confidence. It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. The locations are spaced closely enough to confirm geological and grade continuity.

Indicated Mineral Resource is that part of Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable level of confidence. It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. The locations are too widely or inappropriately spaced to confirm geological and/or grade continuity but are spaced closely enough for continuity to be assumed.

Inferred Mineral Resource is that part of Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a low level of confidence. It is inferred from geological evidence and assumed but not verified geological and/or grade continuity. It is based on information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes which may be limited or of uncertain quality and reliability.

Exploration Target/Results includes data and information generated by exploration programmes that may be of use to investors. The reporting of such information is common in the early stages of exploration and is usually based on limited surface chip sampling, geochemical and geophysical surveys. Discussion of target size and type must be expressed so that it cannot be misrepresented as an estimate of Mineral Resources or Ore Reserves.

A ‘‘Proved Ore Reserve’’ is the economically mineable part of a Measured Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include

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consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified

A Proved Ore Reserve represents the highest confidence category of Ore Reserve estimates. This requires detailed exploration and quality data ‘‘points of observation’’ to provide high geological confidence.

A ‘‘Probable Ore Reserve’’ is the economically mineable part of an Indicated, and in some circumstances, a Measured Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include consideration of and modification by realistic ally assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors These assessments demonstrate at the time of reporting that extraction could reasonably be justified.

A Probable Ore Reserve has a lower level of confidence than a Proved Ore Reserve but has adequate reliability as the basis of mining studies.

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16. ANNEXURE D — JORC COAL RESERVE CHECKLIST

Table 16-1 Shaoyuohua JORC Reserve Checklist

Section	Section		Comment
1.	Is the Reserve derived	from JORC	The JORC Reserve estimate is derived from a JORC compliant Coal
	compliant Resource Statement? Who are		Resource estimate signed by Mrs. Merryl Peterson (Runge Ltd, Senior
	the competent persons?		Geologist).
2.	What is the current project	status?	The mine is currently operating. A life of mine plan has been scheduled.
			The mine has been schedule from current face positions and scheduled
			to start in 2011 and is planned to produce 1.3Mtpa, and 3.5Mtpa from
			2014 onwards.
3.	What cut off parameters	and physical	CAD program was used to optimise mine plan and layouts, within the
	limits have been applied in	estimating the	known licence boundaries and areas of mining. Any seam thickness
	Reserves?		below 0.8m for longwall has been excluded, and any development areas
			less than the minimum mining height have been flagged for stone
			drivage.
4.	What mining and	geotechnical	Geotechnical assumptions have been considered in the design of the
	assumptions have been made?		mine. Coal quality is as per the geological model combined with loss,
			dilution and moisture adjustments. Reasonable factors have been used
			for roof and floor loss, dilution and minimum coal parting thickness as
			well as diluting material properties.
5.	Is there a metallurgical process used and		Handpicking will be used to separate the stone from sized fractions
	what is suitability to	the type of	greater than 80mm. Reasonable assumptions have been applied to these
	operation?		calculations. Remaining stone has been added to product tonnes as
			dilution, and qualities have been weighted accordingly.
6.	How have the project capital, operating		These were derived from the Preliminary Design report as provided by
	costs and royalties been derived?		the mine site personnel and compiled by the Beijing Huayu Engineering
			Company (May, 2008).
7.	What is the market demand and supply		MMC has used a base price of 282RMB/t for saleable coal (based on
	of this commodity and what are the price		audited accounts from the first 9 months of 2010 from the Shaoyaohua
	and volume forecasts of	the Reserves	Mine). The volume sale forecast were based on the Company’s mine
	based upon?		plans, which were adjusted by MMC for reasonableness.
8.	Any other factors that may potentially		Increases in production rates have been planned. These appear to be
	affect the viability of the project and the		above the increases normally approved in regards to the current Chinese
	status of titles and approvals required for		Reserve life. Approvals are ongoing and require updating.
	the project?
9.	What is the basis for the classification of		Classification of Coal Reserves has been derived by considering the
	the Coal Reserves and proportion of Coal		Measured and Indicated resources and the level of mine planning. Both
	Reserves which have been	derived from	Proved and Probable Reserves have been reported. Inferred resources
	Measured Coal Resources?		have been excluded from the estimate.
10.	Results of audits or reviews of Reserves		As per findings in this review, plus internal reconciliation and peer
	Statements		review.
11.	Relative accuracy and confidence of the		There is reasonable confidence in the accuracy of the Coal Reserve
	Reserves Estimate		estimate.

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Table 16-2 Youyi JORC Reserve Checklist

Section	Section	Comment
12.	Is the Reserve derived from JORC	The JORC Reserve estimate is derived from a JORC compliant Coal
	compliant Resource Statement? Who are	Resource estimate signed by Mrs. Merryl Peterson (Runge Ltd, Senior
	the competent persons?	Geologist).
13.	What is the current project status?	The mine is not yet operating. A life of mine plan has been completed
		as part of the Preliminary Design report. The project is awaiting the
		required approvals and licences prior to commencing construction.
14.	What cut off parameters and physical	CAD program was used to optimise mine plan and layouts, within the
	limits have been applied in estimating the	known licence boundaries and areas of mining. Any seam thickness
	Reserves?	below 0.8m for longwall has been excluded, and any development areas
		less than the minimum mining height have been flagged for stone
		drivage.
15.	What mining and geotechnical	Geotechnical assumptions have been considered in the design of the
	assumptions have been made?	mine. Coal quality is as per the geological model combined with loss,
		dilution and moisture adjustments. Reasonable factors have been used
		for roof and floor loss, dilution and minimum coal parting thickness as
		well as diluting material properties.
16.	Is there a metallurgical process used and	Handpicking will be used to separate the stone from sized fractions
	what is suitability to the type of	greater than 80mm. Reasonable assumptions have been applied to these
	operation?	calculations. Remaining stone has been added to product tonnes as
		dilution, and qualities have been weighted accordingly.
17.	How have the project capital, operating	These were derived from the Preliminary Design report as provided by
	costs and royalties been derived?	the mine site personnel and compiled by the Shanxi Weidemufang Coal
		Mine Design and Consultant Company Ltd. (October, 2010).
18.	What is the market demand and supply	MMC has used a base price of 282RMB/t for saleable coal (based on
	of this commodity and what are the price	audited accounts from the first 9 months of 2010 from the Shaoyaohua
	and volume forecasts of the Reserves	Mine) and has applied a premium to the base price due to a higher
	based upon?	quality product being produced at Youyi. An average base price
		314RMB/t has been used and is based on the prevailing market price
		for similar coal types in Shanxi Province. The volume sale forecast were
		based on the Company’s mine plans, which were adjusted by MMC for
		reasonableness.
19.	Any other factors that may potentially	Approvals and licences are required prior to the project commencing
	affect the viability of the project and the	construction.
	status of titles and approvals required for
	the project?
20.	What is the basis for the classification of	Classification of Coal Reserves has been derived by considering the
	the ore reserves and proportion of ore	Measured and Indicated resources and the level of mine planning. Both
	reserves which have been derived from	Proved and Probable Reserves have been reported. Inferred resources
	measured mineral resources?	have been excluded from the estimate.
21.	Results of audits or reviews of Reserves	As per findings in this review, plus internal reconciliation and peer
	Statements	review.
22.	Relative accuracy and confidence of the	There is reasonable confidence in the accuracy of the Coal Reserve
	Reserves Estimate	estimate.

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	2032 Total				15,932 4,495,213	793,961	772 490,590	2,012 131,768	16,704 5,367,204		2,591,755 48,841,989	146,775 7,017,783	435,481 14,427,141	3,027,236 63,269,130	3,043,940 68,636,335		45.10% 34.30%	1.37% 1.56%	17.19 20.30		26.35 28.51	1.615% 1.111%				9,929 3,271,125	606,773	324 249,686	10,253 4,127,584		1,776,087 35,161,284	61,646 2,947,469	286,449 10,184,163	2,124,181 48,292,915	2,134,434 52,420,499		33.47% 24.58%	1.72% 1.87%	19.94 23.96		21.78 26.17	1.193% 0.823%
	2031				238,439		11,561	299	250,000		2,304,374	137,948	540,811	2,845,186	3,095,186		46.83%	1.37%	16.31		25.24	1.704%				163,936		4,855	168,792		1,475,312	57,938	342,155	1,875,405	2,044,197		38.53%	1.60%	20.10		21.82	1.121%
	2030				238,439		11,561		250,000		3,018,236	152,727	131,764	3,150,000	3,400,000		41.41%	1.64%	17.99		27.37	1.815%				154,127		4,855	158,982		2,497,525	64,145	97,354	2,659,025	2,818,007		26.28%	2.14%	19.91		21.72	1.226%
	2029				246,301	87,514	16,185	79	350,000		2,701,789	152,727	448,211	3,150,000	3,500,000		45.67%	1.51%	17.15		26.63	1.562%				204,073	58,962	6,798	269,832		1,777,319	64,145	280,676	2,122,140	2,391,973		35.05%	1.63%	19.49		21.37	1.249%
	2028				286,127		13,873		300,000		3,085,433	193,463	95,932	3,181,364	3,481,364		38.91%	1.45%	18.99		26.84	1.590%				197,591		5,827	203,417		2,268,620	81,254	60,214	2,410,089	2,613,506		31.62%	1.44%	21.50		23.30	1.129%
	2027				166,508	102,109	15,767	12,959	280,178		2,839,866	460,000	460,134	3,300,000	3,580,178		23.95%	1.43%	24.08		31.12	1.976%				124,516	82,732	6,622	213,870		1,908,676	193,200	281,488	2,383,364	2,597,234		15.44%	1.47%	27.75		29.78	1.016%
	2026				204,228		28,468	81	204,309		2,626,740	454,424	633,260	3,260,000	3,464,309		20.13%	1.40%	25.66		32.03	1.298%				136,674		11,957	148,631		1,768,565	190,858	411,932	2,371,355	2,519,985		14.57%	1.32%	28.21		30.53	0.802%
Shaoyaohua Mining Schedule	2020 2021 2022 2023 2024 2025				300,000 149,657 329,197 284,061 170,984 239,370	94,779 60,879 76,199	41,818 37,635 59,648 39,670 34,456 33,367	4,100 910 2,817 630	300,000 248,535 390,985 284,061 250,000 240,000		2,971,194 3,053,024 2,160,570 2,211,381 2,452,262 2,780,116	446,061 460,000 472,109 406,126 446,061 446,061	228,806 246,976 851,400 446,178 747,738 419,884	3,200,000 3,300,000 3,011,971 2,657,559 3,200,000 3,200,000	3,500,000 3,548,535 3,402,956 2,941,620 3,450,000 3,440,000		31.47% 28.14% 18.36% 24.72% 27.70% 25.62%	1.90% 2.16% 1.45% 1.74% 1.46% 1.47%	20.15 22.37 26.41 23.87 22.52 23.51		29.79 30.01 32.18 31.45 30.54 31.19	0.725% 0.723% 1.005% 1.132% 1.271% 1.591%				238,823 105,572 234,214 193,768 121,026 160,186	69,043 41,088 58,742	17,564 15,807 25,052 16,662 14,471 14,014	256,386 190,421 300,354 210,429 194,239 174,200		2,342,988 2,384,402 1,493,438 1,578,388 1,570,984 1,931,847	187,345 193,200 198,286 170,573 187,345 187,345	191,721 192,692 567,549 306,397 493,775 262,254	2,722,054 2,770,294 2,259,273 2,055,358 2,252,104 2,381,447	2,978,440 2,960,715 2,559,627 2,265,787 2,446,344 2,555,647		20.34% 21.39% 15.80% 14.50% 15.54% 14.36%	2.35% 2.40% 1.78% 2.11% 1.81% 1.73%	24.78 23.87 27.67 27.79 27.70 27.98		27.27 26.10 30.06 30.36 30.32 30.31	0.713% 0.574% 0.803% 0.824% 0.854% 0.996%
Table 17-1	2017 2018 2019				198,736 283,778 183,724	14,599 116,276	27,703 41,592 41,818	1,264 1,623	200,000 300,000 300,000		1,875,439 2,665,880 3,199,077	360,000 397,240 446,061	1,424,561 419,934 923	3,300,000 3,085,815 3,200,000	3,500,000 3,385,815 3,500,000		36.54% 36.12% 34.28%	1.64% 1.59% 1.55%	19.41 19.55 19.98		27.45 27.60 28.77	0.451% 0.706% 0.654%				141,039 233,661 138,967	12,218 95,754	11,635 17,469 17,564	152,674 263,347 252,285		1,413,764 1,825,935 2,572,559	151,200 166,841 187,345	1,074,293 319,770 795	2,639,257 2,312,546 2,760,700	2,791,931 2,575,893 3,012,984		26.91% 28.08% 23.59%	2.06% 1.90% 1.76%	23.12 22.88 24.94		25.33 25.03 27.49	0.536% 0.564% 0.634%
	2016				90,313	108,593	27,726	1,094	200,000		1,598,504	360,000	1,701,496	3,300,000	3,500,000		35.08%	1.79%	19.98		27.82	0.674%				61,759	83,584	11,645	156,988		1,220,731	151,200	1,309,345	2,681,276	2,838,264		26.03%	2.23%	23.20		25.52	0.613%
	2015				152,431	50,000	6,970	16,629	202,431		1,636,122	360,000	1,663,878	3,300,000	3,502,431		41.09%	1.40%	17.61		26.74	0.764%				117,636	40,189	9,911	167,737		1,203,843	151,200	1,224,263	2,579,305	2,747,042		30.25%	1.90%	22.69		25.24	0.700%
	2014				200,000			21,818	200,000		1,467,256	360,000	1,832,744	3,300,000	3,500,000		41.76%	1.49%	17.37		26.52	0.609%				150,618		9,164	159,782		1,034,791	151,200	1,292,468	2,478,459	2,638,241		30.99%	1.87%	22.40		24.86	0.630%
	2013				150,548	49,452		21,818	200,000		499,539	120,000	600,461	1,100,000	1,300,000		40.86%	1.60%	17.88		26.77	0.602%				120,677	39,881	9,164	169,721		347,626	50,400	417,627	815,653	985,375		31.20%	1.78%	22.49		24.62	0.604%
	2012				166,438	33,562		21,818	200,000		561,780	120,000	538,220	1,100,000	1,300,000		44.26%	1.37%	14.80		23.16	0.564%				121,795	24,581	9,164	155,539		379,102	50,400	367,366	796,868	952,407		32.08%	1.99%	22.83		24.18	0.550%
	2011				200,000			21,818	200,000		541,653	120,000	558,347	1,100,000	1,300,000		44.22%	1.35%	15.62		24.70	0.528%				140,539		9,164	149,703		388,781	50,400	403,581	842,762	992,465		30.74%	1.83%	23.20		24.73	0.588%
	ALL SEAMS	ROM Quantities and Qualities	Quantities	Development	Gate Roads	Main Headings	Stone Tonnes	Stone Drivage Tonnes	Total Tonnes DV	Longwall	Cutting Tonnes	Stone Tonnes	Caving Tonnes	Total Tonnes LW	Total Tonnes	Qualities	Ash Content	Moisture	Specific Energy	Specific Energy	(dry ash free)	Total Sulphur	Product	Quantities	Development	Gate Roads	Main Headings	Stone Tonnes	Total Tonnes DV	Longwall	Cutting Tonnes	Stone Tonnes	Caving Tonnes	Total Tonnes LW	Total Tonnes	Qualities	Ash Content	Moisture	Specific Energy	Specific Energy	(dry ash free)	Total Sulphur

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APPENDIX IV

INDEPENDENT TECHNICAL REVIEW AND COMPETENT PERSON’S REPORT

Total				1,537,935	1,098,555	319,575	255,218	3,014,208		22,998,787	4,405,091	13,343,210	36,341,997	39,356,205		40.47%	2.37%	21.49	26.45	1.785%				1,373,575	978,960	134,221	2,486,756		20,489,466	1,850,138	11,851,153	34,190,758	36,677,514		35.61%	2.37%	22.88	28.15	1.824%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027				91,223 63,151 163,174 193,853 57,170 57,225 177,830 207,455 188,251 184,972 88,559 10,608	45,669 123,840 43,587 12,813 149,591 38,311 178,378 178,378 36,317 16,698 63,165 70,890 92,460	16,593 22,666 25,062 25,050 25,062 11,580 21,622 21,622 25,957 27,170 30,475 31,014 21,942 1,286	63,108 1,450 564 51,182 36,387 26,962 22,516 5,972	200,000 188,441 206,761 207,230 206,761 95,535 200,000 200,000 260,000 280,000 300,000 300,000 207,586 11,894		496,723 832,782 1,323,326 1,802,865 2,185,657 1,048,228 789,893 537,100 1,714,522 1,896,905 2,453,981 2,110,247 2,048,710 2,367,228 1,390,619	64,354 127,042 317,606 331,398 339,394 339,394 339,394 339,394 339,394 320,314 318,223 327,273 327,273 371,415 203,224	34,200 215,318 1,296,923 931,166 614,343 1,751,772 2,010,107 2,262,900 1,085,478 745,686 171,355 589,753 651,290 696,943 285,976	530,923 1,048,100 2,620,249 2,734,031 2,800,000 2,800,000 2,800,000 2,800,000 2,800,000 2,642,592 2,625,337 2,700,000 2,700,000 3,064,171 1,676,595	730,923 1,236,541 2,827,010 2,941,261 3,006,761 2,895,535 3,000,000 3,000,000 3,060,000 2,922,592 2,925,337 3,000,000 2,907,586 3,076,065 1,676,595		40.51% 41.82% 46.70% 40.68% 36.62% 34.73% 43.37% 49.52% 41.14% 38.42% 37.50% 39.19% 37.59% 40.93% 38.31%	2.14% 2.53% 8.56% 3.03% 1.54% 1.50% 1.42% 1.37% 1.89% 3.78% 1.70% 1.77% 1.42% 1.22% 1.58%	20.32 20.76 18.55 20.70 22.80 24.19 20.13 17.30 21.34 22.01 22.33 22.05 23.74 22.10 24.62	24.21 24.95 26.83 27.00 27.56 27.66 25.88 24.49 25.55 27.78 26.21 25.98 26.71 25.71 29.67	0.860% 1.005% 0.872% 1.324% 1.424% 1.627% 1.760% 1.939% 1.558% 1.899% 1.951% 1.757% 2.320% 2.890% 2.920%				82,393 56,714 144,533 171,708 50,639 50,688 159,145 185,657 168,603 166,014 78,892 9,396	41,248 109,941 38,608 11,349 132,502 33,934 158,001 158,001 33,433 15,467 57,052 63,759 81,898	6,969 9,520 10,526 10,521 10,526 4,864 9,081 9,081 10,902 11,411 12,799 13,026 9,215 540	130,610 176,175 193,667 193,578 193,667 89,485 167,082 167,082 203,480 212,536 238,454 242,799 170,005 9,936		448,639 752,168 1,195,226 1,600,946 1,935,973 928,481 699,657 475,743 1,518,659 1,691,608 2,186,829 1,885,389 1,830,881 2,107,508 1,231,758	27,029 53,358 133,395 139,187 142,545 142,545 142,545 142,545 142,545 134,532 133,653 137,455 137,455 155,994 85,354	30,889 194,475 1,171,379 830,068 544,162 1,551,654 1,780,477 2,004,392 961,476 660,501 151,780 522,381 576,888 617,326 253,307	506,557 1,000,000 2,500,000 2,570,200 2,622,680 2,622,680 2,622,680 2,622,680 2,622,680 2,486,641 2,472,263 2,545,224 2,545,224 2,880,828 1,570,419	637,167 1,176,175 2,693,667 2,763,778 2,816,347 2,712,165 2,789,762 2,789,762 2,826,160 2,699,177 2,710,717 2,788,023 2,715,229 2,890,764 1,570,419		36.81% 36.52% 41.63% 35.78% 31.59% 29.57% 38.80% 45.36% 36.38% 33.33% 32.40% 34.06% 32.33% 36.04% 33.39%	2.11% 2.50% 8.83% 3.05% 1.49% 1.46% 1.37% 1.31% 1.86% 3.88% 1.65% 1.73% 1.36% 1.15% 1.54%	22.12 21.81 19.48 22.03 24.34 25.82 21.49 18.47 22.75 23.37 23.66 23.37 25.24 23.52 26.29	26.12 26.21 28.15 28.72 29.42 29.53 27.63 26.15 27.23 29.52 27.79 27.55 28.37 27.35 31.68	0.814% 0.983% 0.842% 1.335% 1.445% 1.662% 1.804% 1.995% 1.586% 1.941% 1.988% 1.781% 2.383% 3.004% 3.042%
2012				54,465	48,458	12,475	47,077	150,000						150,000		36.06%	2.68%	12.31	17.12	0.721%				49,193	43,767	5,240	98,199						98,199		41.37%	3.51%	16.61	23.06	0.900%
2011
ALL SEAMS	ROM Quantities and Qualities	Quantities	Development	Gate Roads	Main Headings	Stone Tonnes	Stone Drivage Tonnes	Total Tonnes DV	Longwall	Cutting Tonnes	Stone Tonnes	Caving Tonnes	Total Tonnes LW	Total Tonnes	Qualities	Ash Content	Moisture	Specific Energy	Specific Energy (dry ash free)	Total Sulphur	Product	Quantities	Development	Gate Roads	Main Headings	Stone Tonnes	Total Tonnes DV	Longwall	Cutting Tonnes	Stone Tonnes	Caving Tonnes	Total Tonnes LW	Total Tonnes	Qualities	Ash Content	Moisture	Specific Energy	Specific Energy (dry ash free)	Total Sulphur

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VALUATION REPORT ON SHAOYAOHUA AND YOUYI

APPENDIX V

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Unit 3806, 38/F, China Resources Building, 26 Harbour Road, Wan Chai, Hong Kong Tel (852) 2529 6878 Fax (852) 2529 6806 E-mail [email protected] http://www.roma-international.com

9 February 2011

King Stone Energy Group Limited

Room 3603, 36/F, One Exchange Square, Central, Hong Kong

Case Ref: KY/BV373/AUG10

Dear Sir/Madam,

RE: BUSINESS VALUATIONS OF MARKET VALUES OF THE 100% EQUITY INTEREST IN SHANXI SHANYIN SHAOYAOHUA COAL CO., LTD. AND 100% EQUITY INTEREST IN SHANXI SHUOZHOU SHANYIN YOUYI COAL CO., LTD.

In accordance with the instructions from King Stone Energy Group Limited (hereinafter referred to as the ‘‘Company’’), we have performed the valuations of the 100% equity interest in Shanxi Shanyin Shaoyaohua Coal Co., Ltd. (hereinafter referred to as the ‘‘Business Enterprise A’’) and 100% equity interest in Shanxi Shuozhou Shanyin Youyi Coal Co., Ltd. (hereinafter referred to as the ‘‘Business Enterprise B’’) as at 31 October 2010 (hereinafter referred to as the ‘‘Date of Valuation’’). The Business Enterprise A owned coal mine Shaoyaohua (hereinafter referred to as the ‘‘Coal Mine A’’) situated in Shanyin County, Shuozhou City, Shanxi Province, the People’s Republic of China (‘‘the PRC’’); while the Business Enterprise B owned coal mine Youyi (hereinafter referred to as the ‘‘Coal Mine B’’) also situated in Shanyin County, Shuozhou City, Shanxi Province, the PRC.

This report states the purpose and basis of valuation, scope of work, economic and industry overview, overviews of the Business Enterprise A and the Business Enterprise B, major assumptions, valuation methodology and limiting conditions, and presents our opinion of values.

This report has been prepared in accordance with the guidelines set by the Code for the Technical Assessment and Valuation Mineral and Petroleum Assets and Securities for Independent Expert Reports (‘‘VALMIN’’) established by the VALMIN Committee in Australia.

1. PURPOSE OF VALUATION

This report is prepared solely for the use of the directors and management of the Company. The Company is a public company listed on the Main Board of the Hong Kong Stock Exchange. In addition, Roma Appraisals Limited (hereinafter referred to as ‘‘Roma Appraisals’’) acknowledges that this report may be made available to the Company for public documentation purpose and included in the Company’s circular only.

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VALUATION REPORT ON SHAOYAOHUA AND YOUYI

APPENDIX V

Roma Appraisals assumes no responsibility whatsoever to any person other than the Company in respect of, or arising out of, the contents of this report. If others choose to rely in any way on the contents of this report they do so entirely on their own risk.

2. SCOPE OF WORK

Our valuation conclusion is based on the assumptions stated herein and the information provided by the management of the Company, the management of the Business Enterprise A and the Business Enterprise B and/or its representative(s) (together referred as the ‘‘Management’’).

In preparing this report, we have had discussions with the Management in relation to the development and prospect of the coal mining industry in China, the development, operations and other relevant information of the Business Enterprise A and the Business Enterprise B. As part of our analysis, we have reviewed such financial information and other pertinent data concerning the Business Enterprise A and the Business Enterprise B provided to us by the Management and have considered such information and data as attainable and reasonable.

We have no reason to believe that any material facts have been withheld from us. However, we do not warrant that our investigations have revealed all of the matters which an audit or more extensive examination might disclose.

3. ECONOMIC OVERVIEW

3.1 Overview on the Economy of China

According to the National Bureau of Statistics of China, the Gross Domestic Product (‘‘GDP’’) for the first two quarters of 2010 was RMB17,284.0 billion, an 11.1% increase over the same period last year. China is the third largest economy in the world in terms of nominal GDP measured by International Monetary Fund in 2009. Despite global financial crisis, the Chinese economy continues to be supported by the government through spending in infrastructure and real estates.

Throughout 2009, the global economic downturn reduced foreign demand for Chinese exports for the first time in many years. The government vowed to continue reforming the economy and emphasized the need to increase domestic consumption in order to make China less dependent on foreign exports for the GDP growth in the future.

Over the past decade from 1999 to 2009, China’s growth in real GDP had achieved a compound annual growth rate of 14.2% on average, increased from approximately RMB8,967.7 billion in 1999 to approximately RMB33,535.3 billion in 2009. The nominal GDP of 2009 has an 11.5% growth over the previous year. Figure 1 further illustrates the GDP from 2005 to 2009 in China.

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VALUATION REPORT ON SHAOYAOHUA AND YOUYI

APPENDIX V

Figure 1 — China’s Gross Domestic Product 2005–2009

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Source: National Bureau of Statistics of China

4. INDUSTRY OVERVIEW

4.1 Worldwide Coal Industry

4.1.1 Overview

Being one of the major fuels in producing energy, coal demand has been experiencing a rapid continuous growth since 1980s. Coal has many important uses worldwide. The most significant uses are in electricity generation, steel production, cement manufacturing and as a liquid fuel, in which coal is fueling 41% of the world’s electricity.

Coal is mainly used as a fossil fuel to produce electricity and heat through combustion. There are various types of coal existing, which are dependent on the degree of change undergone by the coal as it matures from its lowest form, to its highest form in terms of carbon content through the process called coalification.

4.1.2 Top Ten Coal Producing Countries

While coal is discovered on every single continent on earth, reserves are predominantly found in China, the United States, India, Australia and Indonesia. Figure 2 shows the top ten coal producing countries in 2009, where China and the United States had already accounted for over 50% of the world’s coal production in 2009.

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VALUATION REPORT ON SHAOYAOHUA AND YOUYI

APPENDIX V

Figure 2 — Top Ten Coal Producing Countries in 2009

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Source: International Energy Agency

4.1.3 World Coal Consumption

When the prices of gas and oil are on upward trends, coal is a lower-cost substitute to these fuels. The total world consumption of coal is about 6,755 million tonnes in 2009. According to the estimation from the United States Energy Information Administration (‘‘EIA’’), the total world coal consumption will increase by 1.7% annually on average.

China and the United States are the two highest coal consumption countries in 2009, followed by India and Germany. The four countries have already accounted for over 60% of global coal consumption. Figure 3 shows the top ten coal consuming countries in 2009.

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VALUATION REPORT ON SHAOYAOHUA AND YOUYI

APPENDIX V

Figure 3 — Top Ten Coal Consuming Countries in 2009

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Source: United States Energy Information Administration

4.1.4 Coal’s Share of World Energy Consumption

China and India are projected to have strong economic growth, and such increase in their demand for energy is expected to be met by coal, particularly in the industrial and electricity sectors. According to EIA, China’s use of coal in the electricity sector is projected to increase from about 50 quadrillion Btu (‘‘Btu’’ refers to ‘‘British thermal unit’’, which is a unit of energy) in 2007 to 95 quadrillion Btu by 2030, at an average rate of 2.8% per year.

4.1.5 Global Coal Reserves and Spot Price

The World Coal Institute states that the worldwide proven coal reserves are over 909 billion tonnes, which can suffice global demand over 147 years at the current rate of production. The amount of proved reserves in Asia is about 312,500 million tonnes, of which approximately 40% are found in China. The composite coal price is US$32.59 per short ton (US$29.56 per tonne) in 2008, an increase of about 25% over the past year according to EIA.

4.2 China Coal Industry

According to the United States Energy Information Administration, coal makes up 70 percent of China’s total primary energy consumption and China is both the largest consumer and producer of coal in the world. China is abundant in coal reserves and is the third-largest in the world. It holds an estimated of 114.5 billion short tonnes of recoverable coal reserves, which is about 13 percent of the world’s total reserves.

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VALUATION REPORT ON SHAOYAOHUA AND YOUYI

APPENDIX V

There are 27 provinces in China that produce coal. Northern China, especially Shanxi Province, contains most of China’s easily accessible coal mine. China’s coal industry has traditionally been fragmented among large state-owned coal mines, local state-owned coal mines, and thousands of town and village coal mines. The top three state-owned coal companies produce less than 15 percent of the domestic coal.

China is becoming increasingly open to foreign investment in the coal sector, particularly in an effort to modernize existing large-scale mines and introduce new technologies into China’s coal industry. These include coal liquefaction, coal bed methane production, and slurry pipeline transportation projects.

5. THE BUSINESS ENTERPRISE A

The Business Enterprise A was established in the PRC on 31 October 2000 with limited liability with registered and paid-up capital of RMB30 million. It was a state-owned coal mine and was reformed to a private enterprise in 2007 according to the coal mines reorganization policy of Shanyin County Government. As at the date of this report, it is owned as to 50% by Mr. Yan Changli and 50% by Mr. Li Yubao, both of whom are third parties independent of the Company and its connected persons.

The principal activity of the Business Enterprise A is production of raw coal and the principal assets are the mining permit covering the Coal Mine A located in Shanyin County, Shuozhou City, Shanxi Province, the PRC and it primarily produces long flame coal and gas coal which can be used for power generation and coking, respectively.

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VALUATION REPORT ON SHAOYAOHUA AND YOUYI

APPENDIX V

5.1 Resource Estimate of the Coal Mine A

According to the Independent Technical Review and Competent Person’s Report (hereinafter referred to as the ‘‘Technical Report’’) prepared by Minarco-MineConsult (hereinafter referred to as the ‘‘Technical Consultant’’), the total Coal Resource estimate in 2010 was 96.73 million tonnes, in which Measured, Indicated and Inferred Resources are 44.56 million tonnes, 45.28 million tones and 6.89 million tonnes respectively. The details of Coal Resource estimate on the Coal Mine A are listed in figure 4.

Figure 4 — Coal Resource Estimate of the Coal Mine A in 2010

JORC Classification Seam Average Thickness (m) Measured 4 7.73 6 2.71 9 2.93 10 1.13 11 3.66 Total Indicated 4 6.86 6 2.76 9 3.44 10 1.03 11 2.80 Total Inferred 4 — 6 2.19 9 3.44 10 1.05 11 1.69 Total Grand Total Source: Technical Report	Volume M cu.m. 11.23 5.46 11.37 2.89 7.06 38.01 7.92 6.21 8.49 2.16 4.53 29.31 — 1.34 2.07 0.48 0.70 4.59 71.91	Mass M tonnes 18.61 8.28 1.68 4.17 11.82
		44.56
		12.53 9.52 12.57 3.19 7.47
		45.28
		2.05 3.02 0.73 1.09
		6.89
		96.72

After our thorough review, we considered that the information contained in the Technical Report could be reasonably relied on.

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VALUATION REPORT ON SHAOYAOHUA AND YOUYI

APPENDIX V

6. THE BUSINESS ENTERPRISE B

In accordance with the approval document issued by Shanxi Province Coal Enterprise Annexation and Integration Office on 14 September 2009, Business Enterprise B was approved to be reformed as a limited liability company in the PRC with registered capital of RMB200 million. As at the date of this report, Business Enterprise B is owned as to 33% by Mr. Zhu Jinfeng, 25% by Mr. Zhao Zhishi, 22% by Mr. Xu Wenhua and 20% by Mr. Zhang Bao and is in the course of applying for its business licence.

The principal assets of Business Enterprise B are the mining permit covering the Coal Mine B located in Shanyin County, Shuozhou City, Shanxi Province, the PRC and it primarily produces long flame coal and gas coal which can be used for power generation and cooking, respectively.

The Coal Mine B is a consolidated retained coal mine after the resources consolidation carried out in Shanxi Province with authorized capacity of 1.2 million tonnes. It is currently under reconstruction and production at the Coal Mine B is expected to commence in early 2013. The mining permit of Business Enterprise B over the Coal Mine B is for a term of two years commenced from 3 November 2009.

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VALUATION REPORT ON SHAOYAOHUA AND YOUYI

APPENDIX V

6.1.1 Resource Estimate of the Coal Mine B

According to the Technical Report, the total Coal Resource estimate in 2010 was 105.29 million tonnes, in which Measured, Indicated and Inferred Resources are 52.28 million tonnes, 46.71 million tones and 6.30 million tonnes respectively. The details of Coal Resource estimate on the Coal Mine B are listed in figure 5.

Figure 5 — Coal Resource Estimate of the Coal Mine B in 2010

JORC Classification Seam Average Thickness (m) Measured 4 6.68 9 8.75 10 1.07 11 3.97 Total Indicated 4 3.87 9 6.79 10 0.75 11 4.57 Total Inferred 4 2.96 9 2.83 10 2.11 11 4.09 Total Grand Total Source: Technical Report	Volume M cu.m. 5.46 14.97 2.17 9.03 31.63 2.30 14.50 0.71 11.05 28.56 0.31 1.12 0.48 1.95 3.86 64.05	Mass M tonnes 9.01 25.21 3.63 14.43
		52.28
		3.79 24.14 1.18 17.60
		46.71
		0.51 1.85 0.79 3.15
		6.30
		105.29

After our thorough review, we considered that the information contained in the Technical Report could be reasonably relied on.

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APPENDIX V

7. BASIS OF VALUATION

Our valuation is based on going concern premise and conducted on a market value basis. Market value is defined as ‘‘the amount for which an asset could be exchanged, or a liability settled between knowledgeable, willing parties in an arm’s length transaction’’.

8. INVESTIGATION AND ANALYSIS

Our investigation included discussions with members of the Management in relation to the development and prospect of the coal mining industry in China and worldwide, and the development, operations and other relevant information of the Business Enterprise A and the Business Enterprise B. In addition, we have made relevant inquiries and obtained further information and statistical figures regarding the coal mining industry from external public sources as we considered necessary for the purpose of the valuation.

As part of our analysis, we have reviewed such financial information and other pertinent data concerning the Business Enterprise A and the Business Enterprise B provided to us by the Management and had considered such information and data as attainable and reasonable. We have also consulted other sources of financial and business information. We have not undertaken any site visits to the site as we relied upon the information provided by and the parameters advised by the Technical Consultant who has conducted a site visit.

The valuations of the Business Enterprise A and the Business Enterprise B require consideration of all pertinent factors, which may or may not affect the operation of the business and its ability to generate future investment returns. The factors considered in our valuation include, but are not necessarily limited to, the following:

. The natures and prospects of the Business Enterprise A and the Business Enterprise B;
. The financial conditions of the Business Enterprise A and the Business Enterprise B;
. The economy in general and the specific economic environment and market elements affecting the business, industry and market;
. Relevant licenses and agreements;
. The business risks of the Business Enterprise A and the Business Enterprise B such as the ability in maintaining competent technical and professional personnel; and
. Investment returns and market transactions of entities engaged in similar lines of business.

9. VALUATION METHODOLOGY

There are generally three accepted approaches to obtain the market values of the Business Enterprise A and the Business Enterprise B, namely the Market-Based Approach, Income-Based Approach and Asset-Based Approach. Each of these approaches is appropriate in one or more circumstances, and sometimes, two or more approaches may be used together. Whether to adopt a particular approach will be determined by the most commonly adopted practice in valuing business entities that are similar in nature.

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9.1 Market-Based Approach

The Market-Based Approach values a business entity by comparing prices at which other business entities in a similar nature changed hands in arm’s length transactions. The underlying theory of this approach is that one would not pay more than one would have to for an equally desirable alternative. By adopting this approach, the valuer will first look for valuation indication of prices of other similar business entities in companies that have been sold recently.

The right transactions employed in analyzing indications of values need to be sold at an arm’s length basis, assuming that the buyers and sellers are well informed and have no special motivations or compulsions to buy or to sell.

9.2 Income-Based Approach

The Income-Based Approach focuses on the economic benefits due to the income producing capability of the business entity. The underlying theory of this approach is that the value of the business entity can be measured by the present worth of the economic benefits to be received over the useful life of the business entity. Based on this valuation principle, the Income-Based Approach estimates the future economic benefits and discounts them to their present values using a discount rate appropriate for the risks associated with realizing those benefits.

Alternatively, this present value can be calculated by capitalizing the economic benefits to be received in the next period at an appropriate capitalization rate. This is subject to the assumption that the business entity will continue to maintain stable economic benefits and growth rate.

9.3 Asset-Based Approach

The Asset-Based Approach is based on the general concept that the earning power of a business entity is derived primarily from its existing assets. The assumption of this approach is that when each of the elements of working capital, tangible and intangible assets is individually valued, their sum represents the value of a business entity and equals to the value of its invested capital (‘‘equity and long term debt’’). In other words, the value of the business entity is represented by the money that has been made available to purchase the business assets needed.

This money comes from investors who buy stocks of the business entity (‘‘equity’’) and investors who lend money to the business entity (‘‘debt’’). After collecting the total amounts of money from equity and debt, and converted into various types of assets of the business entity for its operation, their sum equals the value of the business entity.

9.4 Business Valuation of the Business Enterprise A

In the process of valuing the Business Enterprise A, we have taken into account of the uniqueness of its operation and the industry it is participating. The Market-Based Approach was not adopted in this case because most of the important assumptions are hidden. The Asset-Based Approach was also not adopted because it cannot reflect the market value of the Business Enterprise A. We have therefore considered the adoption of Income-Based Approach in arriving at the market value of the Business Enterprise A.

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APPENDIX V

9.4.1 Discounted Cash Flow

Under the Income-Based Approach, we have adopted the discounted cash flow (‘‘DCF’’) method, which is based on a simple reversal calculation to restate all future cash flows in present terms. The present value of the expected cash flows was calculated as follows:

PVCF = CF1/(1 + r)[1] + CF2/(1 + r)[2] + … + CFn/(1 + r)[n]

In which

PVCF = Present value of the expected cash flows; CF = Expected cash flow; r = Discount rate; and n = Number of years.

To adopt this method, we obtained the weighted average cost of capital (‘‘WACC’’) for the Business Enterprise A as a basic discount rate. WACC of the Business Enterprise A is the minimum required return that the Business Enterprise A must earn to satisfy its various capital providers including shareholders and debt holders. WACC calculation takes into account the relative weights of debt and equity. It is computed using the formula below:

WACC = We x Re + Wd x Rd x (1 – Tc)

In which

Re = Cost of equity; Rd = Cost of debt; We = Weight of equity value to enterprise value; Wd = Weight of debt value to enterprise value; and Tc = Corporate tax rate.

9.4.2 Cost of Debt

The cost of debt of the Business Enterprise A was determined by the China above 5- year best lending rate extracted from Bloomberg. Since the interest expenses paid on debts are tax-deductible for the Business Enterprise A, the cost of the Business Enterprise A to get debt funds is less than the required rate of return of the suppliers of the debt capital. The after-tax cost of debt was calculated by multiplying one minus the corporate tax rate by the cost of debt.

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APPENDIX V

9.4.3 Cost of Equity

The cost of equity was calculated by the following formula:

Re = Rf + β x Market Risk Premium + Other Risk Premium

In which

Re = Cost of equity; Rf = Risk-free rate; and β = Beta coefficient.

9.4.4 Discount Rate

The risk-free rate, market expected return and the betas of the comparable companies were obtained from Bloomberg as at the Date of Valuation.

The risk-free rate of 3.70% adopted was the yield rate of China 10-year government bond. The market expected return of China was 13.52% and the market risk premium is calculated by market expected return minus the risk-free rate, arriving 9.82%.

The beta coefficient measures the risk of the mining business relative to the market. We estimated the beta coefficient of 1.05 by taking the average of the beta coefficients of listed companies which their operations are similar to the Business Enterprise A. The comparable companies include Shanxi Coal International Energy Group Co., Ltd. (Stock Code: 600546.CH), China Coal Energy Company Limited (Stock Code: 1898.HK), Inner Mongolia Pingzhuang Energy Co., Ltd. (Stock Code: 000780.CH) and U.S. China Mining Group, Inc. (Stock Code: SGZH.US).

In addition, 3.99% of size premium and 1.00% of the other risk premium were added, hence, we arrived at 19.05% of cost of equity.

The cost of debt of 6.14% taken was the China above 5-year best lending rate. The debt-to-equity ratio of 9.09% was estimated by taking the average of the debt-to-equity ratios of the comparable companies. With the corporate tax rate of China of 25.00%, the after-tax cost of debt was calculated as 4.61%.

The weight of debt is 8.33% in the whole capital structure, whereas the weight of equity is 91.67%. Accounting for the above items, we concluded the discount rate of 17.84% as at the Date of Valuation.

9.4.5 Portfolio of Resources Included in the Valuation

According to Listing Rule Chapter 18, valuations for Inferred Resources are not permitted. Only Measured and Indicated Resources were included in the valuation.

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APPENDIX V

9.4.6 Marketability Discount

Compared to similar interest in public companies, ownership interest is not readily marketable for closely held companies. Therefore, the value of a share of stock in a privately held company is usually less than an otherwise comparable share in a publicly held company. We adopted a marketability discount of 11.60% on the market value of the Business Enterprise A.

9.4.7 Sensitivity Analysis on Discount Rate

To determine how the different values of an independent variable would impact a particular dependent variable under a given set of assumptions, we carried out a sensitivity analysis on the market value of the Business Enterprise A in respect of 1% and 2% deviation in the discount rate from the status quo. The results of the sensitivity analysis were as follows:

Absolute Change in		Market Value of Business
Discount Rate	Applied Discount Rate	Enterprise A
	(%)	(million RMB)
-2%	15.84	4,375
-1%	16.84	4,051
0%	17.84	3,762
1%	18.84	3,505
2%	19.84	3,274

9.4.8 Sensitivity Analysis on Coal Price

We also carried out a sensitivity analysis on the market value of the Business Enterprise A in respect of 1% and 2% deviation in the coal price. The results of the sensitivity analysis were as follows:

Change in	Applied Initial	Market Value of Business
Coal Price	Coal Price in 2010	Enterprise A
	(RMB)	(million RMB)
-2%	276	3,659
-1%	279	3,710
0%	282	3,762
1%	285	3,814
2%	288	3,866

9.5 Business Valuation of the Business Enterprise B

In the process of valuing the Business Enterprise B, we have taken into account of the uniqueness of its operation and the industry it is participating. The Market-Based Approach was not adopted in this case because most of the important assumptions are hidden. The Asset-Based

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APPENDIX V

Approach was also not adopted because it cannot reflect the market value of the Business Enterprise B. We have therefore considered the adoption of Income-Based Approach in arriving at the market value of the Business Enterprise B.

9.5.1 Discounted Cash Flow

PVCF = CF1/(1+r)[1] + CF2/(1+r)[2] + …+ CFn/(1+r)[n]

In which

PVCF = Present value of the expected cash flows; CF = Expected cash flow; r = Discount rate; and n = Number of years.

To adopt this method, we obtained the weighted average cost of capital (‘‘WACC’’) for the Business Enterprise B as a basic discount rate. WACC of the Business Enterprise B is the minimum required return that the Business Enterprise B must earn to satisfy its various capital providers including shareholders and debt holders. WACC calculation takes into account the relative weights of debt and equity. It is computed using the formula below:

WACC = We x Re + Wd x Rd x (1 – Tc)

In which

Re = Cost of equity; Rd = Cost of debt; We = Weight of equity value to enterprise value; Wd = Weight of debt value to enterprise value; and Tc = Corporate tax rate.

9.5.2 Cost of Debt

The cost of debt of the Business Enterprise B was determined by the China above 5- year best lending rate extracted from Bloomberg. Since the interest expenses paid on debts are tax-deductible for the Business Enterprise B, the cost of the Business Enterprise B to get debt funds is less than the required rate of return of the suppliers of the debt capital. The after-tax cost of debt was calculated by multiplying one minus the corporate tax rate by the cost of debt.

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APPENDIX V

9.5.3 Cost of Equity

The cost of equity was calculated by the following formula:

Re = Rf + β x Market Risk Premium + Other Risk Premium

In which

Re = Cost of equity; Rf = Risk-free rate; and β = Beta coefficient.

9.5.4 Discount Rate

The risk-free rate, market expected return and the betas of the comparable companies were obtained from Bloomberg as at the Date of Valuation.

The beta coefficient measures the risk of the mining business relative to the market. We estimated the beta coefficient of 1.05 by taking the average of the beta coefficients of listed companies which their operations are similar to the Business Enterprise B. The comparable companies include Shanxi Coal International Energy Group Co., Ltd. (Stock Code: 600546.CH), China Coal Energy Company Limited (Stock Code: 1898.HK), Inner Mongolia Pingzhuang Energy Co., Ltd. (Stock Code: 000780.CH) and U.S. China Mining Group, Inc. (Stock Code: SGZH.US).

In addition, 3.99% of size premium and 3.00% of the other risk premium were added, hence, we arrived at 21.05% of cost of equity.

The weight of debt is 8.33% in the whole capital structure, whereas the weight of equity is 91.67%. Accounting for the above items, we concluded the discount rate of 19.68% as at the Date of Valuation.

9.5.5 Portfolio of Resources Included in the Valuation

According to Listing Rule Chapter 18, valuations for Inferred Resources are not permitted. Only Measured and Indicated Resources were included in the valuation.

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APPENDIX V

9.5.6 Marketability Discount

9.5.7 Sensitivity Analysis on Discount Rate

To determine how the different values of an independent variable would impact a particular dependent variable under a given set of assumptions, we carried out a sensitivity analysis on the market value of the Business Enterprise B in respect of 1% and 2% deviation in the discount rate from the status quo. The results of the sensitivity analysis were as follows:

Absolute Change in		Market Value of Business
Discount Rate	Applied Discount Rate	Enterprise A
	(%)	(million RMB)
-2%	17.68	2,522
-1%	18.68	2,273
0%	19.68	2,055
1%	20.68	1,863
2%	21.68	1,692

9.5.8 Sensitivity Analysis on Coal Price

We also carried out a sensitivity analysis on the market value of the Business Enterprise B in respect of 1% and 2% deviation in the coal price. The results of the sensitivity analysis were as follows:

Change in	Applied Initial	Market Value of Business
Coal Price	Coal Price in 2010	Enterprise B
	(RMB)	(million RMB)
-2%	276	1,987
-1%	279	2,021
0%	282	2,055
1%	285	2,089
2%	288	2,123

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APPENDIX V

10. MAJOR ASSUMPTIONS FOR THE VALUATION OF THE BUSINESS ENTERPRISE A

We have adopted certain specific assumptions in our valuation and the major ones are as follows:

. The Business Enterprise A has free and uninterrupted rights to operate the Coal Mine A throughout the period until all resources is fully exploited and subject to no land premium or any payment to the government of substantial amount;
. The Business Enterprise A is entitled to dispose of, transfer and assign freely the interests in the Coal Mine A for the whole of the unexpired terms as granted without payment of any premium to the governments;
. The Business Enterprise A can be freely disposed of and transferred free from all encumbrances for its existing or approved uses in the market to purchasers;
. All relevant legal approvals and business certificates or licenses to operate the business in the localities in which the Business Enterprise A operates or intends to operate would be officially obtained and renewable upon expiry;
. There will be sufficient supply of technical staff in the industry in which the Business Enterprise A operates, and the Business Enterprise A will retain competent management, key personnel and technical staff to support its ongoing operation and development;
. The Business Enterprise A has adopted reasonable and necessary security measures and has considered contingency plans against any disruption (such as fire, change of government policy, labour dispute, implementation of serious statutory mining safety measures, geologic formation structurally deformed and other types of unexpected accident or natural disasters of catastrophes) to the scheduled mining operations;
. There exist reliable and adequate transportation network and capacity for processing the mining products;
. There will be no major changes in the current taxation laws in the localities in which the Business Enterprise A operates or intends to operate. The rates of tax payable shall remain unchanged and all applicable laws and regulations will be complied with;
. There will be no major changes in the political, legal, economic or financial conditions in the localities in which the Business Enterprise A operates or intends to operate, which would adversely affect the revenues attributable to and the profitability of the Business Enterprise A;
. Interest rates and exchange rates in the localities for the operation of the Business Enterprise A will not differ materially from those presently prevailed;
. The initial coal price of RMB 282 per tonne adopted, which was based on the historical selling price, is reasonable and can reflect the reality as well as the economic benefit from the past transactions;

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APPENDIX V

. With reference to the Technical Report, the Business Enterprise A is currently producing up to 2,000,000 tonnes per year of run-of-mine (‘‘ROM’’) coal, hence the production of 1,300,000 tonnes per year from year 2010 to year 2013 and production rate of 3,500,000 tonnes from 2014 onwards until all the resources included in the valuation have been exploited are reasonable;
. The estimated operating costs and expenses, which were based on the Technical Report, are reasonable;
. Our valuation has taken into account the capital expenditure of RMB104.41 million, based on the Technical Report, for Business Enterprise A;
. The adopted annual growth rate of 2.65% per year applied on the costs and expenses, with reference to the historical inflation rate of China, is reasonable; and
. The adopted corporate tax rate of China of 25.00% is reasonable.

11. MAJOR ASSUMPTIONS FOR THE VALUATION OF THE BUSINESS ENTERPRISE B

We have adopted certain specific assumptions in our valuation and the major ones are as follows:

. The Business Enterprise B has free and uninterrupted rights to operate the Coal Mine B throughout the period until all resources is fully exploited and subject to no land premium or any payment to the government of substantial amount;
. The Business Enterprise B is entitled to dispose of, transfer and assign freely the interests in the Coal Mine B for the whole of the unexpired terms as granted without payment of any premium to the governments;
. The Business Enterprise B can be freely disposed of and transferred free from all encumbrances for its existing or approved uses in the market to purchasers;
. All relevant legal approvals and business certificates or licenses to operate the business in the localities in which the Business Enterprise B operates or intends to operate would be officially obtained and renewable upon expiry;
. There will be sufficient supply of technical staff in the industry in which the Business Enterprise B operates, and the Business Enterprise will retain competent management, key personnel and technical staff to support its ongoing operation and development;
. The Business Enterprise B has adopted reasonable and necessary security measures and has considered contingency plans against any disruption (such as fire, change of government policy, labour dispute, implementation of serious statutory mining safety measures, geologic formation structurally deformed and other types of unexpected accident or natural disasters of catastrophes) to the scheduled mining operations;
. The Business Enterprise B will successfully reconstruct the Coal Mine B as planned;

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APPENDIX V

. There exist reliable and adequate transportation network and capacity for processing the mining products;
. There will be no major changes in the current taxation laws in the localities in which the Business Enterprise B operates or intends to operate. The rates of tax payable shall remain unchanged and all applicable laws and regulations will be complied with;
. There will be no major changes in the political, legal, economic or financial conditions in the localities in which the Business Enterprise B operates or intends to operate, which would adversely affect the revenues attributable to and the profitability of the Business Enterprise B;
. Interest rates and exchange rates in the localities for the operation of the Business Enterprise B will not differ materially from those presently prevailed;
. The initial coal price of RMB282 per tonne adopted, which was based on the historical selling price of Business Enterprise B, is reasonable and can reflect the reality as well as the economic benefit from the past transactions;
. The production rates of 150,000 tonnes per year in year 2012, 731,000 tonnes per year in year 2013, 1,237,000 tonnes per year in year 2014, and 3,000,000 tonnes per year from year 2015 onwards until all the resources included in the valuation have been exploited, which were estimated with reference to the Technical Report, are reasonable;
. The estimated operating costs and expenses, which were based on the Technical Report, are reasonable;
. Our valuation has taken into account the capital expenditure of RMB587.16 million, based on the Technical Report, for Business Enterprise B.
. The adopted annual growth rate of 2.65% per year applied on the costs and expenses, with reference to the historical inflation rate of China, is reasonable; and
. The adopted corporate tax rate of China of 25.00% is reasonable.

12. INFORMATION REVIEWED

Our opinion requires consideration of relevant factors and information affecting the market values of the Business Enterprise A and the Business Enterprise B. The factors and information considered included, but were not necessarily limited to, the following:

. The Technical Report prepared by the Technical Consultant;
. Copies of the mining licenses of the Coal Mine A and Coal Mine B;
. Financial statements of the Business Enterprise A and the Business Enterprise B;
. Historical information of the Business Enterprise A and the Business Enterprise B;

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APPENDIX V

. Market trends of the coal industry in China and worldwide;
. Registrations and legal documents related to the Coal Mine A and Coal Mine B, and the Business Enterprise A and the Business Enterprise B;
. General descriptions in relation to the Coal Mine A and Coal Mine B, and the Business Enterprise A and the Business Enterprise B; and
. Economy in China and worldwide.

We have also conducted research from various sources to verify the reasonableness and fairness of information provided and we believe that such information is reasonable and reliable. We have assumed the accuracy of information provided and relied to a considerable extent on such information in arriving at our opinion.

13. LIMITING CONDITIONS

The valuation reflects facts and conditions existing at the Date of Valuation. Subsequent events or circumstances have not been considered and we are not required to update our report for such events and conditions.

We would particularly point out that our valuation was based on the information such as the projections made by the Business Enterprise A and the Business Enterprise B, company backgrounds, business natures and market shares of the Business Enterprise A and the Business Enterprise B provided to us.

To the best of our knowledge, all data set forth in this report are reasonable and accurately determined. The data, opinions, or estimates identified as being furnished by others that have been used in formulating this analysis are gathered from reliable sources; yet, no guarantee is made nor liability assumed for their accuracy.

We have relied to a considerable extent on the historical and/or prospective information provided by the Management and other third parties in arriving at our opinion of values. The information has not been audited or compiled by us. We are not in the position to verify the accuracy of all information provided to us. However, we have had no reason to doubt the truth and accuracy of the information provided to us and to doubt that any material facts have been omitted from the information provided. No responsibilities for the operation and financial information that have not been provided to us are accepted.

We assumed that the Management is competent and perform duties under the company regulation. Also, ownerships of the Business Enterprise A and the Business Enterprise B were in responsible hands, unless otherwise stated in this report. The quality of the Management may have direct impact on the viability of the business as well as the market values of the Business Enterprise A and the Business Enterprise B.

We have not investigated the title to or any legal liabilities of the Business Enterprise A and the Business Enterprise B and have assumed no responsibility for the title to the Business Enterprise A and the Business Enterprise B appraised.

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APPENDIX V

Our conclusion of the market values was derived from generally accepted valuation procedures and practices that rely substantially on the use of various assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained. The conclusion and various estimates may not be separated into parts, and/or used out of the context presented herein, and/or used together with any other valuation or study.

We assume no responsibility whatsoever to any person other than the directors and management of the Company in respect of, or arising out of, the content of this report. If others choose to rely in any way on the contents of this report, they do so entirely on their own risk.

No change to any item in any part of this report shall be made by anyone except Roma Appraisals. We have no responsibility for any such unauthorized change. Neither all nor any part of this report shall be disseminated to the public through any means of communication or referenced in any publications, including but not limited to advertising, public relations, news or sales media.

This report may not be reproduced, in whole or in part, and utilized by any third parties for any purpose, without the written consent and approval of Roma Appraisals.

The working papers and models for this valuation are being kept in our files and would be available for further references. We would be available to support our valuation if required.

14. REFERENCES

The list of sources of information cited in this report is stated as follows:

. Bloomberg;
. International Monetary Fund;
. International Energy Agency;
. Ministry of Land and Resources of the People’s Republic of China;
. National Bureau of Statistics of China;
. Technical Report;
. United States Energy Information Administration; and
. World Coal Institute.

15. REMARKS

Unless otherwise stated, all monetary amounts stated in this valuation report are in Renminbi (RMB).

We hereby confirm that we have neither present nor prospective interests in the Company, the Business Enterprise A, the Business Enterprise B and its holding companies, subsidiaries and associated companies, or the values reported herein.

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APPENDIX V

16. OPINION OF VALUES

Based on the investigation and analysis stated above and on the valuation method employed, the market values of 100% equity interest of the Business Enterprise A and the Business Enterprise B as at the Date of Valuation, in our opinion, are reasonably stated as follows:

The Market Values of 100% Equity Interest of the Business Enterprise A and the Business Enterprise B

Market Value of the Business Enterprise A : RMB3,762,000,000 Market Value of the Business Enterprise B : RMB2,055,000,000 Total Market Value : RMB5,817,000,000

Yours faithfully, For and on behalf of Roma Appraisals Limited

Peer reviewed by

Dr. Herman Tso

Kelvin Luk

B.Eng., MBA, PhD, MIMMM, SPEC, CIM, CIM TMS, BGS, CGS, CEng, MICE, CPEng, Director MIEAust, FCMA, MCIOB, ASCE, CSCE Director

Note: Dr. Herman Tso has over twenty years of extensive executive and site experience in civil, geotechnical and mining engineering working with consulting engineers and contractors in places such as Canada, Hong Kong and China. He is the professional member of the Institute of Materials, Minerals and Mining (UK), a board member in the Hong Kong branch of the Institute of Materials, Minerals & Mining. He is the professional member of the Canadian Institute of Mining, Metallurgy and Petroleum, the Canadian Geotechnical Society and the British Geotechnical Society. He is also a Chartered Civil Engineer and Chartered Mining Engineer.

Mr. Kelvin Luk is a member of the Canadian Institute of Mining, Metallurgy and Petroleum. He has over five years of experience in valuation and consultation related to similar assets or companies engaged in similar business activities worldwide as that of the Business Enterprise.

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APPENDIX V

Statement of qualification of the competent evaluator — Dr. Herman Tso

I, Herman Tso, hereby confirm that:

. I have carried out the assignment for Roma Appraisals Limited, located at: Unit 3806, 38/F, China Resources Building, 26 Harbour Road, Wan Chai, Hong Kong

Tel: (852) 2529 6878 Fax: (852) 2529 6808 Email: [email protected]

. I graduated with a Bachelor’s degree in Civil Engineering (B. Eng.) from Lakehead University, Canada in 1990, a Master of Business Administration (MBA) from California Southern University, U. S. A. in 1998, and a Doctor’s degree in Civil Engineering (Ph.D.) from Stamford Hill University, U. S. A. in 2002.
. I am a professional member of the Institute of Materials, Minerals and Mining (UK), a board member in the Hong Kong branch of member of the Institute of Materials, Minerals & Mining.
. I am a professional member of the Canadian Institute of Mining, Metallurgy and Petroleum, the Canadian Geotechnical Society and the British Geotechnical Society.
. I have studied the revised Chapter 18 of the Hong Kong Listing Rules and understood the definitions of ‘‘competent person’’ and ‘‘competent evaluator’’. My past relevant experience, qualifications and my affiliation with professional associations have fulfilled the requirements to be a ‘‘competent person’’ as well as a ‘‘competent evaluator’’ as set out in the listing rules for the purpose of the valuation report.
. I am the primary author responsible for the preparation and compilation of the valuation report, with Mr. Kelvin Luk facilitating.
. I have neither present nor prospective interests in the Coal Mine A, the Business Enterprise, the Company or the values reported herein.
. I am not aware of any material fact or material change with respect to the subject matter of the valuation report that is not reflected in the valuation report.
. This report has been prepared in accordance with the guidelines set by the Code for the Technical Assessment and Valuation Mineral and Petroleum Assets and Securities for Independent Expert Reports (‘‘VALMIN’’) established by the VALMIN Committee in Australia.

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GENERAL INFORMATION

APPENDIX VI

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. SHARE CAPITAL, SHARE OPTIONS AND THE EXISTING CONVERTIBLE BONDS

Share capital

(a) Share capital as at the Latest Practicable Date

Authorised: HK$ 300,000,000,000 Shares 3,000,000,000.00

Issued and fully paid: 23,629,743,370 Shares 236,297,433.70

(b) Share capital immediately following the issue of the Consideration Shares, the issue of the Call Option Consideration Shares, the full conversion of the 1st Tranche Convertible Bonds, the 2nd Tranche Convertible Bonds, the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds in each case at the initial conversion price, assuming no exercise of the outstanding share options and no conversion of the outstanding convertible bonds on or before the Latest Practicable Date

Authorised: HK$ 300,000,000,000 Shares 3,000,000,000.00

– VI-1 –

GENERAL INFORMATION

APPENDIX VI

Issued and fully paid:

23,629,743,370
Shares in issue as at the Latest Practicable Date
4,747,200,000
Issue of the Consideration Shares
3,164,800,000
Issue of the Call Option Consideration Shares
1,764,600,000
Issue of the 1st Tranche Conversion Shares (based
on the initial conversion price of HK$0.21 per 1st
Tranche
Conversion
Share
and
the
aggregate
principal amount of 1st Tranche Convertible Bonds
of HK$370,566,000)
4,857,000,000
Issue of the 2nd Tranche Conversion Shares (based
on the initial conversion price of HK$0.21 per 2nd
Tranche
Conversion
Share
and
the
aggregate
principal amount of 2nd Tranche Convertible Bonds
of HK$1,019,970,000)
1,176,400,000
Issue of the 3rd Tranche Conversion Shares (based
on the initial conversion price of HK$0.21 per 3rd
Tranche
Conversion
Share
and
the
aggregate
principal amount of 3rd Tranche Convertible Bonds
of HK$247,044,000)
3,238,000,000
Issue of the 4th Tranche Conversion Shares (based
on the initial conversion price of HK$0.21 per 4th
Tranche
Conversion
Share
and
the
aggregate
principal amount of 4th Tranche Convertible Bonds
of HK$679,980,000)
42,577,743,370
Shares

236,297,433.70
47,472,000
31,648,000
17,646,000
48,570,000
11,764,000
32,380,000

425,777,433.70

(c) Share capital immediately following the issue of the Consideration Shares, the issue of the Call Option Consideration Shares, the full conversion of the 1st Tranche Convertible Bonds, the 2nd Tranche Convertible Bonds, the 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds in each case at the initial conversion price, assuming full exercise of the outstanding share options and full conversion of the outstanding convertible bonds on or before the Latest Practicable Date

Authorised: HK$ 300,000,000,000 Shares 3,000,000,000.00

– VI-2 –

GENERAL INFORMATION

APPENDIX VI

Issued and fully paid:

236,297,433.70
47,472,000
31,648,000
17,646,000
48,570,000
11,764,000
32,380,000
104,350,000
4,923,200

535,050,633.70

All the issued Shares would rank pari passu with each other in all respects including the rights as to voting, dividends and return of capital. The 1st Tranche Conversion Shares, the 2nd Tranche Conversion Shares, the 3rd Tranche Conversion Shares and the 4th Tranche Conversion Shares shall be fully paid, free from any liens, charges, encumbrances, pre-emptive rights or other third party rights and rank pari passu in all respects with all other Shares in issue.

– VI-3 –

GENERAL INFORMATION

APPENDIX VI

No part of the share capital or any other securities of the Company is listed on or dealt in any stock exchange other than the Stock Exchange and no application is being made or is currently proposed or sought for the Shares or Conversion Shares or any other securities of the Company to be listed on or dealt in any other stock exchange.

As at the Latest Practicable Date, there was no arrangement under which future dividends are waived or agreed to be waived.

Outstanding share options

As at the Latest Practicable Date, the Company had the following outstanding Share Options held by the Directors and employees and other participants:

Number of Shares which may fall to be issued upon exercise of the outstanding share

Directors — 57,500,000 57,500,000 30,000,000 30,000,000 50,000,000 50,000,000 275,000,000	options Employees 12,320,000 102,500,000 102,500,000 — — — — 217,320,000	Total Exercise price Exercise period HK$ per Share 12,320,000 0.125 29 September 2008 to 28 September 2013 160,000,000 0.248 12 May 2011 to 11 May 2013 160,000,000 0.248 12 May 2012 to 11 May 2013 30,000,000 0.248 26 August 2011 to 25 August 2013 30,000,000 0.248 26 August 2012 to 25 August 2013 50,000,000 0.248 10 November 2011 to 9 November 2013 50,000,000 0.248 10 November 2012 to 9 November 2013 492,320,000

– VI-4 –

GENERAL INFORMATION

APPENDIX VI

Outstanding convertible bonds

Details of the convertible bonds outstanding as at the Latest Practicable Date are as follows:

	Underlying Shares
	subject to the
	outstanding
	convertible bonds
	as at the Latest
Holder	Practicable Date	Conversion price	Issue date	Conversion period
		(HK$)
Zhao Ming	9,640,000,000	0.0625	21 December 2009	21 December 2009
				to 20 December 2014
Merrill Lynch	795,000,000	0.20	24 September 2010	24 September 2010 to 23
International				September 2011

Save as disclosed above, the Company did not have any other share options, warrants, derivatives or other convertible securities or rights affecting the Shares as at the Latest Practicable Date.

3. DIRECTORS’ INTERESTS

(a) Directors interests and short positions in the securities of the Company and its associated corporations

As at the Latest Practicable Date, the following Directors or chief executive of the Company had or were deemed to have an interest or short position in the shares, underlying shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) (i) 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 or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules:

					Approximate
					percentage
			Interest in		of the
		Interest in	underlying	Total interest	Company’s
Name of Director	Capacity	Shares	Shares	in Shares	issued share
Mr. Wang Da Yong	Through controlled	1,800,000,000	100,000,000	1,900,000,000	8.04%
(note 1, 2)	corporation/
	Beneficial owner
Mr. Tian Wenwei (note 2)	Beneficial owner	—	75,000,000	75,000,000	0.32%
Mr. Wang Tongtian	Beneficial owner	—	30,000,000	30,000,000	0.13%
(note 2)

– VI-5 –

GENERAL INFORMATION

APPENDIX VI

					Approximate
					percentage
			Interest in		of the
		Interest in	underlying	Total interest	Company’s
Name of Director	Capacity	Shares	Shares	in Shares	issued share
Mr. Li Yi (note 2)	Beneficial owner	—	20,000,000	20,000,000	0.08%
Mr. Su Bin (note 2)	Beneficial owner	—	20,000,000	20,000,000	0.08%
Mr. Jacobsen William	Beneficial owner	—	10,000,000	10,000,000	0.04%
Keith (note 2)
Mr. Cao Kuangyu (note 2)	Beneficial owner	—	10,000,000	10,000,000	0.04%
Mr. Chiu Sui Keung	Beneficial owner	—	10,000,000	10,000,000	0.04%
(note 2)

Notes:

These Shares are held by China Coal and Coke Investment Holding Company Limited which is wholly owned by Sino Bridge Investments Limited, a company wholly beneficially owned by Mr. Wang Da Yong (‘‘Mr. Wang’’).
Options were granted to Mr. Tian Wenwei and Mr. Li Yi under the share option scheme of the Company dated 28 May 2002 which are exercisable at the subscription price of HK$0.248 per Share (subject to adjustments) at any time during a period of two years commencing from and including 12 May 2011 to 11 May 2013.

A total of 20,000,000 options and a total of 10,000,000 options were granted to Mr. Wang Tongtian under the share option scheme of the Company dated 28 May 2002 which are exercisable at the subscription price of HK$0.248 per Share (subject to adjustments) at any time during a period of two years commencing from and including 12 May 2011 to 11 May 2013 and a period of two years commencing from and including 26 August 2011 to 25 August 2013 respectively.

Options were granted to Mr. Su Bin, Mr. Jacobsen William Keith, Mr. Cao Kuangyu and Mr. Chiu Sui Keung under the share option scheme of the Company dated 28 May 2002 which are exercisable at the subscription price of HK$0.248 per Share (subject to adjustments) at any time during a period of two years commencing from and including 26 August 2011 to 25 August 2013.

Options were granted to Mr. Wang Da Yong under the share option scheme of the Company dated 28 May 2002 which are exercisable at the subscription price of HK$0.248 per Share (subject to adjustments) at any time during a period of two years commencing from and including 10 November 2011 to 9 November 2013.

The respective number of underlying Shares which they have interest in represent the number of Shares which would be allotted and issued to them upon the exercise in full of the options granted.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors and the chief executive of the Company had or was deemed to have any interests or short positions in the shares, underlying shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) (i) 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 or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) which were required, pursuant to section 352 of the SFO, to be entered in the register referred to

– VI-6 –

GENERAL INFORMATION

APPENDIX VI

therein; or (iii) which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules.

(b) Competing interest

As at the Latest Practicable Date, none of the Directors and his associates had any interests which competes or was likely to compete, either directly or indirectly, with the Company’s business.

(c) Service contracts

As at the Latest Practicable Date, no Director had a service contract with the Company which is not determinable by the Company within one year without payment of compensation other than statutory compensation.

(d) Directors’ interest in assets

None of the Directors had any direct or indirect interest in any asset which had been, since 31 December 2009 (being the date to which the latest published audited consolidated financial statements of the Group were made up) and up to the Latest Practicable Date, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.

(e) Directors’ interest in contracts

There was no contract of significance in relation to the Enlarged Group’s business to which the Company, its subsidiaries, its fellow subsidiaries or its holding company was a party and in which a Director had a material interest, whether directly or indirectly, subsisting as at the Latest Practicable Date.

– VI-7 –

GENERAL INFORMATION

APPENDIX VI

4. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as was known to the Directors or chief executive of the Company, the following persons (other than the Directors or chief executive of the Company) had, or were deemed to have, an interest or short position in the Shares or/ and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or, who were, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group:

(a) Interest in Shares of the Company

			Approximate
			percentage of
		Total interests in	the Company’s
		shares/underlying	issued share
Name	Capacity	shares	capital
All Aces Investments Limited (note 1)	Beneficial owner	18,948,000,000 (L)	80.19%
Liu Yong (note 1)	Through controlled	18,948,000,000 (L)	80.19%
	corporation
Zhao Ming (note 2)	Beneficial owner/	16,071,535,195 (L)	68.01%
	Through controlled
	corporation
Bank of America Corporation	Through controlled	4,415,004,650 (L)	18.68%
	corporation	952,500,000 (S)	4.03%
Future Wise Limited (note 2)	Beneficial owner	2,125,000,000 (L)	8.99%
Sino Bridge Investments Limited (note 3)	Through controlled	1,800,000,000 (L)	7.62%
	corporation
China Coal and Coke Investment	Beneficial owner	1,800,000,000 (L)	7.62%
Holding Company Limited (note 3)
Wang Da Yong (note 3)	Beneficial owner/	1,900,000,000 (L)	8.04%
	Through controlled
	corporation
Central Huijin Investment Limited (note 4)	Through controlled	1,688,000,000 (L)	7.14%
	corporation	1,600,000,000 (S)	6.77%
China Construction Bank Corporation	Through controlled	1,688,000,000 (L)	7.14%
(note 4)	corporation	1,600,000,000 (S)	6.77%
CCB International Group Holdings Limited	Through controlled	1,688,000,000 (L)	7.14%
(note 4)	corporation	1,600,000,000 (S)	6.77%
CCB Financial Holdings Limited (note 4)	Through controlled	1,688,000,000 (L)	7.14%
	corporation	1,600,000,000 (S)	6.77%
CCB International (Holdings) Limited	Through controlled	1,688,000,000 (L)	7.14%
(note 4)	corporation	1,600,000,000 (S)	6.77%
CCB International Assets Management	Through controlled	1,688,000,000 (L)	7.14%
(Cayman) Limited (note 4)	corporation	1,600,000,000 (S)	6.77%
CCB International Asset Management	Beneficial owner	1,688,000,000 (L)	7.14%
Limited (note 4)		1,600,000,000 (S)	6.77%

– VI-8 –

GENERAL INFORMATION

APPENDIX VI

Notes:

All Aces Investments Limited is wholly owned by Mr. Liu Yong.
Zhao Ming holds 3,506,535,195 Shares. 1,150,000,000 Shares (including 150,000,000 Shares lent to Merrill Lynch International under the securities lending agreement dated 24 September 2010) are held by Future Wise Limited which is wholly owned by Mr. Zhao. Mr. Zhao now holds convertible notes of the Company which entitle the holder thereof to convert into 9,640,000,000 Shares at the current conversion price of HK$0.0625 per Share (subject to adjustments) and has long position of 1,775,000,000 Shares, of which 975,000,000 Shares are held by Future Wise Limited.
China Coal and Coke Investment Holding Company Limited is wholly-owned by Sino Bridge Investments Limited, a company wholly beneficially owned by Mr. Wang.
CCB International Asset Management Limited is the beneficial owner of 1,688,000,000 Shares and has a short position of 1,600,000,000 Shares. Central Huijin Investment Limited is deemed to be interested in the long and short positions held by CCB International Asset Management Limited by virtue of its 57.09% interest in China Construction Bank Corporation which owns 100% of CCB International Group Holdings Limited. CCB International Group Holdings Limited holds 100% of CCB Financial Holdings Limited which in turn owns 100% of CCB International (Holdings) Limited. CCB International (Holdings) Limited holds 100% of CCB International Assets Management (Cayman) Limited which in turn owns 100% of CCB International Asset Management Limited.

Save as disclosed above, as at the Latest Practicable Date, so far as was known to the Directors or chief executive of the Company, no person had, or was deemed or taken to have an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or, who were, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other members of the Group.

5. EXPERTS AND CONSENTS

The following are the qualifications of the experts who have given their opinion and advice which are included in this circular:

Name	Qualification
Ernst & Young	Certified public accountants
Minarco-MineConsult	Independent technical adviser
Roma Appraisals Limited	Independent valuer
Global Law Office	Legal adviser as to the PRC laws

As at the Latest Practicable Date, none of the above experts had any shareholding, directly or indirectly, in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, each of the above expert(s) has given and has not withdrawn its written consent to the issue of this circular, with the inclusion of the references to its name and/or its opinion in the form and context in which they are included.

– VI-9 –

GENERAL INFORMATION

APPENDIX VI

None of the above expert(s) has any direct or indirect interest in any assets which had been acquired, or disposed of by, or leased to any member of the Enlarged Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Enlarged Group since 31 December 2009, the date to which the latest published audited consolidated financial statements of the Group were made up.

6. MATERIAL CONTRACTS

The following contracts, not being contracts in the ordinary course of business, have been entered into by the Enlarged Group within two years preceding the date of this circular and are or may be material:

(a) the sale and purchase agreement dated 2 March 2009 entered into between Anchorage Trading Limited, a direct wholly-owned subsidiary of the Company, and Allied Concept in relation to the disposal of the entire registered capital of Fangcheng Huahai Chemicals Co., Ltd., an indirect wholly-owned subsidiary of the Company, at a consideration of RMB26,000,000;
(b) the sale and purchase agreement dated 15 September 2009 entered into between Mr. Zhao Ming, Magic Field International Limited and the Company in relation to the acquisition of the entire issued share capital of Triumph Fund A Limited at a consideration of HK$1,855,000,000;
(c) an equity transfer agreement in respect of 89% equity interest in Shanxi Puhua entered into between 山西恒創實業有限公司 (Shanxi Hengchuang Industrial Co., Ltd*, ‘‘Shanxi Hengchuang’’) (as transferee) and Mr. Xue Zhendong (as transferor) on 23 September 2009; and an equity transfer agreement in respect of 10% equity interest in Shanxi Puhua entered into between Shanxi Hengchuang (as transferee) and Mr. Zhang Wei (as transferor) on 23 September 2009 at a total consideration of RMB148,500,000;
(d) a letter dated 28 September 2009 given by Baotou Hengtong and Mr. Zhang Hongliang confirming that the total consideration for the transfer of the 95% equity interest in Hengtai to Shanxi Puhua and the 5% equity interest in Hengtai to Puhua Deqin was RMB700,000,000;
(e) the equity transfer agreement dated 8 April 2010 entered into between Yan Changli and Li Yubao as transferors and Haimei as transferee in relation to the transfer of an aggregate of 95% equity interest in Shaoyaohua at a consideration of RMB18,300,000,000;
(f) the equity transfer agreement dated 23 April 2010 entered into among Zhu Jinfeng, Zhao Zhishi, Xu Wenhua and Zhang Bao as transferors and Haimei as transferee in relation to the transfer of 100% equity interest in Youyi at a consideration of RMB1,290,000,000;
(g) the memorandum of understanding dated 26 April 2010 entered into between the Company and All Aces Investments Limited in relation to the proposed acquisition of controlling interests in Triumph Fund A1 Limited;

– VI-10 –

GENERAL INFORMATION

APPENDIX VI

(h) the framework agreement dated 9 June 2010 entered into between Jetway Group Limited, a wholly-owned subsidiary of the Company, and All Aces Investments Limited in relation to the proposed acquisition of 60% of the issued share capital of Triumph Fund A1 Limited;
(i) the placing agreement dated 18 June 2010 entered into between the Company and Kingsway Financial Services Group Limited in relation to the placing of up to a maximum of 2,673,000,000 new Shares at the placing price of HK$0.195 per Share;
(j) the sale and purchase agreement dated 17 July 2010 entered into between the Company and Allied Concept Investments Limited in relation to the disposal of the entire issued share capital of Anchorage Trading Limited, a wholly-owned subsidiary of the Company, by the Company for a consideration of HK$1 million;
(k) the subscription agreement dated 20 September 2010 entered into between the Company and Merrill Lynch International in relation to the subscription of HK$195,000,000 principal amount of 2 per cent. convertible bonds;
(l) the Acquisition Agreement;
(m) the Call Option Agreement;
(n) the supplemental deed dated 3 December 2010 entered into between the Company and Mr. Zhao Ming in relation to amendments to the terms of convertible notes issued on 21 December 2009;
(o) the subscription agreement dated 28 December 2010 entered into between the Company and Everest Project I Limited in relation to the subscription for 1,000,000,000 new Shares at the subscription price of HK$0.205 per Share;
(p) the subscription agreements dated 30 December 2010 entered into between the Company and Chinarise Financial Limited and between the Company and Success Business Holdings Limited, respectively, in relation to the subscriptions for a total of 1,000,000,000 new Shares at the subscription price of HK$0.21 per Share; and
(q) the Supplemental Agreement.

7. 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.

8 DIRECTORS AND SENIOR MANAGEMENT

Set out below are the biographies of the Directors and senior management of the Company:

– VI-11 –

GENERAL INFORMATION

APPENDIX VI

Executive Directors

Mr. Wang Da Yong, aged 44, was appointed as an executive director and chief executive officer on 1 July 2009 and the chairman of the Company on 26 February 2010 and is responsible for the business development of the Group. He holds a PhD in Economics at Business School of Ji-Lin University. He has over 20 years experience of investment, finance and management and is familiar with corporate merger and acquisition and direct investment. He has obtained detailed knowledge of coal, coal chemical, metal mineral resources industries and maintains strong networks in business field and with central and local government agencies in China. He worked in the Ministry of Agriculture, PRC previously. He was an executive director and CEO of China Best Group Holding Limited (Stock Code: 00370), a listed company in the Stock Exchange, from 16 September 2004 to 5 June 2007. He was also the CEO of Fortune Dragon Group Limited, a company with major coking coal mine operation in Shanxi, China, which was acquired by Fushan International Energy Group Limited (Stock Code: 00639) at the consideration of about HK$10 billion in July 2008. As at the Latest Practicable Date, he was a director of China Coal and Coke Investment Holding Company Limited and Sino Bridge Investments Limited which have an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, details of which are set out in Section 4 ‘‘Substantial Shareholders’’ above.

Mr. Tian Wenwei, aged 40, was appointed as an executive director of the Company on 18 January 2010. He holds an MBA at Business School of University of Alberta, Canada. He has over 15 years experience in finance, business and corporate merger and acquisition. He also has solid knowledge and experiences in coal industry. Mr. Tian is responsible for coal business development of the Group in China. Mr. Tian worked in the Bank of Communications, Xian Branch, from 1991 to 1997 and in China Digital Finance Times Company, a subsidiary of China Everbright Group from 2000 to 2001. He was an officer of Puda Coal Inc., a public company in the United States of America, from 2006 to 2009. Mr. Tian has been a director of Triumph Fund A Limited, a subsidiary of the Company since September 2009.

Mr. Wang Tongtian, aged 62, was appointed as a non-executive director of the Company on 1 December 2009 and then an executive director of the Company on 20 May 2010. He worked and held senior position in Beijing Mining Bureau, China National Coal Industry Import and Export Group and China National Coal Development Company from 1975 to 1995. Mr. Wang was the deputy general manager of China Shenhua Group Coal Transportation and Distribution Company for the period of 1996 to 2009. Mr. Wang has more than 40 years experience and possesses extensive knowledge in area of project development, administration, design and engineering of coal mines and import and export of coal, coke and coal related products. He is also familiar with distribution networks and development of coal industry.

Non-executive Directors

Mr. Li Yi, aged 62, was appointed as a non-executive director of the Company on 2 February 2010. He is a senior engineer and expert specializing in field of coal mine operation and coal technology. He was Director of Department of Coal Mine Safety of Xi Ming Coal Mine of Xi Shan Mining Bureau, the Director of Xiqu Coal Mine, Deputy Director General of Xi Shan Mining Bureau, and the deputy managing director of Xishan Coal Electricity Group Co., Ltd. During the

– VI-12 –

GENERAL INFORMATION

APPENDIX VI

period of 2002 to 2007, he was the chairman of Shanxi Xishan Coal and Electricity Power Co., Ltd, a listed company (stock code 000983.sz) in Shenzhen Stock Exchange and during the period of 2001 to 2009 he was also the vice-chairman of Shanxi Coking Coal Group Co., Ltd, the largest coking coal producer in China.

Mr. Su Bin, aged 58, was graduated from PLA National Defense University. Since the past decade, he has been mainly engaged in real estate development, equity investments and corporate mergers and acquisitions. He was co-Chairman of the China Coal and Coke Investment Fund LLP from 2005 to 2009. He has been honorary Chairman of the Hong Kong Energy and Minerals United Associations since 2007. Mr. Su is vastly experienced in corporate management, financing and mergers and acquisitions. He has strong and extensive connections in the political and financial sectors of the PRC.

Independent non-executive Directors

Mr. Jacobsen William Keith, aged 44, was appointed as an independent non-executive director of the Company on 26 September 2008. Mr. Jacobsen has more than 15 years experience in corporate finance and business development. He holds a Bachelor’s Degree of Laws from the University of Hong Kong and a Master’s Degree of Business Administration from the University of British Columbia. He is an independent non-executive director of Hycomm Wireless Limited, a company listed on the main board of the Stock Exchange, and abc Multiactive Limited, a company listed on the Growth Enterprise Board of the Stock Exchange.

Mr. Cao Kuangyu, aged 60, was appointed as an independent non-executive director of the Company on 2 February 2010. He holds a Bachelor of Arts degree in Economics from University of Hunan and a Master of Science degree in Financial Management from The School of Oriental and African Studies, University of London. He has more than 29 years working experience in various financial institutions. Currently, he is the vice chairman of Maxdo Group Limited in Hong Kong. He was the senior partner of Rocket Capital from 2007 to 2009, the managing director of BOCI Asia Limited from 2003 to 2007, the president of Citic Bank, Shenzhen Branch from 1999 to 2003 and the deputy general manager of Bank of China in Singapore Branch from 1996 to 1999 and in Hunan Branch from 1993 to 1996. Mr. Cao is also an independent non-executive director of JLF Investment Company Limited and a non-executive director of Continental Holdings Limited, both companies are listed on the Stock Exchange.

Mr. Chiu Sui Keung, aged 43, was appointed as an independent non-executive director of the Company on 18 January 2010. He has over 15 years experience in the strategic management in listed companies, financial industry and accounting field. He possessed extensive experience in corporate finance including initial public offerings, takeovers, mergers and acquisitions, fund raising and corporate advisory. Mr. Chiu graduated with a Bachelor’s Degree in Commerce from the University of Melbourne, Australia and has obtained a Master’s Degree in Applied Finance from Macquarie University in Sydney, Australia. He has also obtained a Diploma in Practices in Chinese Laws and Regulations Affecting Foreign Businesses jointly organized by Southwest University of Political Science and Law, the PRC and the Hong Kong Management Association. He is a member of CPA Australia and the American Institute of Certified Public Accountants and the fellow member of Hong Kong Institute of Certified Public Accountants. At present, he is the

– VI-13 –

GENERAL INFORMATION

APPENDIX VI

executive director and chief executive officer of Sino Resources Group Limited and was the nonexecutive director of Fulbond Holdings Limited during the period from September 2008 to July 2009, both companies are listed on the Stock Exchange.

Senior management

Mr. Lee Tao Wai, aged 32, is chief financial officer and company secretary of the Company. Mr. Lee is a member of The Hong Kong Institute of Certified Public Accountants and has over 10 years of experience in auditing, accounting and corporate field. Prior to joining the Company, Mr. Lee was an auditor in an international accounting firm and worked as a senior executive of a listed company in Hong Kong. Mr. Lee holds a Bachelor Degree in Business Administration in Accounting from the Chinese University of Hong Kong and a Master Degree in Investment Management from The Hong Kong University of Science and Technology. He joined the Group in April 2010.

Mr. Ip Wing Wai, aged 32, is chief investment officer of the Company and is responsible for identifying and evaluating merger and acquisition opportunities as well as promoting investor relations for the Company. Mr. Ip possesses 10 years of experience in merger and acquisitions, corporate finance and investor relations through working previously in a sizable red chip and an H- share company in Hong Kong as well as an international accounting firm. His stint in Fushan International Energy Group Limited has provided him over 4 years of expertise in mining industry. Mr. Ip holds a Bachelor Degree in Business Administration in Accounting from The Hong Kong University of Science and Technology. He joined the Group in April 2010.

9. GENERAL

(a) The secretary and the qualified accountant of the Company appointed pursuant to Rule 3.24 of the Listing Rules is Mr. Lee Tao Wai, who is a member of the Hong Kong Institute of Certified Public Accountants.
(b) The registered office of the Company is Suite 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong.
(c) The share registrar and transfer office of the Company in Hong Kong is Tricor Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(d) The business address of Mr. Wang Da Yong, Mr. Tian Wenwei, Mr. Wang Tongtian, Mr. Li Yi, Mr. Su Bin, Mr. Cao Kuangyu, Mr. Chiu Sui Keung, Mr. Jacobsen William Keith, Mr. Lee Tao Wai and Mr. Ip Wing Wai is Suite 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the offices of the Company at Suite 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong, during normal business hours up to and including the date of the EGM:

– VI-14 –

GENERAL INFORMATION

APPENDIX VI

(a) the memorandums and articles of association of the Company and the member of the Target Group;
(b) the Acquisition Agreement;
(c) the Call Option Agreement;
(d) the accountant’s reports on the Target Group, the text of which is set out in Appendix II to this circular;
(e) the unaudited pro forma financial information on the Enlarged Group, the text of which is set out in Appendix III to this circular;
(f) the technical report on the Target Coal Mines, the text of which is set out in Appendix IV to this circular;
(g) the valuation report on Shaoyaohua and Youyi prepared under Chapter 18 of the Listing Rules as set out in Appendix V to this circular;
(h) the annual reports of the Company for the two financial years ended 31 December 2008 and 2009;
(i) a copy of each circular of the Company issued pursuant to the requirements set out in Chapters 14 and/or 14A of the Listing Rules since 31 December 2009 (being the date to which the latest published audited consolidated financial statements of the Group were made up);
(j) the material contracts of the Enlarged Group referred to the paragraph headed ‘‘Material contracts’’ in this appendix; and
(k) the written consents referred to in the paragraph headed ‘‘Experts and consents’’ in this appendix.

11. MISCELLANEOUS

The English version of this circular shall prevail over the Chinese text.

– VI-15 –

NOTICE OF EGM

KING STONE ENERGY GROUP LIMITED

金山能源集團有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 663)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of King Stone Energy Group Limited (the ‘‘Company’’) will be held at Room 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong at 12:00 noon on Friday, 25 February 2011 for the purpose of considering and, if thought fit, passing, with or without amendment or modification, the following resolution as an ordinary resolution of the Company:

ORDINARY RESOLUTION

‘‘THAT
(A) the acquisition of 60% of the issued share capital of Triumph Fund A1 Limited by the Company on the terms and conditions of the sale and purchase agreement dated 21 October 2010 (as amended by the supplemental agreement dated 31 December 2010) entered into among Jetway Group Limited as purchaser, All Aces Investments Limited as vendor and the Company as issuer (together the ‘‘Acquisition Agreement’’) a copy of which has been produced to the meeting marked ‘‘A’’ and initialled by the Chairman of the meeting for the purpose of identification, and all transactions contemplated thereunder be and are hereby approved;
(B) the acquisition of an additional 40% of the issued share capital of Triumph Fund A1 Limited by the Company on the terms and conditions of the call option agreement dated 21 October 2010 entered into among Jetway Group Limited as grantee, All Aces Investments Limited as grantor and the Company as issuer (the ‘‘Call Option Agreement’’) a copy of which has been produced to the meeting marked ‘‘B’’ and initialled by the Chairman of the meeting for the purpose of identification, and all transactions contemplated thereunder be and are hereby approved; and

– EGM-1 –

NOTICE OF EGM

(C) the directors of the Company be and are hereby authorised to exercise all the powers of the Company and take all steps as might in their opinion be desirable, necessary or expedient in connection with the implementation of the transactions contemplated under the Acquisition Agreement and the Call Option Agreement including without limitation agreeing and/or effecting the execution, amendment, supplement, delivery, submission and implementation of any further documents or agreements.’’

By order of the Board King Stone Energy Group Limited Wang Da Yong Chairman

Hong Kong, 9 February 2011

Registered Office and Principal Place

of Business in Hong Kong:

Suite 3603, 36th Floor

One Exchange Square 8 Connaught Place Central

Hong Kong

Notes:

A member entitled to attend and vote at the above meeting is entitled to appoint one or more than one proxy to attend and vote instead of him. A proxy need not be a member of the Company.
Where there are joint registered holders of any share, any one of such persons may vote at the above meeting, either personally or by proxy, in respect of such share as if he were solely entitled to it; but if more than one of such joint holders are present at the above meeting personally or by proxy, that one of such persons so present whose name stands first on the Register of Members of the Company in respect of such share will alone be entitled to vote in respect of such share.
A form of proxy of the meeting is enclosed. If the appointer is a corporation, the form of proxy must be under its common seal or under the hand of an officer or attorney duly authorized on its behalf.
To be valid, a form of proxy must be deposited at the Company branch share registrar in Hong Kong, Tricor Secretaries Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not later than 48 hours before the time for holding the extraordinary general meeting or any adjournment thereof.

– EGM-2 –

AI assistant

Design Capital Limited — Proxy Solicitation & Information Statement 2011

49990_rns_2011-02-09_ac931247-19b4-495c-bf76-852e7f223c36.pdf

KING STONE ENERGY GROUP LIMITED 金 山 能 源 集 團 有 限 公 司

VERY SUBSTANTIAL ACQUISITION IN RELATION TO ACQUISITION OF COAL MINES IN THE PRC INVOLVING ISSUE OF CONSIDERATION SHARES AND CONVERTIBLE BONDS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

KING STONE ENERGY GROUP LIMITED 金 山 能 源 集 團 有 限 公 司

VERY SUBSTANTIAL ACQUISITION IN RELATION TO ACQUISITION OF COAL MINES IN THE PRC INVOLVING ISSUE OF CONSIDERATION SHARES AND CONVERTIBLE BONDS

1. INTRODUCTION

Subject matter of the Acquisition Agreement

Consideration

Basis of the Consideration

LETTER FROM THE BOARD

Adjustments to the Consideration

The Consideration Shares

The 1st Tranche Convertible Bonds and the 2nd Tranche Convertible Bonds

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Conditions precedent to the Acquisition Agreement

Acquisition Completion

3. THE CALL OPTION AGREEMENT

Subject matter of the Call Option Agreement

Basis of the Call Option Consideration

Adjustments to the Call Option Consideration

The Call Option Consideration Shares

LETTER FROM THE BOARD

The 3rd Tranche Convertible Bonds and the 4th Tranche Convertible Bonds

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Conditions precedent to the Call Option Agreement

4. INFORMATION ON THE VENDOR

5. INFORMATION ON THE TARGET GROUP

Corporate structure

Background information

The Target Company

Hengming

Lvhai

Haimei

Shaoyaohua

Youyi

Reorganisation of the Target Group

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Financial information

Shaoyaohua

The management team of the Target Group

6. INFORMATION ON THE TARGET COAL MINES

Overview of Coal Mine A

Location and transportation

Mining rights

LETTER FROM THE BOARD

Resources and reserves

Product and production

Quality control

Production capacity

LETTER FROM THE BOARD

Expansion plan and capital commitment

LETTER FROM THE BOARD

Land and property

LETTER FROM THE BOARD

Customers and suppliers

Sales and marketing

Competitive strength and business strategies

Overview of Coal Mine B

Location and transportation

Mining rights

Land and property

LETTER FROM THE BOARD

Resources and reserves

7. RISK FACTORS

Dependence of mining business

Uncertainties associated with Coal Resources

Risk relating to evaluation of the Target Group’s business prospects due to short operating history

Significant and continuous capital investment in mining business

Risk relating to inclement weather

Risk relating to reliance of major customers

Design Capital Limited Proxy Solicitation & Information Statement 2011

KING STONE ENERGY GROUP LIMITED 金山能源集團有限公司

KING STONE ENERGY GROUP LIMITED 金山能源集團有限公司