Design Capital Limited - Proxy Solicitation & Information Statement 2012

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

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

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

KING STONE ENERGY GROUP LIMITED

金山能源集團有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 00663)

(I) PROPOSED ISSUE OF NEW SHARES; AND (II) APPLICATION FOR WHITEWASH WAIVER

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

A letter from the Board is set out on pages 4 to 15 of this circular.

A letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on pages 16 to 17 of this circular.

A letter from Quam Capital Limited, the Independent Financial Adviser containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 18 to 38 of this circular.

A notice convening the EGM to be held at Room 3603, 36th Floor, One Exchange Square, Central, Hong Kong on Wednesday, 5 December 2012 at 12:00 p.m. is set out on pages 128 to 129 of this circular. Whether or not you intend to attend the EGM, please complete and return the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Company’s share registrar in Hong Kong, Tricor Secretaries Limited, at Level 25, Three Pacific Place, 1 Queen’s Road East, Hong Kong as soon as possible and in any event, not less than 48 hours before the time fixed for holding the EGM or any adjournment thereof (as the case may be). Completion and return of the form(s) of proxy will not preclude you from attending and voting in person at the EGM or at any adjourned meeting thereof should you so wish.

15 November 2012

		Page
Definitions	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from	the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from	the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Letter from	the Independent Financial Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Appendix I	— Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	39
Appendix II	— General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	118
Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		128

– i –

DEFINITIONS

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

‘‘acting in concert’’ has the meaning ascribed thereto in the Takeovers Code ‘‘Announcement’’ the announcement issued by the Company dated 17 October 2012 (as clarified on 19 October 2012) in relation to the Subscription
‘‘associates’’ has the meaning ascribed to this term in the Listing Rules ‘‘Board’’ the board of Directors ‘‘Business Day’’ a day (excluding Saturday, Sunday and public holiday) on which licensed banks in Hong Kong are generally open for business in Hong Kong
‘‘CCBIAML’’ CCB International Asset Management Limited, a fellow subsidiary of the financial adviser to the Subscriber, namely, CCB International Capital Limited
‘‘Company’’ King Stone Energy Group Limited, a company incorporated in Hong Kong and the issued Shares of which are listed on the Main Board of the Stock Exchange
‘‘Completion’’ completion of the Subscription in accordance with the terms and conditions of the Subscription Agreement
‘‘Completion Date’’ the fifth (5th) Business Day from and excluding the date on which the last of the conditions of the Subscription have been fulfilled or waived pursuant to the Subscription Agreement (as the case may be) (or such other date as the parties to the Subscription Agreement may agree in writing)
‘‘connected person(s)’’ has the meaning ascribed to this term under the Listing Rules ‘‘Consent’’ any consent, approval, authorization, qualification, waiver, permit, grant, franchise, concession, agreement, licence, exemption or order of, registration, certificate, declaration or filing with, or report or notice to, any person, including any governmental or regulatory body
‘‘Directors’’ the directors of the Company
‘‘EGM’’ the extraordinary general meeting of the Company to be held to approve, among others things, the Subscription and the Whitewash Waiver

– 1 –

DEFINITIONS

‘‘Executive’’ the Executive Director of the Corporate Finance Division of the SFC from time to time and any delegate of suchExecutive Director
‘‘Fund’’
a Cayman Islands exempted limited partnership to be set up as a private equity fund for the purpose of the Subscription
‘‘Group’’ the Company and its subsidiaries
‘‘Hong Kong’’
the Hong Kong Special Administrative Region of the People’s Republic of China
‘‘Independent Board Committee’’
an independent board committee, comprising all the nonexecutive Directors, namely Mr. Wong Chun Hung, Mr. Seah Ang, Mr. Chiu Sui Keung, Mr. Li Peiming, Mr. Lee Chi Hwa, Joshua and Mr. Lam Ka Wai, Graham, which has been formed to advise the Independent Shareholders as to the fairness and reasonableness of the terms of the Subscription Agreement and the Whitewash Waiver
‘‘Independent Financial Adviser’’ or ‘‘Quam Capital’’
Quam Capital Limited, a licensed corporation to conduct type 6 (advising on corporate finance) regulated activity under the SFO, being the independent financial adviser appointed to advise the Independent Board Committee and the Independent Shareholders in respect of the Subscription and the Whitewash Waiver
‘‘Independent Shareholders’’
Shareholders other than the Subscriber, its associates and the parties acting in concert with it and other Shareholders who are interested or involved in the Subscription and the Whitewash Waiver
‘‘Last Trading Date’’
12 October 2012, being the last trading date before the suspension of trading in the Shares pending the release of the Announcement
‘‘Latest Practicable Date’’
12 November 2012, being the latest practicable date for the purpose of ascertaining certain information contained in this circular
‘‘Listing Rules’’
the Rules Governing the Listing of Securities on the Stock Exchange
‘‘Material Adverse Change’’
any change, event, circumstance or other matter that has, or would reasonably be expected to have, either individually or in the aggregate, a material adverse effect on: (a) the ability of the Company to perform its obligations under the Subscription Agreement; or (b) the business, assets and liabilities, financial condition, results of operations of the Group as a whole

– 2 –

DEFINITIONS

‘‘Relevant Period’’ the period commencing six months prior to the date of the Announcement up to and including the Latest Practicable Date
‘‘SFC’’ the Securities and Futures Commission of Hong Kong
‘‘SFO’’ the Securities and Futures Ordinance (Chapter 571 of Laws of Hong Kong)
‘‘Shareholder(s)’’ holder(s) of the Share(s) ‘‘Share(s)’’ ordinary share(s) of HK$0.10 each in the share capital of the Company
‘‘SPV’’ a wholly-owned special purpose vehicle to be established by the Fund
‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited ‘‘Subscriber’’ Jade Bird Strategic Investment, an exempted company incorporated in the Cayman Islands with limited liability, and not a connected person of the Company
‘‘Subscription’’ the subscription for the Subscription Shares by the Subscriber subject to the terms and conditions of the Subscription Agreement
‘‘Subscription Agreement’’ the subscription agreement dated 12 October 2012 and entered into between the Company and the Subscriber in relation to the Subscription
‘‘Subscription Price’’ HK$0.45 per Subscription Share
‘‘Subscription Shares’’ 1,555,555,000 new Shares to be issued by the Company to the Subscriber pursuant to the Subscription Agreement
‘‘Takeovers Code’’ The Hong Kong Code on Takeovers and Mergers
‘‘Whitewash Waiver’’ whitewash waiver as may be granted by the Executive pursuant to Note 1 on dispensations from Rule 26 of the Takeovers Code in respect of any obligation of the Subscriber and any parties acting in concert with it to make a general offer for all the issued Shares not already owned (or agreed to be acquired) by the Subscriber and parties acting in connect with it which might otherwise arise as a result of the Subscription
‘‘HK$’’ Hong Kong dollars, the lawful currency of Hong Kong
‘‘%’’

per cent.

– 3 –

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: 00663)

Executive Directors:

Mr. Wang Da Yong (Chairman) Mr. Tian Wenwei Mr. Wang Tongtian Mr. Chen Marlon Ray

Registered Office and Principal Place of Business in Hong Kong: Room 3603, 36th Floor One Exchange Square Central Hong Kong

Non-executive Directors:

Mr. Wong Chun Hung Mr. Seah Ang

Independent non-executive Directors:

Mr. Chiu Sui Keung Mr. Li Peiming Mr. Lee Chi Hwa, Joshua Mr. Lam Ka Wai, Graham

15 November 2012

To the Shareholders

Dear Sir or Madam,

(I) PROPOSED ISSUE OF NEW SHARES; AND (II) APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

On 17 October 2012, the Board announced that the Company entered into the Subscription Agreement on 12 October 2012 whereby the Company conditionally agreed to allot and issue and the Subscriber conditionally agreed to subscribe in cash for 1,555,555,000 new Shares at the Subscription Price of HK$0.45 per Subscription Share.

The purposes of this circular are: (i) to provide you with further information relating to the Subscription and the Whitewash Waiver; (ii) to set out the recommendations of the Independent Board Committee to the Independent Shareholders; (iii) to set out the recommendations of Quam Capital to the

– 4 –

LETTER FROM THE BOARD

Independent Board Committee and the Independent Shareholders; (iv) to provide you with the financial information of the Group and other information as required under the Takeovers Code and the Listing Rules; and (v) to give the notice of the EGM.

SUBSCRIPTION AGREEMENT

Date: 12 October 2012

Parties: (i) The Company as issuer; and (ii) The Subscriber as subscriber

The Subscriber, its ultimate beneficial owners and parties acting in concert with it (including CCBIAML) are third parties independent of the Company and its connected persons. Prior to the entering into of the Subscription Agreement, the Subscriber did not have any interest in or business dealings/transactions with the Group. As at the Latest Practicable Date, CCBIAML held 23,190,000 Shares, representing approximately 1.62% of the issued share capital of the Company. As CCBIAML is presumed to be acting in concert with the Subscriber pursuant to the Takeovers Code unless the contrary is established, by virtue of the shareholding held by CCBIAML, the Subscriber and the parties acting in concert with it have interests in 23,190,000 Shares, representing approximately 1.62% of the issued share capital of the Company as at the date of the Latest Practicable Date.

The Subscriber is an exempted limited company incorporated in the Cayman Islands and is intended to be the general partner of the Fund. Upon Completion, the Subscriber will assign and novate all its rights and obligations under the Subscription Agreement to the SPV.

Neither the Subscriber nor the parties acting in concert with it (including CCBIAML, CCB International Capital Limited and their respective holding companies, subsidiaries and fellow subsidiaries) has acquired or disposed of or entered into any agreement or arrangement to acquire or dispose of any voting rights in the Company during the Relevant Period, and save for the 23,190,000 Shares held by CCBIAML, none of them was interested in any issued Shares or other relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company as at the date of the Announcement and the Latest Practicable Date.

The Subscription

Pursuant to the Subscription Agreement, the Company has conditionally agreed to allot and issue and the Subscriber has conditionally agreed to subscribe in cash for 1,555,555,000 new Shares at the Subscription Price of HK$0.45 per Subscription Share.

As at the date of the Subscription Agreement and the Latest Practicable Date, there were 1,428,729,168 Shares in issue. The Subscription Shares represent approximately 108.88% of the existing issued share capital of the Company and approximately 52.12% of the issued share capital of the Company as enlarged by the allotment and issue of the Subscription Shares (assuming that there is no change in the issued share capital of the Company other than the issue of the Subscription Shares since the Latest Practicable Date and up to Completion).

Application will be made by the Company to the Stock Exchange for the listing of, and permission to deal in, the Subscription Shares.

– 5 –

LETTER FROM THE BOARD

The Subscription Price

The Subscription Price per Subscription Share is HK$0.45 and the net Subscription Price per Subscription Share is about HK$0.426. The aggregate consideration for the Subscription shall be satisfied in cash and payable by the Subscriber in the following manner:

(a) HK$10,000,000 has been paid within five (5) Business Days after the date of the Subscription Agreement by the Subscriber as refundable deposit and, where Completion takes place in accordance with the terms of the Subscription Agreement, shall be partial payment of the Subscription Price; and
(b) HK$689,999,750, being the remaining balance shall be paid by the Subscriber to the Company upon Completion.

If the Subscription Agreement is terminated prior to Completion or Completion does not take place for any reason, the Company shall, within five (5) Business Days of such termination or confirmation that Completion will not take place, refund in full the deposit (without interest) to the Subscriber.

The Subscriber intends to fund the Subscription Price to be paid to the Company by funding to be provided by parties which are intended to be the limited partners of the Fund.

The Subscription Price was determined after arm’s length negotiations between the Company and the Subscriber by reference to the then prevailing trading prices of the Shares before the date of the Subscription Agreement. The Subscription Price represents:

(a) a discount of 6.25% to the closing price of HK$0.48 per Share as quoted on the Stock Exchange on the Last Trading Date;
(b) a discount of approximately 8.35% to the average of the closing prices of HK$0.491 per Share as quoted on the Stock Exchange for the last 5 trading days up to and including the Last Trading Date;
(c) a discount of approximately 11.24% to the average of the closing prices of approximately HK$0.507 per Share as quoted on the Stock Exchange for the last 10 trading days up to and including the Last Trading Date;
(d) a premium of approximately 4.17% over the average of the closing prices of HK$0.432 per Share as quoted on the Stock Exchange for the last 30 trading days up to and including the Last Trading Date;
(e) a discount of approximately 9.09% to the closing price of HK$0.495 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and
(f) a discount of approximately 61.77% to the unaudited net asset value per Share of approximately HK$1.177 as at 30 June 2012 (based on the unaudited consolidated net assets attributable to owners of the Company of approximately HK$1,682.0 million as at 30 June 2012 and 1,428,729,168 Shares in issue as at 30 June 2012).

– 6 –

LETTER FROM THE BOARD

The Directors consider the Subscription Price to be fair and reasonable as it reflects the then prevailing trading prices of the Shares before the date of the Subscription Agreement. The Directors (including the independent non-executive Directors after taking the advice of Independent Financial Adviser) consider that the terms of the Subscription Agreement are fair and reasonable and on normal commercial terms and the entering into of the Subscription Agreement is in the interests of the Company and the Shareholders as a whole.

Conditions of the Subscription

Completion is conditional upon:

(a) the passing by the Shareholders (other than those who are required by the Listing Rules and/ or the Takeovers Code to abstain from voting in respect of each resolution) in a general meeting of resolutions which are necessary to give effect to the transactions contemplated under the Subscription Agreement and comply with the Listing Rules and the Takeovers Code, among other things, approving (i) the execution, delivery and performance of the Subscription Agreement; (ii) the allotment and issue of the Subscription Shares in accordance with the Subscription Agreement; and (iii) the grant of the Whitewash Waiver;
(b) the granting of the approval for the listing of, and permission to deal in, the Subscription Shares by the Stock Exchange and the Stock Exchange not having withdrawn or revoked such approval;
(c) the grant by the Executive of the Whitewash Waiver, and such grant not having been revoked or withdrawn and fulfilment of any necessary conditions prior to Completion, if any, attached to it;
(d) the Fund and the SPV having been duly established and all related documentations having been duly agreed and signed; and all necessary funds for the payment of Subscription Price having been raised and injected to the Fund, each to the reasonable satisfaction of the Subscriber;
(e) the Company having obtained all Consents from the relevant governmental or regulatory authorities or other third parties which are necessary to be obtained for the execution and performance of the Subscription Agreement by the Company and any of the transactions contemplated under the Subscription Agreement, and such Consents not having been withdrawn or revoked;
(f) (if required) the Subscriber having obtained the requisite approval for the execution, delivery and performance of the Subscription Agreement, including the establishment of the Fund and the subscription for the Subscription Shares;
(g) the current listing of the Shares not having been withdrawn, the Shares continuing to be traded on the Stock Exchange prior to the Completion Date (save for any temporary suspension for no longer than seven (7) consecutive trading days or such other period as the Subscriber may agree, or the temporary suspension in connection with transactions

– 7 –

LETTER FROM THE BOARD

contemplated under the Subscription Agreement) and neither the Stock Exchange nor the SFC having indicated that either one of them will object to such continued listing for reasons related to or arising from the transactions contemplated therein;

(h) each of the warranties given by the Company under the Subscription Agreement remaining true, complete and accurate and not misleading at the Completion as if repeated at the Completion and at all times between the date of the Subscription Agreement and the Completion;
(i) there having been no Material Adverse Change prior to the Completion Date;
(j) on or before the expiry of a period of not more than 30 days from the date of the Subscription Agreement, the Subscriber shall not have issued a notice informing the Company that it is not satisfied with the due diligence conducted by it in respect of, amongst other things, the financial position and operating activities of each member of the Group; and
(k) the Company having duly performed and observed all of the obligations, undertakings, covenants and agreements required to be performed and observed by it prior to the Completion Date under the Subscription Agreement.

The Subscriber may at any time by notice in writing to the Company waive the conditions set out in (d), (g), (h), (i), (j) and (k) above. For the avoidance of doubt, the conditions set out in (a), (b), (c), (e) and (f) above are not waivable by the Company or the Subscriber. Hence, among other things, if the Whitewash Waiver is not granted by the Executive or approved by the Independent Shareholders at the EGM, the Subscription will not proceed.

If any of the conditions set out above has not been fulfilled or waived (as the case may be) pursuant to the Subscription Agreement on or prior to 31 December 2012 (or such other date as may be agreed between the Company and the Subscriber in writing), then neither the Company nor the Subscriber shall be bound to proceed with the transactions contemplated under the Subscription Agreement and the Subscription Agreement shall cease to be of any effect except certain provisions which will shall remain in force and save in respect of claims arising out of any antecedent breach of the Subscription Agreement. In such event, the Company shall refund the deposit of HK$10,000,000 to the Subscriber (without interest).

Up to the Latest Practicable Date, none of the above conditions has been fulfilled.

Completion

Completion shall take place on the fifth (5th) Business Day from and excluding the date on which the last of the conditions of the Subscription mentioned above has been fulfilled or waived (as the case may be) (or such other date as the parties to the Subscription Agreement may agree in writing).

– 8 –

LETTER FROM THE BOARD

Ranking of the Subscription Shares

The Subscription Shares, when issued and fully-paid, will rank pari passu in all respects among themselves and with the Shares in issue as at the date of allotment and issue of the Subscription Shares, including the right to receive all future dividends and distributions which may be declared, made or paid by the Company on or after the date of allotment and issue of the Subscription Shares.

Mandate

The issue of the Subscription Shares is subject to approval by the Independent Shareholders. An ordinary resolution will be proposed at the EGM to seek, among other things, a specific mandate to issue the Subscription Shares pursuant to the Subscription Agreement.

Shareholding Structure of the Company

The following table illustrates the shareholding structure of the Company as at the Latest Practicable Date and immediately following Completion (assuming: (i) there is no other change in the issued share capital of the Company other than the issue of the Subscription Shares since the Latest Practicable Date and up to Completion, and (ii) all the outstanding convertible notes have been fully converted into the Shares and all the outstanding share options have been fully exercised):

As at the Latest Practicable Date Number of Shares %	As at the Latest Practicable Date Number of Shares %	Immediately following Completion assuming there is no other change in the issued share capital of the Company other than the issue of the Subscription Shares since the Latest Practicable Date and up to Completion Number of Shares %	Immediately following Completion assuming there is no other change in the issued share capital of the Company other than the issue of the Subscription Shares since the Latest Practicable Date and up to Completion Number of Shares %	Immediately following Completion assuming: (i) all the outstanding convertible notes have been fully converted into the Shares; (ii) all the outstanding share options have been fully exercised Number of Shares %	Immediately following Completion assuming: (i) all the outstanding convertible notes have been fully converted into the Shares; (ii) all the outstanding share options have been fully exercised Number of Shares %
— 23,190,000	— 1.6	1,555,555,000 23,190,000	52.1 0.8	1,555,555,000 23,190,000	48.0 0.7
23,190,000 8,979,000 160,082,000 43,838,500 65,885,000 — — — 301,974,500 1,126,754,668 — — 1,428,729,168	1.6 0.6 11.2 3.1 4.6 — — — 21.1 78.9 — — 100.0	1,578,745,000 8,979,000 160,082,000 43,838,500 65,885,000 — — — 1,857,529,500 1,126,754,668 — — 2,984,284,168	52.9 0.3 5.3 1.5 2.2 — — — 62.2 37.8 — — 100.0	1,578,745,000 13,979,000 160,082,000 43,838,500 65,885,000 3,750,000 1,500,000 500,000 1,868,279,500 1,126,754,668 231,364,000 13,866,000 3,240,264,168	48.7 0.4 4.9 1.4 2.0 0.2 0.1 0.0
					57.7 34.8 7.1 0.4
					100.0

– 9 –

LETTER FROM THE BOARD

Notes:

Joint Ascent Limited is held as to 80% and 20% by Mr. Wang Da Yong and Mr. Tian Wenwei, both being executive Directors, respectively.
China Coal and Coke Investment Holding Company Limited is wholly owned by Sino Bridge Investments Limited which is a company wholly and beneficially owned by Mr. Wang Da Yong, the Chairman and an executive Director.
Sky Circle International Limited is beneficially owned by Mr. Wang Da Yong, the Chairman and an executive Director.
As at the Latest Practicable Date, Simsen International Corporation, a listed company in Hong Kong with stock code 993, together with its subsidiary held the outstanding convertible notes which entitle them to convert into an aggregate of 231,364,000 Shares at the conversion price of HK$1.25 per Share (subject to adjustment).

As at the Latest Practicable Date, the Company has: (i) outstanding convertible notes in the principal amount of HK$289,205,000 which confers the right on its holder to convert into 231,364,000 new Shares at the conversion price of HK$1.25 per Share (subject to adjustments); and (ii) outstanding 616,000 and 24,000,000 share options exercisable into a total of 24,616,000 new Shares at the subscription prices of HK$2.50 and HK$4.96 respectively. Save as disclosed above, the Company has no other outstanding warrants, options or securities convertible into Shares as at the Latest Practicable Date.

Reasons for the Subscription and use of proceeds

The Group is currently engaged in the mining and selling of coal.

As disclosed in the annual report of the Company for the year ended 31 December 2011, the Group had net current liabilities of approximately HK$1,259 million. As disclosed in the interim report of the Company for the six months ended 30 June 2012, the Group’s unaudited net current liabilities were approximately HK$1,363 million as at 30 June 2012. There is a material uncertainty that may cast significant doubt about the Group’s ability to operate as a going concern. Although the net operating cash inflow generated by the Group’s coal mining business is still expected to be able to meet its liabilities and capital commitment as and when they fall due, the financial position of the Group could not be substantially enhanced without the availability of external financing.

The Directors have considered other means of fund raising such as rights issue. However, given the recent trading prices of the Shares and the funding needs of the Group, it would be difficult to identify any underwriter to fully underwrite the rights issue as required under the Listing Rules. The Directors have also considered debt financing but it would be difficult for any financial institutions to extend such amount of facility to the Company at affordable terms due to the current financial condition of the Group.

Given the above reasons, the Company is of the view that a new equity financing is the most imminent priority of the Company and a placement under a specific mandate is the most viable option for the Company. The Subscription by the Subscriber provides a good opportunity for the Company to raise long term equity fund to repay its outstanding liabilities, fund its operation, improve the financial position of the Company and, where appropriate, seek appropriate investment opportunities. Given the background of the Subscriber, the Group is expected to benefit from its experience in managing equity fund investments for developing and managing the Group’s newly developed trust fund management

– 10 –

LETTER FROM THE BOARD

business and for developing the Group’s existing coal mining business. As such, the Directors are confident that the Subscriber will bring in additional resources and investment opportunities to the Company that is beneficial to the Company and the Shareholders as a whole. Having taken into account all the aforementioned factors before entering into the Subscription Agreement, the Directors considered it is in the interest of the Company and the Shareholders as a whole to proceed with the Subscription.

As the Subscription is subject to Independent Shareholders’ approval, the Independent Shareholders can make their own decision in voting on the relevant resolutions in respect of the Subscription after considering the advice from the Independent Board Committee and the Independent Financial Adviser.

The net proceeds from the Subscription, after deduction of all related expenses, is approximately HK$663 million. It is the intention of the Group to apply 30% to 50% of the net proceeds from the Subscription to the repayment of liabilities and balance of the net proceeds will be applied to investments in new acquisitions or business ventures when suitable opportunities arise in the future and/ or general working capital of the Group. As at the Latest Practicable Date, the Board has not identified any potential target for investment or acquisition, nor is there any negotiation being undertaken in this regard. If there is no suitable opportunity for any investment or business venture, the balance of the net proceeds will all be applied as general working capital of the Group.

Background and information on the Subscriber

The Subscriber, an exempted company incorporated in the Cayman Islands with limited liability, is intended to be the general partner of the Fund. The controlling shareholders of the Subscriber are: (i) Beida Jade Bird Universal Sci-Tech (Cayman) Development Company Limited (‘‘Beida Jade Bird’’), a wholly owned subsidiary of Beijing Beida Jade Bird Universal Sci-Tech Company Limited, the issued H-shares of which are listed on the Growth Enterprise Market of the Stock Exchange (stock code: 8095) and the principal business of which is the research, development, manufacture, marketing and sale of wireless fire alarm systems and related products, the development of travel and leisure business and investment holding; and (ii) Mr. Benjamin Clark Danielson (‘‘Mr. Danielson’’) who has extensive experience in investment and fund management in natural resources sector such as coal and other mining areas. Mr. Danielson has been managing and monitoring the activities of the fund portfolio companies as well as sourcing, evaluating and executing investments for a United States-based private equity fund (which is not directly or indirectly involved in the Subscription) focused in energy-related industries. Beida Jade Bird and Mr. Danielson each owns as to 30% of the issued share capital of the Subscriber. The remaining shareholding is held by three shareholders, each owns as to 10% to 15% of the issued share capital of the Subscriber and none of them is a party acting in concert with each other or Beida Jade Bird or Mr. Danielson.

Dealing and interest of the Subscriber in the securities of the Company

As at the Latest Practicable Date, save for the Subscription and the 23,190,000 Shares held by CCBIAML, (i) the Subscriber and parties acting in concert with it (including the directors of the Subscriber) do not hold, control or have direction over any outstanding options, warrants, or any securities that are convertible into Shares, or any derivatives in respect of securities in the Company or hold any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) in the Company; (ii) the Subscriber and parties acting in concert with it did not borrow or lend any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) in the Company; (iii) there is no arrangement

– 11 –

LETTER FROM THE BOARD

referred to in Note 8 to Rule 22 of the Takeovers Code (whether by way of option, indemnity or otherwise) in relation to the relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company or the Subscriber, which might be material to the Subscription and the Whitewash Waiver, with any other persons; (iv) there is no agreement or arrangement to which the Subscriber or any of its parties acting in concert is a party which relates to circumstances in which it may or may not invoke or seek to invoke a pre-condition or a condition to the Subscription and the Whitewash Waiver; and (v) none of the Subscriber or parties acting in concert with it has received any irrevocable commitment to vote for or against the Subscription or the Whitewash Waiver.

Future intentions of the Subscriber regarding the Group

Following Completion, the Subscriber intends to continue the existing business of the Group. The Subscriber has no developments plans to operate and/or expand the existing business of the Group. The Subscriber has no intention to introduce any change to the existing business of the Group including any redeployment of the fixed assets of the Group. The Subscriber and the Company do not have any agreement, arrangement, understanding, intention or negotiation (concluded or otherwise) about:

(a) any disposal, termination, and/or scaling-down of the existing businesses and major assets of the Group up to the Latest Practicable Date; and
(b) any injection and/or acquisition of assets and/or business of the Group up to the Latest Practicable Date.

The Subscriber and the Company have no intention to make major changes to the continued employment of the employees of the Group. Nevertheless, the Subscriber has the nomination right under the terms of the Subscription Agreement such that the Company shall cause six persons as the Subscriber may nominate to be validly appointed as Directors upon Completion. As at the Latest Practicable Date, the Subscriber has not confirmed the name and position of the persons to be nominated to the Board. Once the proposed Directors are nominated by the Subscriber, the Nomination Committee of the Company will assess the suitability of any proposed Directors and make recommendation to the Board for approval accordingly. Any appointment of new Directors by the Board shall be subject to the requirements under the Listing Rules (including the requirement under Rule 3.10A of the Listing Rules), Takeovers Code, the Memorandum and Articles of Association of the Company and all applicable laws and regulations. The Subscriber and the Group will ensure that all key employees of the Group after Completion (including existing Directors, Directors to be nominated by the Subscriber and members of the senior management) taken as a whole will have sufficient experience and expertise to operate the business of the Group. As at the Latest Practicable Date, no Director or senior management of the Group has tendered resignation due to the Subscription.

Any changes to the Board including details of the proposed Directors as nominated by the Subscriber will be announced and proposed to Shareholders for re-election, if necessary. Details of the professional qualifications and experience of each of the prospective Directors will be included in the relevant announcement and/or circular of the Company in accordance with the Listing Rules, as appropriate.

– 12 –

LETTER FROM THE BOARD

NO FUND RAISING EXERCISE FOR THE PAST 12 MONTHS

Save for the Subscription, the Company did not undertake any equity fund raising exercise in the past 12 months immediately prior to the date of the Announcement.

APPLICATION FOR WHITEWASH WAIVER

Immediately after Completion, the voting rights of the Subscriber and parties acting in concert with it will in aggregate increase from approximately 1.62% to approximately 52.90% of the enlarged issued share capital of the Company (assuming that there is no change in the issued share capital of the Company other than the issue of the Subscription Shares since the Latest Practicable Date and up to Completion). Under Rule 26.1 of the Takeovers Code, the Subscriber would be obliged to make a mandatory general offer to the Shareholders for all the issued Shares and other securities of the Company not already owned or agreed to be acquired by it and any parties acting in concert with it, unless the Whitewash Waiver is obtained from the Executive. In this regard, the Subscriber has made an application to the Executive for the Whitewash Waiver in respect of the issue of the Subscription Shares. The Whitewash Waiver, if granted by the Executive, will be subject to, among other things, approval by the Independent Shareholders at the EGM by way of poll. The Executive has indicated that it will grant the Whitewash Waiver subject to the approval of the Independent Shareholders on a vote by way of poll at the EGM. If the Whitewash Waiver is not approved by the Independent Shareholders at the EGM, the Subscription Agreement will lapse.

If the Whitewash Waiver is approved by the Independent Shareholders and upon Completion, the aggregate shareholding of the Subscriber and parties acting in concert with it in the Company will exceed 50%. The Subscriber and parties acting in concert with it may further increase their shareholdings in the Company without incurring any further obligations under Rule 26 of the Takeovers Code to make a general offer.

GENERAL

The Independent Board Committee, comprising all the non-executive Directors, namely Mr. Wong Chun Hung, Mr. Seah Ang, Mr. Chiu Sui Keung, Mr. Li Peiming, Mr. Lee Chi Hwa, Joshua and Mr. Lam Ka Wai, Graham, has been established to consider and make recommendation to the Independent Shareholders as regards the Subscription and the Whitewash Waiver after taking into account the advice from the Independent Financial Adviser. Quam Capital has been appointed by the Company as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on the fairness and reasonableness in respect of the Subscription and the Whitewash Waiver. The appointment of the Independent Financial Adviser has been approved by the Independent Board Committee.

EGM

There is set out on page 128 to page 129 of this circular a notice convening the EGM to be held at Room 3603, 36th Floor, One Exchange Square, Central, Hong Kong, on Wednesday, 5 December 2012 at 12:00 p.m., at which ordinary resolutions will be proposed to approve, among other things: (i) the execution, delivery and performance of the Subscription Agreement; (ii) the allotment and issue of the Subscription Shares in accordance with the Subscription Agreement; and (iii) the Whitewash Waiver.

– 13 –

LETTER FROM THE BOARD

The voting in relation to the Subscription and the Whitewash Waiver at the EGM will be conducted by way of a poll whereby the Subscriber and parties acting in concert with it and other Shareholders who are interested or involved in the Subscription and the Whitewash Waiver shall abstain from voting on the relevant ordinary resolutions to be proposed at the EGM to approve the Subscription and the Whitewash Waiver.

As disclosed above, as at the Latest Practicable Date, by virtue of the shareholding held by CCBIAML, the Subscriber and parties acting in concert with it were interested in 23,190,000 Shares. Hence, the Subscriber and parties acting in concert with it including CCBIAML will abstain from voting on any resolutions at the EGM. As Mr. Wang Da Yong, the Chairman and an executive Director, was involved in the negotiation of the Subscription, he will also abstain from voting on any resolutions at the EGM.

A form of proxy for use at the EGM is enclosed with this circular. In order to be valid, the enclosed form of proxy, together with any power of attorney or other authority under which it is signed must be delivered to the office of the Company’s share registrar and transfer office in Hong Kong, Tricor Secretaries Limited, at Level 25, Three Pacific Place, 1 Queen’s Road East, 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 enclosed form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.

Warning: The Subscription is subject to the fulfillment or waiver (as the case may be) of a number of conditions precedent set out under the section headed ‘‘Conditions of the Subscription’’ in this circular, including the approval by the Independent Shareholders at the EGM for the Subscription and the Whitewash Waiver, and the granting of the Whitewash Waiver by the Executive. As such, the Subscription may or may not proceed.

Shareholders and potential investors are advised to exercise caution when dealing in the Shares, and are recommended to consult their professional advisers if they are in any doubt about their position and as to actions that they should take.

The Stock Exchange has stated that if the Stock Exchange believes that (i) a false market exist or may exist in the trading of the Shares, or (ii) there are insufficient Shares in the public hands to maintain orderly market, then it will consider exercising its discretion to suspend dealing in the Shares.

RECOMMENDATION

The Directors (including the independent non-executive Directors after taking the advice of Independent Financial Adviser) consider that the Subscription and the Whitewash Waiver are fair and reasonable and in the interests of the Company and the Independent Shareholders as a whole, and recommend the Independent Shareholders to vote in favour of the relevant resolutions to be proposed at the EGM.

Independent Shareholders are strongly advised to consider the ‘‘Letter from the Independent Board Committee’’ set out on pages 16 to 17 of this circular which contains the recommendation of the Independent Board Committee to the Independent Shareholders in respect of the Subscription and the Whitewash Waiver, and the ‘‘Letter from the Independent Financial Adviser’’ set out on pages 18 to 38

– 14 –

LETTER FROM THE BOARD

of this circular which contains the recommendation and opinions of the Independent Financial Adviser in respect of the Subscription and the Whitewash Waiver and the principal factors and reasons taken into consideration before deciding to vote in favour of or against the resolutions to be proposed at the EGM.

ADDITIONAL INFORMATION

Your attention is also drawn to the information set out in the appendices to this circular and the notice of the EGM.

Yours faithfully By the order of the Board KING STONE ENERGY GORUP LIMITED Wang Da Yong Chairman

– 15 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of the letter from the Independent Board Committee setting out its recommendation to the Independent Shareholders in relation to the Subscription and the Whitewash Waiver:

KING STONE ENERGY GROUP LIMITED

金山能源集團有限公司

(incorporated in Hong Kong with limited liability)

(Stock Code: 00663)

15 November 2012

To the Independent Shareholders

Dear Sir or Madam,

(I) PROPOSED ISSUE OF NEW SHARES; AND (II) APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

We refer to the circular of the Company dated 15 November 2012 (the ‘‘Circular’’), of which this letter forms part. Terms used herein have the same meanings as those defined in the Circular unless otherwise specified.

We have been appointed by the Board to form the Independent Board Committee to advise the Independent Shareholders as to: (i) whether the terms of the Subscription, the Whitewash Waiver and the transactions contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned; (ii) whether the terms of the Subscription, the Whitewash Waiver and the transactions contemplated thereunder are in the interests of the Company and the Shareholders as a whole; and (iii) whether the Independent Shareholders should vote in favour of the resolutions to approve the Subscription, the Whitewash Waiver and the transactions contemplated thereunder at the EGM.

Quam Capital Limited has been appointed as the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders to opine on: (i) whether the terms of the Subscription, the Whitewash Waiver and the transactions contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned; (ii) whether the terms of the Subscription, the Whitewash Waiver and the transactions contemplated thereunder are in the interests of the Company and the Shareholders as a whole; and (iii) whether the Independent Shareholders should vote in favour of the resolutions to approve the Subscription, the Whitewash Waiver and the transactions contemplated thereunder at the EGM.

– 16 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

We wish to draw your attention to the letter from the Independent Financial Adviser set out on pages 18 to 38 of the Circular which contain, among other things, its advice and recommendations regarding the Subscription, the Whitewash Waiver and the transactions contemplated thereunder and the principal factors and reasons taken into consideration for its advice and recommendations.

We also wish to draw your attention to the letter from the Board set out on pages 4 to 15 of the Circular and the additional information set out in the appendices to the Circular.

RECOMMENDATION

Having taken into account the advice and recommendations of the Independent Financial Adviser and the principal factors and reasons taken into consideration by it in arriving at its opinion, we consider that the Subscription, the Whitewash Waiver and the transactions contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned and the Subscription, the Whitewash Waiver and the transactions contemplated thereunder are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the relevant resolutions to be proposed at the EGM to approve the Subscription, the Whitewash Waiver and the transactions contemplated thereunder.

Yours faithfully, For and on behalf of

the Independent Board Committee of King Stone Energy Group Limited

Mr. Chiu Sui Keung Independent non-executive Director

Mr. Li Peiming Independent non-executive Director

Mr. Lee Chi Hwa, Joshua Independent non-executive Director

Mr. Lam Ka Wai, Graham Independent non-executive Director

Mr. Wong Chun Hung Non-executive Director

Mr. Seah Ang Non-executive Director

– 17 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the full text of a letter of advice from Quam Capital, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, which has been prepared for the purpose of incorporation into this circular, setting out its advice to the Independent Board Committee and the Independent Shareholders in respect of the Subscription and the Whitewash Waiver.

15 November 2012

The Independent Board Committee and the Independent Shareholders

Dear Sirs,

PROPOSED ISSUE OF NEW SHARES AND APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in relation to the Subscription and the Whitewash Waiver. Details of the Subscription and the Whitewash Waiver are set out in the circular of the Company dated 15 November 2012 (the ‘‘Circular’’), of which this letter forms part. Terms used in this letter shall have the same meanings as defined in the Circular unless the context otherwise defines.

The Company entered into the Subscription Agreement with the Subscriber on 12 October 2012 pursuant to which the Company has conditionally agreed to allot and issue and the Subscriber has conditionally agreed to subscribe for 1,555,555,000 Subscription Shares at the Subscription Price of HK$0.45 each in cash for a total consideration of HK$699,999,750.

As at the Latest Practicable Date, the Subscriber and parties acting in concert with it in aggregate were interested in 23,190,000 Shares, representing approximately 1.6% of the existing issued share capital of the Company. Immediately after Completion, the Subscriber and parties acting in concert with it will in aggregate be interested in 1,578,745,000 Shares, representing approximately 110.5% of the existing issued share capital of the Company as at the Latest Practicable Date and approximately 52.9% of the enlarged issued share capital of the Company (assuming that there is no change in the issued share capital of the Company other than the issue of the Subscription Shares since the Latest Practicable Date and up to Completion). Under Rule 26.1 of the Takeovers Code, the Subscriber would be obligated to make a mandatory general offer to the Shareholders for all the issued Shares and other securities of the Company not already owned or agreed to be acquired by it and any parties acting in concert with it, unless the Whitewash Waiver is obtained from the Executive. In this regard, the Subscriber has made an application to the Executive for the Whitewash Waiver in respect of the issue of the Subscription Shares. The Executive has indicated that the Whitewash Waiver would be granted, subject to, among other things, approval by the Independent Shareholders at the EGM voting by way of poll whereby the Subscriber, its associates and parties acting in concert with it and other Shareholders who are involved

– 18 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

or interested in the Subscription and the Whitewash Waiver shall abstain from voting. It is one of the conditions to the Subscription that the Whitewash Waiver be granted by the Executive and approved by the Independent Shareholders at the EGM. If the Whitewash Waiver is not granted by the Executive or approved by the Independent Shareholders at the EGM, the Subscription Agreement will not become unconditional and the Subscription will not proceed.

The Independent Board Committee comprising all the non-executive Directors, namely Mr. Wong Chun Hung, Mr. Seah Ang, Mr. Chiu Sui Keung, Mr. Li Peiming, Mr. Lee Chi Hwa, Joshua and Mr. Lam Ka Wai, Graham, has been formed to advise the Independent Shareholders on whether the terms of the Subscription Agreement and Whitewash Waiver are fair and reasonable and in the interests of the Company and the Independent Shareholders as a whole and to advise the Independent Shareholders on how to vote on the relevant resolutions at the EGM.

We, Quam Capital, have been appointed as the Independent Financial Adviser to give an independent opinion to the Independent Board Committee and the Independent Shareholders on whether the Subscription Agreement and the Whitewash Waiver are based on normal commercial terms, fair and reasonable and in the interests of the Company and the Shareholders as a whole. The Independent Board Committee has approved our appointment in such regard.

Quam Capital is not associated or connected with any members of the Group, or the Subscriber, or any of their respective substantial shareholders, directors or chief executives, or any of their respective associates, or any party acting, or presumed to be acting, in concert with any of them and accordingly, we are considered eligible to give independent advice to the Independent Board Committee and the Independent Shareholders in respect of the Subscription and the Whitewash Waiver. Apart from normal professional fees payable to us in connection with the issue of this letter of advice, no arrangement exists whereby we will receive any fees or benefits from any members of the Group, or the Subscriber, or any of their respective substantial shareholders, directors or chief executives, or any of their respective associates, or any party acting, or presumed to be acting, in concert with any of them.

BASIS OF OUR OPINION

In formulating our recommendation, we have relied on the information and facts supplied by the Company, and the opinions expressed by and the representations of the directors and the management of the Company. We have assumed that all the information and representations contained or referred to in the Circular were true, accurate and complete in all respects at the date thereof and may be relied upon. We have also assumed that all statements contained and representations made or referred to in the Circular are true, accurate and complete at the time that they were made and continue to be true until the date of the EGM. The Company is obliged to inform the Shareholders if there is any material change to the information disclosed in the Circular prior to the date of the EGM, in which case we will consider whether it is necessary to revise our opinion and inform the Independent Board Committee and the Independent Shareholders accordingly. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors, and the Directors have confirmed that no material facts have been withheld or omitted from the information provided and referred to in the Circular, which would make any statement therein misleading.

We consider that we have reviewed sufficient information currently available to reach an informed view and to justify our reliance on the accuracy of the information contained in the Circular so as to provide a reasonable basis for our recommendation. We have not, however, carried out any independent

– 19 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

verification of the information, nor have we conducted any form of in-depth investigation into the business, affairs, operations, financial position or future prospects of the Company or any of its subsidiaries or associate companies.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our recommendation, we have taken into consideration the following principal factors and reasons:

1. Review of historical performance of the Group

The Group is principally engaged in mining and selling of coal. The Group currently owns two coal mines in Inner Mongolia, namely the Hengtai coal mine and the Liaoyuan coal mine. The Hengtai coal mine had 62.86 million tonnes of reserves and 194.87 million tonnes of resources as at 30 June 2012. Its designed capacity is 6.6 million tonnes per annum. The Liaoyuan coal mine had 15.39 million tonnes of resources as at 30 June 2012 and its designed capacity is 0.9 million tonnes per annum. Further, the Group has set up a fund management company with CITIC Trust Co. Ltd. in 2011 to manage energy trust funds which invest in quality coal mines and clean energy projects in the People’s Republic of China (‘‘PRC’’). Since its launching, the size of the trust funds has reached approximately RMB1 billion.

The table below summaries the consolidated financial results of the Group for each of the three years ended 31 December 2011, as extracted from the Group’s annual reports for the year ended 31 December 2011 (the ‘‘2011 Annual Report’’) and for the year ended 31 December 2010 (the ‘‘2010 Annual Report), and for the six months ended 30 June 2012 and 30 June 2011, as extracted from its interim report for the six months ended 30 June 2012 (the ‘‘2012 Interim Report’’):

Table 1 — Summary of the consolidated financial results of the Group

	For the six months ended	For the six months ended	For the year ended	For the year ended
	30 June			31 December
	2012	2011	2011	2010	2009
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
	(unaudited)	(unaudited)	(audited)	(audited)	(audited)
Revenue	396,170	532,202	995,100	1,007,740	88,710
Cost of sales	356,835	288,698	612,248	483,055	82,450
Gross profit	39,335	243,504	382,852	524,685	6,260
(Loss)/profit before
taxation	(901,716)	146,831	105,830	(785,589)	(1,078,819)
Total
comprehensive
(loss)/income
attributable to the
owners of the
Company	(701,580)	145,082	157,139	(841,869)	(1,085,431)

– 20 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Group diversified from its business of trading in phosphorus products and optical products to the coal mining business since December 2009. As shown in table 1, the Group’s revenue increased approximately 10.4 times from approximately HK$88.7 million in 2009 to approximately HK$1,007.7 million in 2010, which was mainly due to the remarkable performance of the coal mining business. As explained in the 2010 Annual Report, the demand for coal was strong during 2010, given the lower average temperature than in the previous year with winter heating requirements since the first quarter. Further, supply of coal in Asia was tight in light of the flooding in Australia. The coal mining business has contributed substantial revenue and profit to the Group and helped the Group recorded a significant turnaround in its results from operation during the year. During 2010, the demand for both phosphorus products and optical products remained very weak and therefore revenue and gross profit from trading of phosphorus products and optical products decreased significantly compared with the previous year. The Group recorded total comprehensive loss attributable to the owners of the Company of approximately HK$841.9 million for the year ended 31 December 2010. The significant loss was mainly attributable to fair value loss of convertible notes issued in December 2009 amounting to approximately HK$1,133.1 million. Excluding the aforesaid fair value loss, the Group would have recorded a comprehensive income attributable to the owners of the Company of approximately HK$291.3 million.

For the year ended 31 December 2011, the Group recorded turnover of approximately HK$995.1 million, which were all generated from the coal mining business. As explained in the 2011 Annual Report, the decrease in revenue as compared to 2010 was mainly due to the decrease in average selling prices of raw coal produced in the Hengtai and Liaoyuan coal mines during the year as a result of the sluggish market in the region during the year. The Group’ coal mining business during the year was affected by the volatility in global markets and macro-economic controls exercised by the PRC government. Gross profit decreased approximately 27.0% from approximately HK$524.7 million for the year ended 31 December 2010 to approximately HK$382.9 million for the year ended 31 December 2011, mainly due to the decrease in average selling prices of raw coal produced and the increase in production cost. The Group recorded total comprehensive income attributable to the owners of the Company of approximately HK$157.1 million. The significant turnaround was mainly attributable to no fair value loss on convertible notes recognised in 2011 after amendments to the terms of convertible notes effective from 31 December 2010.

For the six months ended 30 June 2012, the Group recorded revenue of approximately HK$396.2 million, representing a decrease of approximately 25.6% as compared with approximately HK$532.2 million for the six months ended 30 June 2011. As explained in the 2012 Interim Report, the decrease in revenue during the period was mainly due to weak demand in the coal market which was significantly affected by the economic slowdown in the PRC during the period. In addition, the Group’s gross profit for the six months ended 30 June 2012 decrease to approximately HK$39.3 million from approximately HK$243.5 million in the previous corresponding period. The Group’s total comprehensive loss attributable to the owners of the Company for the six months ended 30 June 2012 was approximately HK$701.6 million as compared with a total comprehensive income attributable to the owners of the Company of approximately HK$145.1 million for the six months ended 30 June 2011. As explained in the 2012 Interim Report, the deterioration on the results of the Group for the six months ended 30 June 2012 was mainly attributable to (i) the substantial decline in the average selling prices of raw coal produced and the sales volume during the period, which resulted in significant decrease in revenue

– 21 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

and gross profit; and (ii) impairment of property, plant and equipment, and mining rights and other receivable during the period. The Europe debt crisis combined with the weak global and PRC economy have further dampened the coal market. As discussed in the 2012 Interim Report, since the beginning of second quarter of 2012, the imbalance between supply and demand of coal has resulted in high level of coal inventory across the PRC and caused thermal coal price drop drastically. The Hengtai and Liaoyuan coal mines, whose customers are mainly power plants in Inner Mongolia, unavoidably suffered from a downturn of sales volume and revenue.

The table below summaries the consolidated statement of financial position of the Group as at 30 June 2012, 31 December 2011, 31 December 2010 and 31 December 2009 as extracted from the 2012 Interim Report, 2011 Annual Report and 2010 Annual Report respectively:

Table 2 — Summary of the consolidated statement of financial position of the Group

	As at
	30 June	As at 31 December
	2012	2011	2010	2009
	HK$’000	HK$’000	HK$’000	HK$’000
	(unaudited)	(audited)	(audited)	(audited)
Non-current assets	4,562,762	5,303,779	4,095,774	3,482,388
Current assets	369,370	755,324	1,064,694	268,690
Current liabilities	1,732,730	2,014,622	1,203,187	386,005
Non-current liabilities	1,439,124	1,546,955	1,928,547	3,862,240
Net current (liabilities)	(1,363,360)	(1,259,298)	(138,493)	(117,315)
Net assets/(liabilities)
attributable to the
owners of the Company	1,682,042	2,376,998	1,924,933	(577,551)
Current ratio	0.21	0.37	0.88	0.70

The Group’s non-current assets and current assets fluctuate during the three years ended 31 December 2011 and the six months ended 30 June 2012. The main component of the assets of the Group was the mining rights and property, plant and equipment, which represents approximately 88.6%, 84.4%, 70.7% and 86.3% of its total assets as at 30 June 2012, 31 December 2011, 31 December 2010 and 31 December 2009 respectively.

The Group had total liabilities of approximately HK$3,171.9 million as at 30 June 2012, which mainly comprised interest-bearing bank borrowings of approximately HK$1,257.3 million, other payables and accruals of approximately HK$894.6 million, deferred tax liabilities of approximately HK$440.9 million and convertible notes of approximately HK$231.9 million. Out of the HK$1,257.3 million of interest-bearing bank borrowings as at 30 June 2012, approximately HK$585.9 million of its bank loans are payable within one year. The mining right of the Hengtai coal mine is pledged for its bank loans as at the Latest Practicable Date. The gearing ratio of the Group, measured as net debt (being trade and bills payables, other payables and accruals and interest-bearing bank borrowings, less cash and cash equivalents) to total capital (being liability component of convertible notes and equity attributable to owners of the Company), was 1.15 as at 30 June 2012, as compared to 0.91 as at 31 December 2011.

– 22 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Group recorded net current liabilities of approximately HK$1,363.4 million, HK$1,259.3 million, HK$138.5 million and HK$117.3 million as at 30 June 2012, 31 December 2011, 31 December 2010 and 31 December 2009 respectively. The net current liabilities position indicates the existence of a material uncertainty that may cast significant doubt about the Group’s ability to operate as a going concern. The current ratio of the Group had also shown a downward trend, which decreased from 0.70 as at 31 December 2009 to 0.21 as at 30 June 2012.

Table 3 — Consolidated statement of financial position of the Group

	For the six
	months
	ended
	30 June	For the year	ended 31 December
	2012	2011	2010	2009
	HK$’000	HK$’000	HK$’000	HK$’000
	(unaudited)	(audited)	(audited)	(audited)
Net cash inflows/(outflows)
from/(used in):
— operating activities	149,436	784,566	455,385	(35,962)
— investing activities	(177,111)	(1,097,991)	(680,284)	42,274
— financing activities	20,113	(252,453)	734,352	7,994
Net (decrease)/increase in
cash and cash equivalents	(7,562)	(565,878)	509,453	14,306
Cash and cash equivalents at
end of year/period	44,430	51,928	625,216	98,739

The Group recorded net decrease in cash and cash equivalents for the year ended 31 December 2011 and the six months ended 30 June 2012. The cash and cash equivalents of the Group were approximately HK$625.2 million, HK$51.9 million and HK$44.4 million as at 31 December 2010, 31 December 2011 and 30 June 2012 respectively. As advised by the Company, the decreasing trend was mainly due to purchases of property, plant and equipment for the mining operation, the acquisition of the Liaoyuan coal mine and decrease in cash flow from financing activities.

Having considered (i) the Group had net current liabilities of approximately HK$1,363.4 million as at 30 June 2012; (ii) the Group had high gearing ratio of approximately 1.15 as at 30 June 2012 and had increased from 0.91 as at 31 December 2011; (iii) that the Group’s current ratio decreased from approximately 0.37 as at 31 December 2011 to approximately 0.21 as at 30 June 2012; (iv) the Group had net decrease in cash and cash equivalents for the year ended 31 December 2011 and the six months ended 30 June 2012; (v) the Group had large amount of interest-bearing bank borrowings of approximately HK$1,257.3 million as at 30 June 2012 as well as unfavourable commercial lending market due to issues relating to European sovereign debt; and (vi) the difficult market environment with weak global and PRC economy, high level of coal inventory across the PRC and substantial decline in thermal coal prices, we are of the view that it is necessary and expedient for the Group to preserve its cash resources and alleviate its indebtedness level so as to improve the overall liquidity and financial position in view of the

– 23 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

current uncertain business and economic environment globally. Therefore, we consider that the Subscription could enable the Company to raise additional equity funding in order to strengthen its financial position.

2. Background and reasons for the Subscription and use of proceeds

As discussed in section 1 above, the Group had net current liabilities of approximately HK$1,363.4 million as at 30 June 2012. There is a material uncertainty that may cast significant doubt about the Group’s ability to operate as a going concern. As stated in the 2012 Interim Report, the Directors estimate that the net operating cash inflow generated by the Group’s coal mining business shall be adequate to meet with the liabilities and capital commitment of the Group as and when they fall due. Further, Mr. Wang Da Yong, the Chairman of the Company and a substantial Shareholder, has confirmed his ability and agreed to provide financial support to the Group to enable it to meet with its liabilities as and when they fall due in the foreseeable future. In addition, the Directors are also considering/taking other alternatives to monitor and improve the cash flows of the Group including extension of repayment dates of existing bank loans and other financing arrangements. Notwithstanding the above measures taken by the Company, the financial position of the Group could not be substantially enhanced without the availability of substantial external financing.

As stated in the 2012 Interim Report, the Company expects that the economic environment worldwide will remain shaky in the remaining of 2012. The Company expects that while maintaining stable economic growth, the PRC government will continue to adopt tight policies to suppress domestic inflation by limiting the upside of oil and coal prices. However, with coal remains to be the key raw materials in the PRC’s energy consumption structure, the Company is optimistic in the long-term prospect of the coal sector. As stated in the 2012 Interim Report, the Group will step up effort to speed up the application for a potential new mine adherent to the Liaoyuan coal mine. Meanwhile, the Group will actively explore for quality mergers and acquisition projects to enhance the Group’s coal resources and production scale. Considering future liquidity, the Group will line up with major banks in the PRC and Hong Kong for the funding needs for future development. At the same time, the Group will further strengthen its capital base by raising equity funds and introducing quality long-term investors.

As stated in the letter from the Board in the Circular, the Company considers that the Subscription by the Subscriber provides a good opportunity for the Company to raise long term equity fund to repay its outstanding liabilities, fund its operation, improve the financial position of the Company and, where appropriate, seek appropriate investment opportunities. We consider that the Subscription is in line with the Group’s business strategy as discussed above.

The Subscriber is intended to be the general partner of the Fund to be set up as a private equity fund for the purpose of the Subscription. The controlling shareholders of the Subscriber are (i) Beida Jade Bird Universal Sci-Tech (Cayman) Development Company Limited, a wholly owned subsidiary of Beijing Beida Jade Bird Universal Sci-Tech Company Limited (‘‘Beida Jade Bird’’), the issued H-shares of which are listed on the Growth Enterprise Market of the Stock Exchange; and (ii) Mr. Benjamin Clark Danielson. The principal businesses of Beida Jade Bird and its subsidiaries (the ‘‘Beida Jade Bird Group’’) are research, development, manufacture, marketing and sale of wireless fire alarm systems and related products, the development of travel and leisure

– 24 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

business and investment holding. As disclosed in its annual report, the Beida Jade Bird Group had audited turnover of approximately RMB369.7 million and net profit of approximately RMB69.6 million for the year ended 31 December 2011. As disclosed in its interim report, the Beida Jade Bird Group had unaudited total assets of approximately RMB1,242.6 million and net asset value of approximately RMB998.3 million as at 30 June 2012. The Beida Jade Bird Group also manages equity fund investments, which have investments in various industries, including education, insurance, baby products, light-emitting diode and property development. The Beida Jade Bird Group has also recently invested in the winery business. As stated in the letter from the Board in the Circular, Mr. Danielson has extensive experience in investment and fund management in natural resources sector such as coal and other mining areas. Mr. Danielson has been managing and monitoring the activities of the fund portfolio companies as well as sourcing, evaluating and executing investments for a United States-based private equity fund (which is not directly or indirectly involved in the Subscription) focused in energy-related industries. Having considered the background of the Subscriber, whose controlling shareholders have extensive business network and investment experience, the Directors are confident that the Subscriber will bring in additional resources and investment opportunities to the Company that is beneficial to the Company and the Shareholders as a whole.

As stated in the letter from the Board in the Circular, the Subscriber will appoint six Directors to the Board as soon as permissible under the Takeovers Code, and intends to review the composition of the Board thereafter. Such changes reflect the expected involvement of the Subscriber in the Board. Having considered the extensive business network and investment experience of the controlling shareholders of the Subscriber, we are of the view that the Subscription will allow the Company to leverage on the experience, expertise and networks of the controlling shareholders of the Subscriber to pursue its business development.

The net proceeds from the Subscription, after deduction of all related expenses, is approximately HK$663 million. It is the intention of the Group to apply 30% to 50% of the net proceeds from the Subscription to the repayment of liabilities and the balance of the net proceeds will be applied to investments in new acquisitions or business ventures when suitable opportunities arise in the future and/or general working capital of the Group. The Company confirms that no acquisition or investment opportunity has been identified as at the Latest Practicable Date.

Approximately HK$585.9 million of the Group’s bank loans as at 30 June 2012 were due within one year. As stated in the 2011 Annual Report, the Directors are considering/taking alternatives to monitor and improve the cash flows of the Group, including extension of repayment dates of existing bank loans and other liabilities. Further, as stated in the 2012 Interim Report, the Directors estimate that the net operating cash inflow generated by the Group’s coal mining business shall be adequate to meet the liabilities of the Group as and when they fall due. In view of the aforesaid and taking into consideration that it will be beneficial for the Group to enhance its coal resources and production scale from quality mergers and acquisition projects, notwithstanding we consider that it is necessary and expedient for the Group to preserve its cash resources and alleviate its indebtedness level so as to improve the overall liquidity and financial position, we consider it is reasonable for the Company to apply a portion of the net proceeds from the Subscription to investments in new acquisitions or business ventures. The use of the net proceeds

– 25 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

from the Subscription as general working capital is also expected to improve the liquidity and financial position of the Group. Accordingly, we consider the Company’s usage of the net proceeds from the Subscription is reasonable and in the interest of the Company given the circumstances.

Having considered the foregoing, we consider that it would be beneficial for the Company to enter into the Subscription Agreement for the following reasons:

(i) it is necessary and expedient for the Company to raise additional equity so as to reduce its indebtedness and improve its financial position, given the Group had net current liabilities and high gearing level which indicate the existence of a material uncertainty that may cast significant doubt about the Group’s ability to operate as a going concern;
(ii) having considered the difficult market environment with weak global and PRC economy, high level of coal inventory across the PRC and substantial decline in thermal coal prices, it would be beneficial for the Group to preserve its cash resources and alleviate its present/future liabilities so as to improve the overall liquidity and financial stability position in view of the current uncertain business and economic environment globally;
(iii) the Company currently intends to apply 30% to 50% of the net proceeds from the Subscription to the repayment of liabilities. Therefore, the Group’s total liabilities is expected to be reduced by approximately HK$331.5 million at most to approximately HK$2,840.4 million from approximately HK$3,171.9 million as at 30 June 2012 and the gearing ratio is also expected to be reduced accordingly;
(iv) it is the intention of the Company that it may apply a portion of the net proceeds from the Subscription to finance new acquisitions or business ventures, which is in line with the Group’s business strategy of actively exploring quality mergers and acquisition projects to enhance the Group’s coal resources and production scale as discussed in this section above. According to the Company, no such investment opportunities had been identified as at the Latest Practicable Date. Nonetheless, we consider that the Subscription would enhance the capital base of the Company at the outset and allow the Company to make timely commitment in any investment opportunity which could create value for Shareholders;
(v) we have reviewed the background of the controlling shareholders of the Subscriber and considered that they have extensive business network. The Group is expected to benefit from the Beida Jade Bird Group’s experience in managing equity fund investments for developing and managing the Group’s newly developed trust fund management business. The Group is also expected to benefit from Mr. Benjamin Clark Danielson’s extensive experience in investment and fund management in natural resources sector such as coal and other mining areas for developing the Group’s existing coal mining business. Further, with the Beida Jade Bird Group being engaged in a wide range of businesses and equity fund investments and Mr. Danielson being engaged in private equity fund management, it is expected that they have access to various business and investment opportunities, including those in the coal mining industry. Therefore, it is expected that their business network will allow the Company to access a large pool of

– 26 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

investment opportunities. Accordingly, we concur with the Directors’ view that it is expected the Subscriber will bring in additional resources and investment opportunities to the Company that is beneficial to the Company and the Shareholders as a whole; and

(vi) we consider that the dilution effect of the Subscription on the shareholding in the Company of the existing public Shareholders is justifiable so far as the interest of the Independent Shareholders is concerned, details of which are discussed in section 6 below.

Having considered the foregoing, we concur with the Directors’ view that the entering into of the Subscription Agreement is in the interests of the Company and the Shareholders as a whole.

3. Other alternative methods of financing

As stated in the letter from the Board in the Circular, the Directors have considered other means of fund raising, namely equity financing by way of a rights issue and debt financing by way of bank borrowings. However, given the then trading prices of the Shares and the funding needs of the Group, the Company had difficulty in identifying underwriter to fully underwrite the rights issue as required under the Listing Rules. The Directors also had difficulty in identifying financial institutions to extend such amount of facility to the Company at affordable terms due to the current financial condition of the Group.

It is acknowledged that equity financing by way of a rights issue or open offer would have afforded fairer treatment to existing Shareholders by offering new Shares on a pro rata basis, thereby avoiding a material dilution to the interests of the existing Shareholders in the Company. However, in light of the current financial condition of the Group and the difficult market environment with weak global and PRC economy, high level of coal inventory across the PRC and substantial decline in thermal coal prices, it would be difficult for the Company to secure interests from financial institutions at reasonable terms to conduct equity fund raising activities given the current highly volatile market condition. We also consider that it would be difficult for the Company to identify placing agent to place new Shares for the Company given the current market condition. Further, debt financing, such as bank borrowings and issue of bonds or notes, would impose additional interest burden to the Group and further increase the already high gearing level of the Group. Given the net current liabilities position of the Group, it would be difficult for the Group to obtain additional bank borrowings at affordable terms. Therefore, we concur with the Directors that such financing means may not be appropriate to the Group given its current financial position and, taking into consideration the potential benefits of the Subscription, we consider that the Subscription is the current best available option of financing for the Company given the circumstances.

4. Principal terms of the Subscription

According to the Subscription Agreement, the Company has conditionally agreed to allot and issue and the Subscriber has conditionally agreed to subscribe for 1,555,555,000 Subscription Shares at the Subscription Price of HK$0.45 each in cash for a total consideration of HK$699,999,750. The Subscription Shares represent approximately 108.88% of the existing issued share capital of the Company as at the Latest Practicable Date and approximately 52.12% of the issued share capital of the Company as enlarged by the allotment and issue of the Subscription

– 27 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Shares (assuming that there is no change in the issued share capital of the Company other than the issue of the Subscription Shares since the Latest Practicable Date and up to Completion). The Subscription Shares, when issued and fully paid, will rank pari passu in all respects among themselves and with all the Shares in issue at the date of allotment and issue of the Subscription Shares.

The consideration for the Subscription shall be satisfied in cash and payable by the Subscriber in the following manner:

(i) HK$10,000,000 was paid within five Business Days after the date of the Subscription Agreement; and
(ii) HK$689,999,750 payable upon Completion.

The Subscription Price of HK$0.45 represents:

(a) a discount of 6.25% to the closing price of HK$0.48 per Share as quoted on the Stock Exchange on the Last Trading Date;
(b) a discount of approximately 8.35% to the average of the closing prices of HK$0.491 per Share as quoted on the Stock Exchange for the last 5 trading days up to and including the Last Trading Date;
(c) a discount of approximately 11.24% to the average of the closing prices of approximately HK$0.507 per Share as quoted on the Stock Exchange for the last 10 trading days up to and including the Last Trading Date;
(d) a premium of approximately 4.17% over the average of the closing prices of HK$0.432 per Share as quoted on the Stock Exchange for the last 30 trading days up to and including the Last Trading Date;
(e) a discount of approximately 9.09% to the closing price of HK$0.495 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and
(f) a discount of approximately 61.77% to the unaudited net asset value per Share of approximately HK$1.177 as at 30 June 2012 (based on the unaudited consolidated net assets attributable to owners of the Company of approximately HK$1,682.0 million as at 30 June 2012 as shown in the 2012 Interim Report and 1,428,729,168 Shares in issue as at 30 June 2012).

As stated in the letter from the Board in the Circular, the Subscription Price of HK$0.45 per Subscription Share was determined after arm’s length negotiations between the Company and the Subscriber taking into account the then market price of the Shares.

– 28 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Historical performance of Share price

The chart below shows the Subscription Price and the closing prices of the Shares as quoted on the Stock Exchange during the period commencing from 13 October 2011 to the Latest Practicable Date (the ‘‘Review Period’’), being the 12-month period prior to the date of the Subscription Agreement, up to and including the Latest Practicable Date:

Chart 1 — Share price performance for the Review Period

==> picture [384 x 233] intentionally omitted <==

Source: Website of the Stock Exchange (www.hkex.com.hk)

– 29 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

During the Review Period, the closing price of the Shares showed a downward trend in general, with the highest closing price and the lowest closing price of the Shares ranging from HK$0.345 (on 1 August 2012) to HK$1.09 (on 22 February 2012). The Subscription Price represents a discount of approximately 58.7% to the highest closing price and a premium of approximately 30.4% over the lowest closing price of the Shares during the Review Period and falls within the said range. The Subscription Price represents a discount of approximately 27.4% to the average closing price of approximately HK$0.62 during the Review Period.

As advised by the Directors, the Subscription Price was determined after arm’s length negotiations between the Company and the Subscriber by reference to the trading prices of the Shares in around August and September 2012. We have reviewed the recent trend of Share prices. The chart below shows the Subscription Price and the closing prices of the Shares as quoted on the Stock Exchange for the three month period up to and including the Last Trading Date (the ‘‘ThreeMonth-Period’’):

Chart 2 — Share price performance for the Three-Month-Period

==> picture [319 x 140] intentionally omitted <==

Source: Website of the Stock Exchange (www.hkex.com.hk)

– 30 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

During the Three-Month-Period, the Shares were trading at a price lower than the Subscription Price for most of the time, being approximately 81.25% of the Three-Month-Period, except for 23 August 2012 and from 26 September 2012 onwards. The Subscription Price of HK$0.45 represents a premium of approximately 10.71% over the average closing price of approximately HK$0.406 during the Three-Month-Period. We have also noted that the Subscription Price represents (i) a premium of approximately 11.0% over the average closing price of approximately HK$0.405 per Share for the last 60 trading days up to and including the Last Trading Date; and (ii) a premium of approximately 4.17% over the average closing price of approximately HK$0.432 per Share for the last 30 trading days up to and including the Last Trading Date.

We have also reviewed the announcements of the Company published on the website of the Stock Exchange during the three month period prior to the date of the Subscription Agreement. The Company did not issue any announcement relating to any price-sensitive information. In view of the unprofitable position of the Group as shown in the 2012 Interim Report, we are therefore of the view that the significant increase in the Share price on 23 August 2012 and from 26 September 2012 onwards was not supported by any improvement in the financial performance of the Group.

We have also considered whether it is appropriate to compare the Subscription Price with the net asset value per Share. We note that the Share price has been trading consistently well below its net asset value attributable to the owners of the Company per Share of approximately HK$1.177 and HK$1.664 as at 30 June 2012 and 31 December 2011 respectively, which reflects that the market has not been attaching much importance to the net asset value in the valuation of the Shares. As such, we consider that comparison of the Subscription Price with the net asset value per Share will not be appropriate.

– 31 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Trading liquidity of the Shares

The chart below sets out the daily trading volume of the Shares during the Review Period:

Chart 3 — Trading volume of the Shares

==> picture [361 x 216] intentionally omitted <==

Source: Website of the Stock Exchange (www.hkex.com.hk)

– 32 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The table below sets out the monthly trading volume, the average daily number of Shares traded per month and the respective percentage of average daily trading volume compared with the issued share capital and the public float respectively during October 2011 up to the Latest Practicable Date:

Table 4 — Trading volume of the Shares

				Percentage of
			Percentage of	average daily
			average daily	trading volume to
			trading volume to	total number of
			total number of	Shares held by the
	Total monthly	Average daily	Shares	public
Month	trading volume	trading volume	in issue	Shareholders
	(Number of Shares)	(Number of Shares)	(%)	(%)
		(Note 1)	(Note2)	(Note 3)
2011
October	49,972,226	2,498,611	0.17%	0.22%
November	60,475,597	2,748,891	0.19%	0.24%
December	84,988,141	4,249,407	0.30%	0.38%
2012
January	30,966,250	1,720,347	0.12%	0.15%
February	180,411,919	8,591,044	0.60%	0.76%
March	81,330,100	3,696,823	0.26%	0.33%
April	29,557,000	1,642,056	0.11%	0.15%
May	24,653,000	1,120,591	0.08%	0.10%
June	27,025,179	1,286,913	0.09%	0.11%
July	63,313,700	3,014,938	0.21%	0.27%
August	41,913,884	1,822,343	0.13%	0.16%
September	90,612,250	4,530,613	0.32%	0.40%
October	66,541,300	3,914,194	0.27%	0.35%
November (up to the
Latest Practicable
Date)	7,647,917	955,990	0.07%	0.08%

Source: Website of the Stock Exchange (www.hkex.com.hk)

Notes:

Average daily trading volume is calculated by dividing the total trading volume of the Shares for the month/ period by the number of trading days during the month/period.
Based on 1,428,729,168 Shares in issue as at the Latest Practicable Date.
Based on 1,126,754,668 Shares held by public Shareholders as at Latest Practicable Date.

As illustrated above, during the period under review, the average daily trading volume of the Shares as a percentage of the total number of issued Shares ranged from 0.07% to 0.60% while the average daily trading volume of the Shares as a percentage of the total number of Shares held by

– 33 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

the public Shareholders ranged from 0.08% to 0.76%. Thus, the Share had not been actively traded historically. Given the thin liquidity of the Shares and the net current liabilities position of the Group as at 30 June 2012, we consider that it would be difficult for the Company to conduct equity fund raising activities such as placing, rights issue or open offer with similar pricing of that of the Subscription under the current market condition.

Having considered:

(i) the Group’s difficulty in obtaining alternative means of financing in view of the current market conditions and the Company’s current financial position;
(ii) the Subscription represents the current best available option for the Company to obtain additional funding for repaying its debts, its working capital and future development;
(iii) the Subscription Price represents (a) a premium of approximately 10.71% over the average closing price of the Shares of the Three-Month-Period, (b) a premium of approximately 11.0% over the average closing price of the Shares for the last 60 trading days up to and including the Last Trading Date; and (c) a premium of approximately 4.17% over the average closing price of the Shares for the last 30 trading days up to and including the Last Trading Date;
(iv) the Group’s current ratio and gearing level deteriorated during the six months ended 30 June 2012 and the Subscription would have an overall positive effect on the financial position of the Group in terms of net asset value, working capital, current ratio and gearing level upon Completion;
(v) a portion of the net proceeds from the Subscription is intended to be used towards repayment of the Group’s liabilities, thus improving the Group’s gearing ratio, and reducing its interest burden; and
(vi) the potential benefits from the Subscriber being a controlling Shareholder which allows the Company to leverage on the experience, expertise and networks of the Beida Jade Bird Group and Mr. Benjamin Clark Danielson and gain access to a large pool of investment opportunities,

we are of the view that the terms of the Subscription, including the Subscription Price, are fair and reasonable so far as the Independent Shareholders are concerned.

5. Financial effects of the Subscription

Working capital

According to the 2012 Interim Report, the unaudited current assets and current liabilities of the Group amounted to approximately HK$369.4 million and HK$1,732.7 million respectively as at 30 June 2012, translating into a current ratio (current assets/current liabilities) of approximately 0.21 and net current liabilities of approximately HK$1,363.4 million. The Company is expected to raise net proceeds of approximately HK$663 million

– 34 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

from the Subscription, hence the liquidity and cash position of the Group will be improved immediately following Completion. Accordingly, the working capital and the current ratio of the Group are expected to be improved upon Completion.

Net asset value

According to the 2012 Interim Report, the Group’s unaudited consolidated net assets value attributable to owners of the Company as at 30 June 2012 amounted to approximately HK$1,682.0 million translating into an unaudited net asset value per Share of approximately HK$1.177 (based on 1,428,729,168 Shares in issue as at 30 June 2012). Upon Completion, the net asset value attributable to owners of the Company will be increased as the net proceeds from the Subscription would increase the share capital of the Group. Accordingly, the Subscription is expected to increase the net asset value attributable to owners of the Company by approximately HK$663 million to approximately HK$2,345.0 million. However, it should be noted that, since the Subscription Price of HK$0.45 is at a discount of approximately 61.77% to the net asset value per Share of approximately HK$1.177 as at 30 June 2012, there will be a substantial dilution effect on the net asset value per Share immediate after the Completion. For illustration purpose, the net asset value per Share as at 30 June 2012 would be diluted to approximately HK$0.786 assuming the Completion Date was on 30 June 2012.

Gearing and current ratios

The gearing ratio of the Group, measured as net debt (being trade and bills payables, other payables and accruals and interest-bearing bank borrowings, less cash and cash equivalents) to total capital (being liability component of convertible notes and equity attributable to owners of the Company), increased from approximately 0.91 as at 31 December 2011 to approximately 1.15 as at 30 June 2012. Meanwhile, the Group’s current ratio decreased from approximately 0.37 as at 31 December 2011 to approximately 0.21 as at 30 June 2012. Upon Completion, the gearing ratio and current ratio of the Group are expected to improve as a result of the increase in working capital of approximately HK$663 million, being the net proceeds from the Subscription.

In view of the above, the Subscription is expected to have an overall positive effect on the financial position of the Group in terms of total net asset value, working capital, current ratio and gearing level upon Completion. In spite of the dilution effect on the net asset value per Share, the Group’s overall financial position will be strengthened upon Completion. In light of the need of new capital to improve the financial condition of the Group, we consider the decrease in the net asset value per Share justifiable. Accordingly, we are of the view that the Subscription is in the interest of the Company and the Shareholders as a whole.

Shareholders should note that the above analyses are for illustrative purposes only and do not purport to represent the financial position of the Group upon Completion.

– 35 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

6. Effect on the shareholding structure of the Company

Set out below is the shareholding structure of the Company as at the Latest Practicable Date and immediately after Completion, the conversion of the Company’s outstanding convertible notes in full and all the Company’s outstanding share options being fully exercised (assuming that there is no change in the issued share capital of the Company other than the issue of the Subscription Shares since the Latest Practicable Date and up to Completion):

Table 5 — Shareholding structure of the Group

As at the Latest Practicable Date Number of Shares Approximate % of issued share capital — — 23,190,000 1.6 23,190,000 1.6 8,979,000 0.6 160,082,000 11.2 43,838,500 3.1 65,885,000 4.6 — — — — — — 301,974,500 21.1 1,126,754,668 78.9 — — — — 1,428,729,168 100.0	As at the Latest Practicable Date Number of Shares Approximate % of issued share capital — — 23,190,000 1.6 23,190,000 1.6 8,979,000 0.6 160,082,000 11.2 43,838,500 3.1 65,885,000 4.6 — — — — — — 301,974,500 21.1 1,126,754,668 78.9 — — — — 1,428,729,168 100.0	Immediately following Completion Number of Shares Approximate % of issued share capital 1,555,555,000 52.1 23,190,000 0.8 1,578,745,000 52.9 8,979,000 0.3 160,082,000 5.3 43,838,500 1.5 65,885,000 2.2 — — — — — — 1,857,529,500 62.2 1,126,754,668 37.8 — — — — 2,984,284,168 100.0	Immediately following Completion Number of Shares Approximate % of issued share capital 1,555,555,000 52.1 23,190,000 0.8 1,578,745,000 52.9 8,979,000 0.3 160,082,000 5.3 43,838,500 1.5 65,885,000 2.2 — — — — — — 1,857,529,500 62.2 1,126,754,668 37.8 — — — — 2,984,284,168 100.0	Immediate following (i) Completion; (ii) full conversion of the outstanding convertible notes; and (iii) all the outstanding share options being fully exercised (Note 4) Number of Shares Approximate % of issued share capital (Note 5) 1,555,555,000 48.0 23,190,000 0.7 1,578,745,000 48.7 13,979,000 0.4 160,082,000 4.9 43,838,500 1.4 65,885,000 2.0 3,750,000 0.2 1,500,000 0.1 500,000 0.0 1,868,279,500 57.7 1,126,754,668 34.8 231,364,000 7.1 13,866,000 0.4 3,240,264,168 100.0	Immediate following (i) Completion; (ii) full conversion of the outstanding convertible notes; and (iii) all the outstanding share options being fully exercised (Note 4) Number of Shares Approximate % of issued share capital (Note 5) 1,555,555,000 48.0 23,190,000 0.7 1,578,745,000 48.7 13,979,000 0.4 160,082,000 4.9 43,838,500 1.4 65,885,000 2.0 3,750,000 0.2 1,500,000 0.1 500,000 0.0 1,868,279,500 57.7 1,126,754,668 34.8 231,364,000 7.1 13,866,000 0.4 3,240,264,168 100.0
23,190,000 8,979,000 160,082,000 43,838,500 65,885,000 — — —	1.6 0.6 11.2 3.1 4.6 — — —	1,578,745,000 8,979,000 160,082,000 43,838,500 65,885,000 — — —	52.9 0.3 5.3 1.5 2.2 — — —	1,578,745,000 13,979,000 160,082,000 43,838,500 65,885,000 3,750,000 1,500,000 500,000	48.7 0.4 4.9 1.4 2.0 0.2 0.1 0.0
301,974,500 1,126,754,668 — —	21.1 78.9 — —	1,857,529,500 1,126,754,668 — —	62.2 37.8 — —	1,868,279,500 1,126,754,668 231,364,000 13,866,000	57.7 34.8 7.1 0.4
1,428,729,168	100.0	2,984,284,168	100.0	3,240,264,168	100.0

Joint Ascent Limited is held as to 80% and 20% by Mr. Wang Da Yong and Mr. Tian Wenwei, both being executive Directors, respectively.

– 36 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

China Coal and Coke Investment Holding Company Limited is wholly owned by Sino Bridge Investments Limited which is a company wholly and beneficially owned by Mr. Wang Da Yong, the Chairman and an executive Director.
Sky Circle International Limited is beneficially owned by Mr. Wang Da Yong, the Chairman and an executive Director.
As at the Latest Practicable Date, Simsen International Corporation, a company listed on the Stock Exchange, together with its subsidiary held the outstanding convertible notes which entitle them to convert into an aggregate of 231,364,000 Shares at the conversion price of HK$1.25 per Share (subject to adjustment).
Number of Shares held by Mr. Chiu Sui Keung represents approximately 0.02% of the issued share capital.

The shareholding in the Company held by the existing public Shareholders will be diluted from approximately 78.9% as at the Latest Practicable Date to approximately 37.8% immediately after the allotment and issue of the Subscription Shares. The shareholding of public Shareholders in the Company will be approximately 42.3% immediately after the issue of the Subscription Shares, the conversion of the Company’s outstanding convertible notes in full and all the Company’s outstanding share options being fully exercised. Notwithstanding the dilution of the shareholding in the Company of the existing public Shareholders, having taken into account (i) the benefits of entering into the Subscription Agreement as discussed in section 2 above; (ii) that the Subscription will improve the Group’s financial position; (iii) that it would be difficult for the Group to raise capital of a similarly significant amount as that from the Subscription by other fund raising means such as a rights issue, open offer or debt financing, as discussed in section 3 above; and (iv) that the terms of the Subscription Agreement are fair and reasonable so far as the Independent Shareholders are concerned, we are of the view that the dilution effect on the shareholding of the existing public Shareholders in the Company is justifiable so far as the interest of the Independent Shareholders is concerned.

7. Whitewash Waiver

As at the Latest Practicable Date, the Subscriber and parties acting in concert with it in aggregate were interested in 23,190,000 Shares, representing approximately 1.6% of the existing issued share capital of the Company. Immediately after Completion, the Subscriber and parties acting in concert with it will in aggregate be interested in 1,578,745,000 Shares, representing approximately 52.9% of the issued share capital of the Company as enlarged by the allotment and issue of the Subscription Shares (assuming that there is no change in the issued share capital of the Company other than the issue of the Subscription Shares since the Latest Practicable Date and up to Completion). Under Rule 26.1 of the Takeovers Code, the Subscriber would be obliged to make a mandatory general offer to the Shareholders for all the issued Shares and other securities of the Company not already owned or agreed to be acquired by it and any parties acting in concert with it. In this regard, the Subscriber has made an application to the Executive for the Whitewash Waiver and the Executive has indicated that the Whitewash Waiver, if granted, will be subject to, among other things, the approval of the Independent Shareholders at the EGM by way of poll.

The Subscription is conditional upon, among other things, the granting of the Whitewash Waiver by the Executive and the approval of the Whitewash Waiver by the Independent Shareholders at the EGM. The aforesaid condition is not capable of being waived. If the Whitewash Waiver is not granted by the Executive or not approved by the Independent Shareholders at the EGM, the Subscription will not proceed.

– 37 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Given the aforesaid potential benefits of the Subscription and that the terms of the Subscription Agreement are fair and reasonable so far as the Independent Shareholders are concerned, we are of the view that the granting of the Whitewash Waiver is fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Shareholders should note that upon Completion, the Subscriber and parties acting in concert with it will hold more than 50% of the voting rights of the Company upon Completion. In the event that the aggregate shareholding of the Subscriber and parties acting in concert with it in the Company exceed 50% upon Completion, and the Whitewash Waiver condition is fulfilled, the Subscriber and parties acting in concert with it may increase their shareholding in the Company in the future without incurring any further obligation to make a general offer under Rule 26 of the Takeovers Code.

RECOMMENDATIONS

Having taken into account the above principal factors and reasons, in particular,

(i) the Group’s difficulty in obtaining alternative means of financing in view of the current market conditions and the Company’s current financial position;
(ii) the Subscription represents the current best available option for the Company to obtain additional funding for its working capital and future development;
(iii) the Group’s current ratio and gearing level deteriorated during the six months ended 30 June 2012 and the Subscription would have an overall positive effect on the financial position of the Group in terms of net asset value, working capital, current ratio and gearing upon Completion; and
(iv) the Subscription Price represents a premium of approximately 10.71% over the average closing price of the Shares of the Three-Month-Period,

we consider that the terms of the Subscription Agreement and the Whitewash Waiver are conducted on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned, and are in the interests of the Company and the Independent Shareholders as a whole. Accordingly, we advise the Independent Shareholders as well as the Independent Board Committee to advise the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Subscription Agreement and the Whitewash Waiver.

Yours faithfully, For and on behalf of Quam Capital Limited Gary Mui

Managing Director

– 38 –

FINANCIAL INFORMATION

APPENDIX I

1. FINANCIAL SUMMARY

The following financial summary in respect of the audited consolidated financial information of the Group for each of the three years ended 31 December 2011 (the auditors’ reports on which are not qualified) and the unaudited consolidated financial information of the Group for the six months ended 30 June 2012 has been extracted from the Company’s 2009, 2010 and 2011 annual reports and the 2012 interim report.

According to the opinion from Ernst & Young, the auditors of the Company, the consolidated financial statements of the Group for each of the three years ended 31 December 2011 give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2009, 2010 and 2011, and of the Group’s profit/loss and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the Hong Kong Companies Ordinance. Without qualifying its opinion, the auditors of the Company draw attention to the existence of a material uncertainty that may cast significant doubt about the Group’s ability to continue as a going concern in respect of the financial position of the Group as at 31 December 2011. There are no extraordinary and exceptional items in the audited financial statements of the Group for each of the three years ended 31 December 2011 and the six months ended 30 June 2012.

RESULTS Revenue Cost of sales Gross profit Impairment of goodwill Fair value loss on convertible notes Gain on bargain purchase of a subsidiary Other income and gains, net Selling and distribution costs Administrative expenses Other expenses Finance costs Share of profit/(loss) of a jointly-controlled entity	Year ended 31 December 2009 2010 2011 (Audited) (Audited) (Audited) HK$’000 HK$’000 HK$’000 88,710 1,007,740 995,100 (82,450) (483,055) (612,248) 6,260 524,685 382,852 (14,949) — — (1,053,831) (1,133,144) — — — 29,948 11,358 29,823 52,195 (5,731) (4,220) (4,632) (20,441) (107,838) (182,754) — (10,829) — (1,485) (84,066) (171,751) — — (28)	Six months ended 30 June 2012 (Unaudited) HK$’000 396,170 (356,835) 39,335 — — — 32,470 (4,063) (52,534) (855,734) (63,901) 2,711

– 39 –

FINANCIAL INFORMATION

APPENDIX I

Profit/(Loss) before tax Income tax expenses Profit/(Loss) for the year Attributable to: Owners of the Company Non-controlling interests Earnings/(Loss) per Share attributable to ordinary equity holders of the Company — basic and diluted (HK$) Dividend ASSETS AND LIABILITIES Non-current assets Current assets Current liabilities Non-current liabilities Net assets/(liabilities)	Year ended 31 December 2009 2010 2011 (Audited) (Audited) (Audited) HK$’000 HK$’000 HK$’000 (1,078,819) (785,589) 105,830 159 (100,405) (40,396) (1,078,660) (885,994) 65,434 (1,078,519) (905,164) 55,339 (141) 19,170 10,095 (1,078,660) (885,994) 65,434 (HK$0.3356) (HK$1.15)* HK$0.04 Nil Nil Nil 3,482,388 4,095,774 5,303,779 268,690 1,064,694 755,324 (386,005) (1,203,187) (2,014,622) (3,862,240) (1,928,547) (1,546,955) (497,167) 2,028,734 2,497,526	Six months ended 30 June 2012 (Unaudited) HK$’000 (901,716) 180,527 (721,189) (680,196) (40,993) (721,189) (HK$0.476) Nil 4,562,762 369,370 (1,732,730) (1,439,124) 1,760,278

Restated

– 40 –

FINANCIAL INFORMATION

APPENDIX I

2. LATEST AUDITED FINANCIAL STATEMENTS

The following is the audited financial statements of the Group for the year ended 31 December 2011 together with accompanying notes (the auditors’ report on which is not qualified though there is emphasis on matter on going concern as set out in note 2 in the financial statements) as extracted from the Company’s 2011 annual report. Reference to page numbers in the notes to the financial statements is to the page numbers in the Company’s 2011 annual report.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year ended 31 December 2011

Notes REVENUE 6 Cost of sales Gross profit Fair value loss on convertible notes 27 Gain on bargain purchase of a subsidiary 32 Other income and gains, net 6 Selling and distribution costs Administrative expenses Finance costs 7 Share of loss of a jointly-controlled entity 18 PROFIT/(LOSS) BEFORE TAX 8 Income tax expense 11 PROFIT/(LOSS) FOR THE YEAR OTHER COMPREHENSIVE INCOME/ (LOSS) Exchange differences on translation of foreign operations: — Increase for the year — Reclassification adjustment on disposal of subsidiaries 33 OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX TOTAL COMPREHENSIVE INCOME/ (LOSS) FOR THE YEAR	2011 HK$’000 995,100 (612,248) 382,852 — 29,948 52,195 (4,632) (182,754) (171,751) (28) 105,830 (40,396) 65,434 108,432 — 108,432 173,866	2010 HK$’000 1,007,740 (483,055) 524,685 (1,133,144) — 29,823 (4,220) (118,667) (84,066) — (785,589) (100,405) (885,994) 74,311 (6,769) 67,542 (818,452)

– 41 –

FINANCIAL INFORMATION

APPENDIX I

Notes Profit/(loss) for the year attributable to: Owners of the Company 12 Non-controlling interests Total comprehensive income/(loss) for the year attributable to: Owners of the Company 12 Non-controlling interests EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE COMPANY 13 Basic and diluted	2011 HK$’000 55,339 10,095 65,434 157,139 16,727 173,866 HK$0.04	2010 HK$’000 (905,164) 19,170 (885,994) (841,869) 23,417 (818,452) (Restated) (HK$1.15)

The directors of the Company do not recommend the payment of any dividend in respect of the year ended 31 December 2011 (2010: Nil).

– 42 –

FINANCIAL INFORMATION

APPENDIX I

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

31 December 2011

Notes NON-CURRENT ASSETS Property, plant and equipment 14 Prepaid land premiums 15 Mining rights 16 Investment in a jointly-controlled entity 18 Prepayments for non-current assets 21 Total non-current assets CURRENT ASSETS Inventories 19 Trade and bills receivables 20 Prepayments, deposits and other receivables 21 Pledged deposits 22 Cash and cash equivalents 22 Total current assets CURRENT LIABILITIES Trade and bills payables 23 Other payables and accruals 24 Interest-bearing bank borrowings 25 Derivative component of convertible bonds 26(a) Liability component of convertible bonds 26(b) Tax payable Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES	2011 HK$’000 2,151,176 15,080 2,964,936 16,623 155,964 5,303,779 17,216 117,100 566,144 2,936 51,928 755,324 5,048 1,181,973 555,075 — — 272,526 2,014,622 (1,259,298) 4,044,481	2010 HK$’000 1,305,588 12,299 2,343,144 — 434,743 4,095,774 4,283 263,346 171,432 417 625,216 1,064,694 903 484,748 411,775 35,452 121,896 148,413 1,203,187 (138,493) 3,957,281

– 43 –

FINANCIAL INFORMATION

APPENDIX I

Notes NON-CURRENT LIABILITIES Other payables and accruals 24 Interest-bearing bank borrowings 25 Convertible notes 27 Deferred tax liabilities 28 Total non-current liabilities Net assets EQUITY Equity attributable to owners of the Company Issued capital 29 Reserves 31(a) Non-controlling interests Total equity Wang Da Yong Director	2011 2010 HK$’000 HK$’000 — 41,098 678,425 882,375 221,782 466,288 646,748 538,786 1,546,955 1,928,547 2,497,526 2,028,734 142,873 226,298 2,234,125 1,698,635 2,376,998 1,924,933 120,528 103,801 2,497,526 2,028,734 Tian Wenwei Director	2010 HK$’000 41,098 882,375 466,288 538,786
		1,928,547
		2,028,734
		226,298 1,698,635
		1,924,933 103,801
		2,028,734

– 44 –

FINANCIAL INFORMATION

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 31 December 2011

			Attributable	to owners of	the Company	the Company	Retained earnings/ (Accumulated losses) Total Non- controlling interests HK$’000 HK$’000 HK$’000 (1,803,560) (577,551) 80,384 (905,164) (905,164) 19,170 — 63,295 4,247 (905,164) (841,869) 23,417 7,904 — — — 205,000 — — (238) — — 37,873 — — 1,838,742 — — 1,239,114 — — 23,862 — (2,700,820) 1,924,933 103,801 55,339 55,339 10,095 — 101,800 6,632 55,339 157,139 16,727 — 271,408 — — (99) — — — — (7,322) (7,322) — — — — 2,953,243 — — — 30,939 — 300,440 2,376,998 120,528	Retained earnings/ (Accumulated losses) Total Non- controlling interests HK$’000 HK$’000 HK$’000 (1,803,560) (577,551) 80,384 (905,164) (905,164) 19,170 — 63,295 4,247 (905,164) (841,869) 23,417 7,904 — — — 205,000 — — (238) — — 37,873 — — 1,838,742 — — 1,239,114 — — 23,862 — (2,700,820) 1,924,933 103,801 55,339 55,339 10,095 — 101,800 6,632 55,339 157,139 16,727 — 271,408 — — (99) — — — — (7,322) (7,322) — — — — 2,953,243 — — — 30,939 — 300,440 2,376,998 120,528	Retained earnings/ (Accumulated losses) Total Non- controlling interests HK$’000 HK$’000 HK$’000 (1,803,560) (577,551) 80,384 (905,164) (905,164) 19,170 — 63,295 4,247 (905,164) (841,869) 23,417 7,904 — — — 205,000 — — (238) — — 37,873 — — 1,838,742 — — 1,239,114 — — 23,862 — (2,700,820) 1,924,933 103,801 55,339 55,339 10,095 — 101,800 6,632 55,339 157,139 16,727 — 271,408 — — (99) — — — — (7,322) (7,322) — — — — 2,953,243 — — — 30,939 — 300,440 2,376,998 120,528	Total equity HK$’000 (497,167 (885,994 67,542
Issued capital HK$’000 (Note 29) 77,338 — —	Share premium account HK$’000 (Note 31 (a)(i)) 1,133,198 — —	Capital redemption reserve HK$’000 — — —	Equity component of convertible notes HK$’000 (Note 27) — — —	Share option reserve HK$’000 (Note 31 (a)(ii)) 764 — —	PRC statutory reserves HK$’000 (Note 31 (a)(iii)) 7,904 — —	Exchange fluctuation reserve HK$’000 (Note 31 (a)(iv)) 6,805 — 63,295
— — 10,000 — 1,800 137,160 — —			— — — — — — 1,239,114 —	— — — — — — — 23,862	— 63,295 (7,904) — — — — — — — — — — — — —					(818,452 — 205,000 (238 37,873 1,838,742 1,239,114 23,862
226,298 — —	3,065,615 — —	* — — —	* 1,239,114 — —	* 24,626 — —	* — — —	* 70,100 — 101,800			103,801 10,095 6,632	2,028,734 65,434 108,432
					— — — — — — — —	101,800 — — — — — — —				173,866 271,408 (99 — (7,322 — — 30,939
142,873	1,166,813	* 523	* 538,884	* 55,565	* —	* 171,900	* 300,440	* 2,376,998	120,528	2,497,526

These reserve accounts comprise the consolidated reserves of HK$2,234,125,000 (2010: HK$1,698,635,000) in the consolidated statement of financial position.

– 45 –

FINANCIAL INFORMATION

APPENDIX I

CONSOLIDATED STATEMENT OF CASH FLOWS

Year ended 31 December 2011

Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) before tax Adjustments for: Finance costs 7 Bank interest income 6 Other interest income 6 Write-off/(gain on disposal) of items of property, plant and equipment, net 8 Gain on bargain purchase of a subsidiary 32 Gain on disposal of subsidiaries 6 Fair value gain on derivative component of convertible bonds 6, 26(a) Fair value loss on convertible notes 27 Depreciation 8, 14 Amortisation of prepaid land premiums 8, 15 Amortisation of mining rights 8, 16 Impairment of trade receivables 8, 20(b) Impairment of prepayments, deposits and other receivables 8, 21(a) Equity-settled share option expense 8, 30(a) Share of loss of a jointly-controlled entity 18 Decrease/(increase) in inventories Decrease/(increase) in trade and bills receivables Decrease/(increase) in prepayments, deposits and other receivables Decrease in trade and bills payables Increase in other payables and accruals Cash generated from operations Interest paid Income tax paid Net cash flows from operating activities	2011 HK$’000 105,830 171,751 (262) (6,270) 22,789 (29,948) — (35,452) — 157,880 357 162,831 144 1,086 30,939 28 581,703 (7,157) 146,102 30,539 (3,521) 159,572 907,238 (107,745) (14,927) 784,566	2010 HK$’000 (785,589) 84,066 (813) — (598) — (24,784) (2,736) 1,133,144 109,134 548 124,202 2,308 8,521 23,862 — 671,265 2,485 (234,155) (97,430) (17,325) 201,909 526,749 (71,359) (5) 455,385

– 46 –

FINANCIAL INFORMATION

APPENDIX I

Notes CASH FLOWS FROM INVESTING ACTIVITIES Interest received Purchases of items of property, plant and equipment Proceeds from disposal of items of property, plant and equipment Acquisition of a subsidiary 32 Disposal of subsidiaries 33 Investment in a jointly-controlled entity 18 Decrease/(increase) in prepayments for non- current assets Decrease in time deposits with maturity of more than three months when acquired Increase in pledged time deposits Net cash flows used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares 29 Share issue expenses 29 Repurchase of shares 29 Redemption of convertible bonds 26 Net proceeds from issue of convertible bonds 26 New bank loans Repayment of bank loans Increase in other borrowings included in other payables Net cash flows from/(used in) financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes, net CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 22 Time deposits 22 Cash and cash equivalents as stated in the consolidated statement of financial position and the consolidated statement of cash flows 22	2011 HK$’000 6,532 (823,160) 625 (292,887) — (16,651) 30,069 — (2,519) (1,097,991) — (99) (7,322) (159,000) — 431,725 (555,075) 37,318 (252,453) (565,878) 625,216 (7,410) 51,928 41,928 10,000 51,928	2010 HK$’000 813 (622,599) 91,275 — (422) — (193,219) 44,285 (417) (680,284) 205,000 (238) — — 185,250 401,730 (57,390) — 734,352 509,453 98,739 17,024 625,216 605,179 20,037 625,216

– 47 –

FINANCIAL INFORMATION

APPENDIX I

STATEMENT OF FINANCIAL POSITION

31 December 2011

Notes NON-CURRENT ASSETS Property, plant and equipment 14 Investments in subsidiaries 17(a) Prepayment 21 Total non-current assets CURRENT ASSETS Due from subsidiaries 17(b) Prepayments, deposits and other receivables 21 Cash and cash equivalents 22 Total current assets CURRENT LIABILITIES Other payables and accruals 24 Derivative component of convertible bonds 26(a) Liability component of convertible bonds 26(b) Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITY Convertible notes 27 Net assets EQUITY Issued capital 29 Reserves 31(b) Total equity	2011 HK$’000 1,077 1,810,195 — 1,811,272 237 211,140 19,676 231,053 3,683 — — 3,683 227,370 2,038,642 221,782 1,816,860 142,873 1,673,987 1,816,860	2010 HK$’000 1,408 1,810,195 180,000
		1,991,603
		83 2,145 244,184
		246,412
		11,969 35,452 121,896
		169,317
		77,095
		2,068,698
		466,288
		1,602,410
		226,298 1,376,112
		1,602,410

Wang Da Yong Director

Tian Wenwei

Director

– 48 –

FINANCIAL INFORMATION

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

31 December 2011

1. CORPORATE INFORMATION

King Stone Energy Group Limited (the ‘‘Company’’) is a limited liability company incorporated in Hong Kong. The registered address of the Company is located at Room 3603, 36/F, One Exchange Square, Central, Hong Kong.

During the year, the Company and its subsidiaries (collectively referred to as the ‘‘Group’’) were involved in mining and selling of coal.

2. BASIS OF PREPARATION, PRESENTATION AND CONSOLIDATION

Basis of preparation

As at 31 December 2011, the current liabilities of the Group exceeded its current assets by approximately HK$1,259 million, which indicates the existence of a material uncertainty that may cast significant doubt about the Group’s ability to operate as a going concern. The consolidated financial statements of the Group have been prepared on a going concern basis, the validity of which depends upon the outcome of various measures adopted by the directors of the Company as mentioned below and the future performance of the Group.

As at the date of approval of these financial statements, the Group is in process of negotiating with certain banks for obtaining new bank loans for the purpose to meet with the Group’s liabilities as and when they fall due. Based on the communications with the relevant banks and after taking into account the Group’s availability of mining rights, and property, plant and equipment (free of charges and encumbrances) with aggregate carrying value of HK$760 million as at 31 December 2011 for pledging purposes, operating performance and other factors, the directors of the Company are confident that such new bank loans will be obtained.

In March 2012, two customers have entered into contracts to purchase the Group’s future coal output up to March 2014, and prepayment totaling HK$311 million will be paid to the Group in April 2012. Such prepayments will be maintained throughout the period until the end of the respective contracts.

A substantial shareholder of the Company has confirmed his ability and agreement to provide continual financial support and adequate funds to the Group to meet with the Group’s liabilities as and when they fall due in the foreseeable future.

The directors of the Company are also considering/taking other alternatives to monitor and improve the cash flows of the Group, which included extension of repayment dates of existing bank loans and other liabilities, and other financing arrangements. The directors of the Company expect that payments of certain liabilities of the Group can be extended to twelve months after 31 December 2011.

In light of the measures described above, and after taking into account the performance of the Group and the cash flow projection prepared by the directors of the Company, the directors of the Company are confident that the Group will have sufficient working capital to meet with its financial obligations in the foreseeable future. Accordingly the directors of the Company are of the opinion that it is appropriate to prepare these financial statements on a going concern basis. These financial statements do not include any adjustments that might be necessary should the Group not be able to continue as a going concern.

Basis of presentation

These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (‘‘HKFRSs’’) (which include all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (‘‘HKASs’’) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong and the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, except for the derivative components of convertible bonds and convertible notes (before their terms were amended on 31 December 2010), which have been measured at fair value. These financial statements are presented in Hong Kong dollars and all values are rounded to the nearest thousand except when otherwise indicated.

– 49 –

FINANCIAL INFORMATION

APPENDIX I

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries (collectively referred to as the ‘‘Group’’) for the year ended 31 December 2011. The financial statements of the subsidiaries are prepared for the same reporting period as the Company. The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated on consolidation in full. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

Total comprehensive income within a subsidiary is attributed to the non-controlling interest even if that results in a deficit balance.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.

If the Group loses control over a subsidiary, it derecognises (i) the assets (including goodwill) and liabilities of the subsidiary, (ii) the carrying amount of any non-controlling interest and (iii) the cumulative translation differences recorded in equity, and recognises (i) the fair value of the consideration received, (ii) the fair value of any investment retained and (iii) any resulting surplus or deficit in profit or loss. The Group’s share of components previously recognised in other comprehensive income is reclassified to profit or loss or retained profits, as appropriate.

3.1 CHANGES IN ACCOUNTING POLICY AND DISCLOSURES

The Group has adopted the following new and revised HKFRSs for the first time for the current year’s financial statements:

HKFRS 1 Amendment	Amendment to HKFRS 1 First-time Adoption of Hong Kong Financial
	Reporting Standards — Limited Exemption from Comparative HKFRS 7
	Disclosures for First-time Adopters
HKAS 24 (Revised)	Related Party Disclosures
HKAS 32 Amendment	Amendment to HKAS 32 Financial Instruments: Presentation — Classification
	of Rights Issues
HK(IFRIC)-Int 14 Amendments	Amendments to HK(IFRIC)-Int 14 Prepayments of a Minimum Funding
	Requirement
HK(IFRIC)-Int 19	Extinguishing Financial Liabilities with Equity Instruments
Improvements to HKFRSs 2010	Amendments to a number of HKFRSs issued in May 2010

Other than as further explained below regarding the impact of HKAS 24 (Revised), and amendments to HKFRS 3, HKAS 1 and HKAS 27 included in Improvements to HKFRSs 2010, the adoption of the HKFRSs has had no significant financial effect on these financial statements.

The principal effects of adopting these new and revised HKFRSs are as follows:

(a) HKAS 24 (Revised) Related Party Disclosures

HKAS 24 (Revised) clarifies and simplifies the definitions of related parties. The new definitions emphasise a symmetrical view of related party relationships and clarify the circumstances in which persons and key management personnel affect related party relationships of an entity. The revised standard also introduces an exemption from the general related party disclosure requirements for transactions with a government and entities that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity. The accounting policy for related parties has been revised to reflect the changes in the definitions of related parties under the revised standard. The adoption of the revised standard did not have any impact on the financial position or performance of the Group. Details of the related party transactions, including the related comparative information, are included in note 37 to the consolidated financial statements.

– 50 –

FINANCIAL INFORMATION

APPENDIX I

(b) Improvements to HKFRSs 2010 issued in May 2010 sets out amendments to a number of HKFRSs. There are separate transitional provisions for each standard. While the adoption of some of the amendments may result in changes in accounting policies, none of these amendments has had a significant financial impact on the financial position or performance of the Group. Details of the key amendments most applicable to the Group are as follows:
. HKFRS 3 Business Combinations: The amendment clarifies that the amendments to HKFRS 7, HKAS 32 and HKAS 39 that eliminate the exemption for contingent consideration do not apply to contingent consideration that arose from business combinations whose acquisition dates precede the application of HKFRS 3 (as revised in 2008).

In addition, the amendment limits the scope of measurement choices for non-controlling interests. Only the components of non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the acquiree’s net assets in the event of liquidation are measured at either fair value or at the present ownership instruments’ proportionate share of the acquiree’s identifiable net assets. All other components of non-controlling interests are measured at their acquisition date fair value, unless another measurement basis is required by another HKFRS.

The amendments also added explicit guidance to clarify the accounting treatment for non-replaced and voluntarily replaced share-based payment awards.

. HKAS 1 Presentation of Financial Statements: The amendment clarifies that an analysis of each component of other comprehensive income can be presented either in the statement of changes in equity or in the notes to the financial statements. The Group elects to present the analysis of each component of other comprehensive income in the consolidated statement of changes in equity.
. HKAS 27 Consolidated and Separate Financial Statements: The amendment clarifies that the consequential amendments from HKAS 27 (as revised in 2008) made to HKAS 21, HKAS 28 and HKAS 31 shall be applied prospectively for annual periods beginning on or after 1 July 2009 or earlier if HKAS 27 is applied earlier.

3.2 ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

The Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial statements.

HKFRS 1 Amendments Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial Reporting Standards — Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters[1] HKFRS 7 Amendments Amendments to HKFRS 7 Financial Instruments: Disclosures — Transfers of Financial Assets[1] HKFRS 7 Amendments Amendments to HKFRS 7 Financial Instruments: Disclosures — Offsetting Financial Assets and Financial Liabilities[4] HKFRS 9 Financial Instruments[6] HKFRS 10 Consolidated Financial Statements[4] HKFRS 11 Joint Arrangements[4] HKFRS 12 Disclosure of Interests in Other Entities[4] HKFRS 13 Fair Value Measurement[4] HKAS 1 Amendments Amendments to HKAS 1 Presentation of Financial Statements — Presentation of Items of Other Comprehensive Income[3] HKAS 12 Amendments Amendments to HKAS 12 Income Taxes — Deferred Tax: Recovery of Underlying Asset[2] HKAS 19 (2011) Employee Benefits[4] HKAS 27 (2011) Separate Financial Statements[4] HKAS 28 (2011) Investments in Associates and Joint Ventures[4] HKAS 32 Amendments Amendments to HKAS 32 Financial Instruments: Presentation — Offsetting Financial Assets and Financial Liabilities[5] HK(IFRIC)-Int 20 Stripping Costs in the Production Phase of a Surface Mine[4]

– 51 –

FINANCIAL INFORMATION

APPENDIX I

1 Effective for annual periods beginning on or after 1 July 2011
2 Effective for annual periods beginning on or after 1 January 2012 3 Effective for annual periods beginning on or after 1 July 2012 4 Effective for annual periods beginning on or after 1 January 2013 5 Effective for annual periods beginning on or after 1 January 2014 6 Effective for annual periods beginning on or after 1 January 2015

Further information about those changes that are expected to significantly affect the Group is as follows:

(a) HKFRS 7 Amendments issue new disclosure requirements in relation to the offsetting models of financial assets and financial liabilities. The amendments also improve the transparency in the reporting of how companies mitigate credit risk, including disclosure of related collateral pledged or received. The Group expects to adopt the amendments from 1 January 2013.
(b) HKFRS 9 issued in November 2009 is the first part of phase 1 of a comprehensive project to entirely replace HKAS 39 Financial Instruments: Recognition and Measurement. This phase focuses on the classification and measurement of financial assets. Instead of classifying financial assets into four categories, an entity shall classify financial assets as subsequently measured at either amortised cost or fair value, on the basis of both the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. This aims to improve and simplify the approach for the classification and measurement of financial assets compared with the requirements of HKAS 39.

In November 2010, the HKICPA issued additions to HKFRS 9 to address financial liabilities (the ‘‘Additions’’) and incorporated in HKFRS 9 the current derecognition principles of financial instruments of HKAS 39. Most of the Additions were carried forward unchanged from HKAS 39, while changes were made to the measurement of financial liabilities designated at fair value through profit or loss using the fair value option (‘‘FVO’’). For these FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in other comprehensive income (‘‘OCI’’). The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. However, loan commitments and financial guarantee contracts which have been designated under the FVO are scoped out of the Additions.

HKAS 39 is aimed to be replaced by HKFRS 9 in its entirely. Before this entire replacement, the guidance in HKAS 39 on hedge accounting and impairment of financial assets continues to apply. The Group expects to adopt HKFRS 9 from 1 January 2015.

(c) HKFRS 10 establishes a single control model that applies to all entities including special purpose entities or structured entities. It includes a new definition of control which is used to determine which entities are consolidated. The changes introduced by HKFRS 10 require management of the Group to exercise significant judgement to determine which entities are controlled, compared with the requirements in HKAS 27 and HK(SIC)-Int 12 Consolidation — Special Purpose Entities. HKFRS 10 replaces the portion of HKAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in HK(SIC)-Int 12.

HKFRS 11 replaces HKAS 31 Interests in Joint Ventures and HK(SIC)-Int 13 Jointly Controlled Entities — Non-Monetary Contributions by Venturers. It describes the accounting for joint arrangements with joint control. It addresses only two forms of joint arrangements, i.e., joint operations and joint ventures, and removes the option to account for joint ventures using proportionate consolidation.

HKFRS 12 includes the disclosure requirements for subsidiaries, joint arrangements, associates and structured entities that are previously included in HKAS 27 Consolidated and Separate Financial Statements, HKAS 31 Interests in Joint Ventures and HKAS 28 Investments in Associates. It also introduces a number of new disclosure requirements for these entities.

Consequential amendments were made to HKAS 27 and HKAS 28 as a result of the issuance of HKFRS 10, HKFRS 11 and HKFRS 12. The Group expects to adopt HKFRS 10, HKFRS 11, HKFRS 12, and the consequential amendments to HKAS 27 and HKAS 28 from 1 January 2013.

– 52 –

FINANCIAL INFORMATION

APPENDIX I

(d) HKFRS 13 provides a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across HKFRSs. The standard does not change the circumstances in which the Group is required to use fair value, but provides guidance on how fair value should be applied where its use is already required or permitted under other HKFRSs. The Group expects to adopt HKFRS 13 prospectively from 1 January 2013.
(e) Amendments to HKAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or recycled) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items which will never be reclassified. The Group expects to adopt the amendments from 1 January 2013.
(f) HKAS 12 Amendments clarify the determination of deferred tax for investment property measured at fair value. The amendments introduce a rebuttable presumption that deferred tax on investment property measured at fair value should be determined on the basis that its carrying amount will be recovered through sale. Furthermore, the amendments incorporate the requirement previously in HK(SIC)-Int 21 Income Taxes — Recovery of Revalued Non-Depreciable Assets that deferred tax on non-depreciable assets, measured using the revaluation model in HKAS 16, should always be measured on a sale basis. The Group expects to adopt HKAS 12 Amendments from 1 January 2012.
(g) HKAS 32 Amendments clarify the requirements for offsetting financial instruments. The amendments address inconsistencies in current practice when applying the offsetting criteria and clarify the meaning of ‘‘currently has a legally enforceable right of set-off’’ and some gross settlement systems may be considered equivalents to net settlements. The Group expects to adopt the amendments from 1 January 2014.

3.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Subsidiaries

A subsidiary is an entity in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or controls the composition of its board of directors; or over which the Company has a contractual right to exercise a dominant influence with respect to that entity’s financial and operating policies.

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

Joint ventures

A joint venture is an entity set up by contractual arrangement, whereby the Group and other parties undertake an economic activity. The joint venture operates as a separate entity in which the Group and the other parties have an interest.

The joint venture agreement between the venturers stipulates the capital contributions of the joint venture parties, the duration of the joint venture and the basis on which the assets are to be realised upon its dissolution. The profits or losses from the joint venture’s operations and any distributions of surplus assets are shared by the venturers, either in proportion to their respective capital contributions, or in accordance with the terms of the joint venture agreement.

A joint venture is treated as:

(a) a subsidiary, if the Group has unilateral control, directly or indirectly, over the joint venture;
(b) a jointly-controlled entity, if the Group does not have unilateral control, but has joint control, directly or indirectly, over the joint venture;
(c) an associate, if the Group does not have unilateral or joint control, but holds, directly or indirectly, generally not less than 20% of the joint venture’s registered capital and is in a position to exercise significant influence over the joint venture; or

– 53 –

FINANCIAL INFORMATION

APPENDIX I

(d) an equity investment accounted for in accordance with HKAS 39, if the Group holds, directly or indirectly, less than 20% of the joint venture’s registered capital and has neither joint control of, nor is in a position to exercise significant influence over, the joint venture.

Jointly-controlled entities

A jointly-controlled entity is a joint venture that is subject to joint control, resulting in none of the participating parties having unilateral control over the economic activity of the jointly-controlled entity.

The Group’s investments in jointly-controlled entities are stated in the consolidated statement of financial position at the Group’s share of net assets under the equity method of accounting, less any impairment losses. Adjustments are made to bring into line any dissimilar accounting policies that may exist. The Group’s share of the post-acquisition results and reserves of jointly-controlled entities is included in profit or loss and consolidated reserves, respectively.

Business combinations and goodwill

Business combinations are accounted for using the acquisition method. The consideration transferred is measured at the acquisition date fair value which is the sum of the acquisition date fair values of assets transferred by the Group, liabilities assumed by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. For each business combination, the Group elects whether it measures the non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of net assets in the event of liquidation either at fair value or at the proportionate share of the acquiree’s identifiable net assets. All other components of non-controlling interests are measured at fair value. Acquisition costs are expensed as incurred.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value as at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the acquirer is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with HKAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it will not be remeasured. Subsequent settlement is accounted for within equity. In instances where the contingent consideration does not fall within the scope of HKAS 39, it is measured in accordance with the appropriate HKFRS.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognised for non-controlling interests and any fair value of the Group’s previously held equity interests in the acquiree over the identifiable net assets acquired and liabilities assumed. If the sum of this consideration and other items is lower than the fair value of the net assets of the subsidiary acquired, the difference is, after reassessment, recognised in profit or loss as a gain on bargain purchase.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at 31 December. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.

– 54 –

FINANCIAL INFORMATION

APPENDIX I

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cashgenerating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised. An impairment loss recognised for goodwill is not reversed in a subsequent period.

Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cashgenerating unit retained.

Impairment of non-financial assets

Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, financial assets and goodwill), 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 cashgenerating 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 asset.

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 other than goodwill 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 and amortisation) had no impairment loss been recognised for the asset in prior years. A reversal of such an impairment loss is credited to profit or loss in the period in which it arises, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

Related parties

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

(a) the party is a person or a close member if that person’s family and that person (i) has control or joint control over the Group; (ii) has significant influence over the Group; or (iii) is a member of the key management personnel of the Group or of a parent of the Group; or

(b) the party is an entity where any of the following conditions applies: (i) the entity and the Group are members of the same group; (ii) one entity is an associate or joint venture of the other entity (or of a parent, subsidiary or fellow subsidiary of the other entity);
(iii) the entity and the Group are joint ventures of the same third party;

– 55 –

FINANCIAL INFORMATION

APPENDIX I

(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
(v) the entity is a post-employment benefit plan for the benefit of the employees of either the Group or an entity related to the Group;
(vi) the entity is controlled or jointly controlled by a person identified in (a); and
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchases 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 a major inspection is capitalised in the carrying amount of the asset as a replacement. Where significant parts of property, plant and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly.

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 principal annual rates used for this purpose are as follows:

Buildings	Over the lease term
Leasehold improvements	Over the shorter of the lease terms and five years
Plant and machinery	6.7% to 12.5%
Furniture, fixtures and equipment	10% to 20%
Motor vehicles	20%

In addition, certain plant and machinery used in the coal mines are depreciated on the unit of production method based on the actual production volume and over the total estimated proven and probable reserves of the coal mine.

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.

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 the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents a building or mining structure and other assets under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction and capitalised borrowing costs on related borrowed funds during the period of construction. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.

– 56 –

FINANCIAL INFORMATION

APPENDIX I

Operating 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 Group is the lessee, rentals payable under the operating leases are charged to profit or loss on the straight-line basis over the lease terms.

Prepaid land premiums are stated at cost less accumulated amortisation and any impairment losses, and amortisation is calculated on the straight-line basis over the lease term of 50 years.

Mining rights

Mining rights are stated at cost less accumulated amortisation and any impairment losses, and are amortised on the units of production method based on the actual production volume and over the total estimated proven and probable reserves of the coal mine.

The cost of mining rights acquired in a business combination is the fair value as at the date of acquisition. The mining rights are subsequently assessed for impairment whenever there is an indication that the mining rights may be impaired. The amortisation period and the amortisation method for the mining rights are reviewed at least at each financial year end.

Investments and other financial assets

Initial recognition and measurement

The Group determines the classification of its financial assets at initial recognition. The Group’s financial assets included cash and bank balances, trade and bills receivables, other receivables and pledged deposits, which are classified as loans and receivables under HKAS 39. When financial assets are recognised initially, they are measured at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss.

All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the 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.

Subsequent measurement

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 financial income in profit or loss. The loss arising from impairment is recognised in profit or loss in finance costs for loans and in other expenses for 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 Group 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 ‘‘pass-through’’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

– 57 –

FINANCIAL INFORMATION

APPENDIX I

When the Group has transferred its rights to receive cash flows from an asset or has entered into a passthrough arrangement it evaluates if and to what extent it has retained the risk and rewards of ownership of asset. When it 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 Group’s continuing involvement in the asset. In that case, the 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 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 Group could be required to repay.

Impairment of financial assets

The Group 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 Group 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 Group 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 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 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 other expenses in profit or loss.

Financial liabilities

Initial recognition and measurement

Financial liabilities within the scope of HKAS 39 are classified as financial liabilities at fair value through profit or loss and loans and borrowings. The Group determines the classification of its financial liabilities at initial recognition.

– 58 –

FINANCIAL INFORMATION

APPENDIX I

All financial liabilities are recognised initially at fair value plus, in the case of loans and borrowings, plus directly attributable transaction costs.

The Group’s financial liabilities include trade and bills payables, other payables, accruals, interest-bearing loans, and the liability component of convertible bonds and convertible notes.

Subsequent measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities designated upon initial recognition as at fair value through profit or loss. Gains or losses on financial liabilities designated upon initial recognition as at fair value through profit or loss are recognised in profit or loss. The net fair value gain or loss recognised in profit or loss does not include any interest charged on these financial liabilities.

Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the date of initial recognition and only if the criteria of HKAS 39 are satisfied.

Loans and borrowings

After initial recognition, interest-bearing 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.

Convertible bonds/notes

Convertible bonds/notes which entitle the holder to convert the bonds/notes into equity instruments, other than into a fixed number of equity instruments at a fixed conversion price, are regarded as combined instruments consisting of a liability component and a derivative component.

When the convertible bonds/notes with a derivative component as a whole are designated as financial liabilities at fair value through profit or loss, the entire convertible bonds/notes are initially recognised at fair value on the date of issue and are subsequently measured at fair value until extinguished on conversion or redemption. Changes in the fair value of the entire convertible bonds/notes are recognised in profit or loss in the year in which they arise.

When the convertible bonds/notes with a derivative component as a whole are not designated as financial liabilities at fair value through profit or loss, on initial recognition, the derivative component of the convertible bonds/notes is measured at fair value and presented as part of the derivative liability. Any excess of net proceeds over the amount initially recognised as the derivative component is recognised as the liability component. Subsequently, changes in the fair value of the derivative component of the convertible bonds/notes are recognised in profit or loss in the year in which they arise and the liability component of the convertible bonds/notes is stated at amortised cost using the effective interest rate method.

Convertible bonds/notes which entitle the holder to convert the bonds/notes into a fixed number of equity instruments at a fixed conversion price are regarded as combined instruments consisting of a liability component and an equity component.

On initial recognition, the component of convertible bonds/notes that exhibits characteristics of a liability is recognised as a liability in the statement of financial position, net of transaction costs. The fair value of the liability component is determined using a market rate for an equivalent non-convertible bond/note; and this amount is carried

– 59 –

FINANCIAL INFORMATION

APPENDIX I

as a liability on the amortised cost basis using the effective interest rate method until extinguished on conversion or redemption. In addition, the fair value of the conversion option is assessed and is recognised and included in shareholders’ equity as ‘‘Equity component of convertible notes’’. The carrying amount of the conversion option recognised in shareholders’ equity is not remeasured in subsequent years.

Upon the exercise of the conversion option of the convertible bonds/notes, the resulting ordinary shares issued are recorded by the Company as additional share capital at the nominal value of the ordinary shares issued, and the excess of the total carrying amounts of the derivative, liability and equity components of the convertible bonds/notes over the nominal value of the ordinary shares issued is recorded in the share premium account. No gain or loss is recognised in profit or loss upon conversion of the conversion option.

When the convertible bonds/notes are redeemed, the carrying amount of the equity component of the convertible bonds/notes, if any, is transferred to retained profit or accumulated losses as a movement in reserves and any difference between the amount paid and the carrying amounts of the derivative and liability components is recognised in profit or loss. No gain or loss is recognised in profit or loss upon expiration of the conversion option.

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.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

Fair value of financial instruments

The fair value of financial instruments that are traded in active markets is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For financial instruments where there is no active market, the fair value is determined using appropriate valuation techniques. These techniques include using recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; a discounted cash flow analysis; and other valuation models.

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 work in progress and finished goods, comprises direct materials, direct labour and an 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 consolidated statement of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

For the purpose of the statement of financial position, cash and cash equivalents comprise cash on hand and at banks, including term deposits, and assets similar in nature to cash, which are not restricted as to use.

– 60 –

FINANCIAL INFORMATION

APPENDIX I

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 will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

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 Group 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 recognised for all taxable temporary differences, except:

. when the deferred tax liability arises from the initial recognition of goodwill or 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, when the timing of the reversal of 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, the carryforward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, the carryforward of unused tax credits and unused tax losses can be utilised, except:

. when 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 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 each 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.

– 61 –

FINANCIAL INFORMATION

APPENDIX I

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.

Revenue recognition

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

(a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold; and
(b) 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 or a shorter period, when appropriate, to the net carrying amount of the financial asset.

Share-based payment transactions

The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Employees (including directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (‘‘equity-settled transactions’’).

The cost of equity-settled transactions with employees for grants after 7 November 2002 is measured by reference to the fair value at the date at which they are granted. The fair value is determined by an external valuer using a binomial model, further details of which are given in note 30 to the financial statements.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled. The cumulative expense recognised for equity-settled transactions at the end of each reporting period until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to profit or loss for a period represents the movement in the cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified, if the original terms of the award are met. In addition, an expense is recognised for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. This includes any award where non-vesting conditions within the control of either the Group or the employee are not met. However, if a new award is substituted for the cancelled award, and is designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

The dilutive effect of outstanding options, if any, is reflected as additional share dilution in the computation of earnings per share.

– 62 –

FINANCIAL INFORMATION

APPENDIX I

Other employee benefits

Pension schemes

The Group operates a defined contribution Mandatory Provident Fund retirement benefit scheme (the ‘‘MPF Scheme’’) under the Mandatory Provident Fund Schemes Ordinance for all those employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees’ basic salaries and are charged to profit or loss as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme.

Subsidiaries of the Group in the People’s Republic of China (the ‘‘PRC’’) contributes on a monthly basis to defined contribution retirement schemes organised by relevant municipal and provincial governments in the PRC. The municipal and provincial governments undertake to assume the retirement benefits payable to all existing and future retired employees under these plans and the Group has no further obligations for respective post-retirement benefits beyond the contributions made. The contributions to the schemes are charged to profit or loss as and when incurred.

Borrowing costs

Borrowing costs directly attributable to the construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. All other borrowing costs are expensed in the period in which they are incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

Foreign currencies

These financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions recorded by the entities in the Group are initially recorded using their respective functional currency rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the end of the reporting period. All differences arising on settlement or translation of monetary items are taken to profit or loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. The gain or loss arising on retranslation of a non-monetary item is treated in line with the recognition of the gain or loss on change in fair value of the item (i.e., translation differences on item whose fair value gain or loss is recognised in other comprehensive income or profit or loss is also recognised in other comprehensive income or profit or loss, respectively).

The functional currency of certain subsidiaries and a jointly-controlled entity in the PRC is currency other than the Hong Kong dollar. As at the end of the reporting period, the assets and liabilities of these entities are translated into the presentation currency of the Company at the exchange rate ruling at the end of the reporting period and their profits or losses are translated into Hong Kong dollars at the weighted average exchange rates for the year. The resulting exchange differences are recognised in other comprehensive income and accumulated in the exchange fluctuation reserve. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in profit or loss.

For the purpose of the consolidated statement of cash flows, the cash flows of subsidiaries and a jointlycontrolled entity in the PRC are translated into Hong Kong dollars at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of subsidiaries and a jointly-controlled entity in the PRC which arise throughout the year are translated into Hong Kong dollars at the weighted average exchange rates for the year.

– 63 –

FINANCIAL INFORMATION

APPENDIX I

4. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and 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 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 statements:

Impairment of assets

The 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 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

The key assumptions concerning the future and other key sources of estimation uncertainty at the end of each 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 described below.

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 Group 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, the expected usage of the asset, the expected physical wear and tear, the care and maintenance of the asset, and legal or similar limits in the use of the asset. The estimation of the useful life of the asset is based on the experience of the Group 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 in the consolidated statement of financial position of the Group at 31 December 2011 was HK$2,151,176,000 (2010: HK$1,305,588,000) (note 14).

Impairment of property, plant and equipment and mining rights

The Group 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 property, plant and equipment, including mining structures, 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 the financial statements. Estimating the value in use requires the Group 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 amount of property, plant and equipment in the consolidated statement of financial position of the Group at 31 December 2011 was HK$2,151,176,000 (2010: HK$1,305,588,000) (note 14). The net carrying amount of mining rights in the consolidated statement of financial position of the Group at 31 December 2011 was HK$2,964,936,000 (2010: HK$2,343,144,000) (note 16).

– 64 –

FINANCIAL INFORMATION

APPENDIX I

Mine reserves

Engineering estimates of the Group’s mine reserves are inherently imprecise and represent only approximate amounts because of the significant judgements 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 on 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 estimate for accounting purposes and is reflected on a prospective basis in both depreciation and amortisation rates calculated on a unit of production basis. Changes in the estimate of mine reserves are also taking into account in the impairment assessment of mining rights. The net carrying amount of mining rights in the consolidated statements of financial position of the Group at 31 December 2011 was HK$2,964,936,000 (2010: HK$2,343,144,000) (note 16).

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 amount of inventories in the consolidated statement of financial position of the Group at 31 December 2011 was HK$17,216,000 (2010: HK$4,283,000) (note 19).

Impairment of trade and bills receivables, prepayments, deposits and other 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. The net carrying amounts of trade and bills receivables, prepayments, deposits and other receivables in the consolidated statement of financial position of the Group at 31 December 2011 were HK$117,100,000 and HK$722,108,000, respectively (2010: HK$263,346,000 and HK$606,175,000, respectively) (notes 20 and 21).

Provision for rehabilitation

Provision for rehabilitation is based on estimates of future expenditures incurred by management to undertake rehabilitation and restoration work a to a coal mine 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 consolidated statements of financial position of the Group by adjusting the rehabilitation liability. At 31 December 2011, the directors of the Company estimated that no provision for rehabilitation is required (2010: Nil).

Fair value assessments of share options granted during the year

All theses fair value assessments were based on valuation techniques for which all inputs which have a significant effect on the recorded fair values are observable, either directly or indirectly. These valuations require the Group to make estimates about credit risk and volatility of the Company’s listed shares, and hence they are subject to uncertainty. Where the estimation on these factors is different from those previously estimated, such differences will impact the equity-settled share option expense recognised during the vesting period. Further details are included in note 30 to the financial statements.

– 65 –

FINANCIAL INFORMATION

APPENDIX I

5. OPERATING SEGMENT INFORMATION

Over 90% of the Group’s revenue, expenses and assets are generated from mining and selling of coal in Mainland China. The management of the Group makes decisions about resources allocation and assesses performance of the Group based on the operating results from these business activities. Accordingly, the directors of the Company are of the opinion that mining and selling of coal in Mainland China is a single reportable segment of the Group.

Analysis of the Group’s revenue from external customers for each group of similar products and services are disclosed in note 6 to the financial statements.

The Group’s revenue from external customers is derived solely from its operations in the PRC, and all non-current assets (other than financial assets) of the Group are located in the PRC.

During the year, the Group had transactions with three external customers which individually contributed to over 10% of the Group’s total revenue (2010: three). The aggregate revenue generated from these three customers amounted to HK$475,296,000 (2010: HK$588,148,000).

– 66 –

FINANCIAL INFORMATION

APPENDIX I

6. REVENUE, OTHER INCOME AND GAINS, NET

Revenue, which is also the Group’s turnover, represents the net value of goods sold after sales tax, value added tax, goods returns and allowances for returns and trade discounts.

An analysis of the Group’s revenue, other income and gains, net is as follows:

Revenue Mining and selling of coal Trading of phosphorus products Trading of optical products Other income Bank interest income Other interest income Other income from termination of subscription agreements Others Gains, net Gain on disposal of items of property, plant and equipment Gain on disposal of subsidiaries (note 33) Fair value gain on derivative component of convertible bonds, net (note 26(a)) Others Other income and gains, net 7. FINANCE COSTS	2011 HK$’000 995,100 — — 995,100 2011 HK$’000 262 6,270 10,000 — 16,532 162 — 35,452 49 35,663 52,195	2010 HK$’000 992,995 12,336 2,409
		1,007,740
		2010 HK$’000 813 — — 876
		1,689
		598 24,784 2,736 16
		28,134
		29,823

An analysis of the Group’s finance costs is as follows:

Interest on bank and other loans wholly repayable within five years Imputed interest on convertible bonds (note 26(b)) Imputed interest on convertible notes (note 27) Interest on convertible bonds Less: Interest capitalised as property, plant and equipment	2011 HK$’000 106,155 37,104 26,902 1,590 — 171,751	2010 HK$’000 93,825 12,707 — —
		(22,466
		84,066

– 67 –

FINANCIAL INFORMATION

APPENDIX I

8. PROFIT/(LOSS) BEFORE TAX

The Group’s profit/(loss) before tax is arrived at after charging/(crediting):

Notes Cost of inventories sold Depreciation 14 Amortisation of prepaid land premiums 15 Amortisation of mining rights 16 Employee benefit expense (including directors’ remuneration): Wages, salaries and other benefits Equity-settled share option expense 30(a) Pension scheme contributions (defined contribution scheme) Auditors’ remuneration Impairment on trade receivables 20(b) Impairment on prepayments, deposits and other receivables 21(a) Operating lease rentals in respect of properties, machinery and equipment Write-off/(gain on disposal) of items of property, plant and equipment, net	2011 HK$’000 612,248 157,880 357 162,831 48,247 30,939 79,186 9,453 88,639 2,480 144 1,086 2,376 22,789	2010 HK$’000 483,055 109,134 548 124,202 20,625 23,862
		44,487 2,783
		47,270
		1,650 2,308 8,521 2,384 (598

9. DIRECTORS’ REMUNERATION

Directors’ remuneration for the year, disclosed pursuant to the Rules Governing the Listings of Securities (the ‘‘Listing Rules’’) on The Stock Exchange of Hong Kong Limited (the ‘‘Stock Exchange’’) and Section 161 of the Hong Kong Companies Ordinance, is as follows:

Fees Other emoluments: Salaries, allowances and benefits in kind Pension scheme contributions Equity-settled share option expense	Group 2011 2010 HK$’000 HK$’000 1,080 766 5,170 3,867 25 8 18,220 10,143 23,415 14,018 24,495 14,784	Group 2011 2010 HK$’000 HK$’000 1,080 766 5,170 3,867 25 8 18,220 10,143 23,415 14,018 24,495 14,784
		3,867 8 10,143
		14,018
		14,784

– 68 –

FINANCIAL INFORMATION

APPENDIX I

During the year ended 31 December 2010, certain directors were granted share options, in respect of their services to the Group, under the share option scheme of the Company, further details of which are set out in note 30 to the financial statements. The fair value of these options, which has been recognised in profit or loss over the vesting period, was determined as at the date of grant and the amount included in the financial statements for the current year is included in the above directors’ remuneration disclosures.

An analysis of director’s remuneration, on a named basis, for the year is as follows:

Group

2011 Executive directors Wang Da Yong Tian Wenwei Wang Tongtian Chen Marlon Ray (appointed on 21 December 2011) Non-executive directors Li Yi Su Bin Li Feng (appointed on 25 August 2011 and resigned on 27 February 2012) Wang Daoyuan (appointed on 25 August 2011 and resigned on 27 February 2012) Independent non- executive directors Jacobsen William Keith (resigned on 30 September 2011) Cao Kuangyu Chiu Sui Keung Li Peiming (appointed on 30 September 2011) Total	Fees HK$’000 — — — — — 360 180 — — 540 135 180 180 45 540 1,080	Salaries, allowances and benefits in kind HK$’000 3,406 1,404 360 — 5,170 — — — — — — — — — — 5,170	Pension scheme contributions HK$’000 13 12 — — 25 — — — — — — — — — — 25	Equity-settled share options expense HK$’000 8,499 4,653 1,672 — 14,824 1,241 862 — — 2,103 431 431 431 — 1,293 18,220	Total remuneration HK$’000 11,918 6,069 2,032 —
					20,019
					1,601 1,042 — —
					2,643
					566 611 611 45
					1,833
					24,495

– 69 –

FINANCIAL INFORMATION

APPENDIX I

2010 Executive directors Wang Da Yong Tian Wenwei Wang Tongtian Liu Yee Nee Louie Mei Po Li Wei Zhou Jing Non-executive directors Li Yi Su Bin Independent non- executive directors Jacobsen William Keith Cao Kuangyu Chiu Sui Keung Ng Wai Hung Wu Wang Li Total	Fees HK$’000 — — — — — — — — 164 84 248 160 164 172 16 6 518 766	Salaries, allowances and benefits in kind HK$’000 2,800 887 180 — — — — 3,867 — — — — — — — — — 3,867	Pension scheme contributions HK$’000 8 — — — — — — 8 — — — — — — — — — 8	Equity-settled share options expense HK$’000 1,295 5,020 1,530 — — — — 7,845 1,339 383 1,722 192 192 192 — — 576 10,143	Total remuneration HK$’000 4,103 5,907 1,710 — — — —
					11,720
					1,503 467
					1,970
					352 356 364 16 6
					1,094
					14,784

There was no arrangement under which a director waived or agreed to waive any remuneration during the year (2010: Nil).

10. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees during the year included three (2010: three) directors, details of whose remuneration are set out in note 9 above. Details of the remuneration of the remaining two (2010: two) non-director, highest paid employees for the year are as follows:

Salaries, allowances and benefits in kind Pension scheme contributions Equity-settled share option expense	Group 2011 2010 HK$’000 HK$’000 2,096 1,271 24 13 4,344 4,685 6,464 5,969	Group 2011 2010 HK$’000 HK$’000 2,096 1,271 24 13 4,344 4,685 6,464 5,969
		5,969

– 70 –

FINANCIAL INFORMATION

APPENDIX I

The number of non-director, highest paid employees whose remuneration fell within the following bands is as follows:

HK$2,500,001 to HK$3,000,000 HK$3,000,001 to HK$3,500,000	Number of employees 2011 2010 1 1 1 1 2 2	Number of employees 2011 2010 1 1 1 1 2 2
		2

During the year ended 31 December 2010, the non-director, highest paid employees were granted share options of the Company, in respect of their services to the Group, under the share option scheme of the Company, further details of which are set out in note 30 to the financial statements. The fair value of these options, which has been recognised in profit or loss over the vesting period, was determined as at the date of grant and the amount included in the financial statements for the current year is included in the above non-director, highest paid employees’ remuneration disclosures.

During the year ended 31 December 2011, no share options have been granted to the above non-director, highest paid employees.

11. INCOME TAX

No provision for Hong Kong profits tax has been made as the Group did not generate any assessable profits arising in Hong Kong during the year ended 31 December 2011 (2010: Nil). Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the jurisdictions in which the Group operates.

Group: Current — Mainland China Deferred (note 28) Total tax charge for the year	2011 HK$’000 119,108 (78,712) 40,396	2010 HK$’000 144,786 (44,381
		100,405

A reconciliation of the tax expense applicable to profit/(loss) before tax at the statutory rates for the jurisdictions in which the Company and the majority of its subsidiaries are domiciled to the tax expense at the effective tax rates, and a reconciliation of the applicable rates (i.e., the statutory tax rates) to the effective tax rates, are as follows:

Group — 2011

Profit/(loss) before tax Tax at the statutory tax rate Income not subject to tax Expenses not deductible for tax Tax losses not recognised Tax charge at the Group’s effective rate	Hong HK$’000 (80,632) (13,304) (7,547) 18,197 2,654 —	Kong % 16.5 9.4 (22.6) (3.3) —	Mainland China HK$’000 % 186,462 46,616 25.0 (7,487) (4.0) 916 0.4 351 0.2 40,396 21.6	Total HK$’000 % 105,830 33,312 31.5 (15,034) (14.2 19,113 18.1 3,005 2.8 40,396 38.2	Total HK$’000 % 105,830 33,312 31.5 (15,034) (14.2 19,113 18.1 3,005 2.8 40,396 38.2
					31.5 (14.2 18.1 2.8
					38.2

– 71 –

FINANCIAL INFORMATION

APPENDIX I

Group — 2010

Profit/(loss) before tax Tax at the statutory tax rate Income not subject to tax Expenses not deductible for tax Tax losses not recognised Tax charge at the Group’s effective rate	Hong HK$’000 (1,172,726) (193,500) (4,699) 193,049 5,150 —	Kong % 16.5 0.4 (16.5) (0.4) —	Mainland China HK$’000 % 387,137 96,784 25.0 — — 2,754 0.7 867 0.2 100,405 25.9	Total HK$’000 % (785,589) (96,716) 12.3 (4,699) 0.6 195,803 (24.9 6,017 (0.8 100,405 (12.8	Total HK$’000 % (785,589) (96,716) 12.3 (4,699) 0.6 195,803 (24.9 6,017 (0.8 100,405 (12.8
					12.3 0.6 (24.9 (0.8
					(12.8

12. PROFIT/(LOSS) ATTRIBUTABLE TO OWNERS OF THE COMPANY

The consolidated profit/(loss) attributable to owners of the Company for the year ended 31 December 2011 includes a loss of HK$80,476,000 (2010: HK$1,193,633,000) which has been dealt with in the financial statements of the Company (note 31(b)).

13. EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE COMPANY

The calculation of the basic earnings/(loss) per share amounts is based on the profit/(loss) for the year attributable to ordinary equity holders of the Company, and the weighted average number of ordinary shares of 1,313,416,291 (2010: 787,522,237) in issue during the year. The weighted average numbers of ordinary shares in 2011 and 2010 have been retrospectively adjusted for the twenty-to-one share consolidation which took place on 24 June 2011 (note 29(f)(i)).

The calculation of the diluted earnings per share amounts for the year is based on the profit for the year attributable to ordinary equity holders of the Company, adjusted to reflect the interest on the convertible notes/bonds and fair value gain on the derivative component of the convertible bonds. The weighted average number of ordinary shares used in the calculation is the weighted average number of ordinary shares in issue during the year, as used in the basic earnings per share calculation, and the weighted average number of ordinary shares assumed to have been issued at no consideration on the deemed exercise and conversion of share options and convertible bonds/notes into ordinary shares.

For the years ended 31 December 2011 and 2010, no adjustment has been made to the basic earnings/(loss) per share amounts presented in respect of a dilution as the share options of the Company outstanding during these years and the deemed conversion of the convertible bonds/notes issued by the Company have either no dilutive effect or an anti-dilutive effect on the basic earnings/(loss) per share amounts for these years.

– 72 –

FINANCIAL INFORMATION

APPENDIX I

14. PROPERTY, PLANT AND EQUIPMENT

Group

Note 31 December 2011 At 31 December 2010 and 1 January 2011: Cost Accumulated depreciation Net carrying amount At 1 January 2011, net of accumulated depreciation Additions Disposals and written-off Acquisition of a subsidiary 32 Depreciation provided during the year Transfers Exchange realignment At 31 December 2011, net of accumulated depreciation At 31 December 2011: Cost Accumulated depreciation Net carrying amount Note 31 December 2010 At 1 January 2010: Cost Accumulated depreciation Net carrying amount At 1 January 2010, net of accumulated depreciation Additions Disposals Disposal of subsidiaries 33 Depreciation provided during the year Transfers Exchange realignment At 31 December 2010, net of accumulated depreciation At 31 December 2010: Cost Accumulated depreciation Net carrying amount	Buildings HK$’000 36,941 (2,220) 34,721 34,721 621 — 8,772 (2,316) 3,355 1,950 47,103 52,417 (5,314) 47,103 Buildings HK$’000 35,663 (429) 35,234 35,234 — — — (1,733) — 1,220 34,721 36,941 (2,220) 34,721	Leasehold improvements HK$’000 878 (132) 746 746 — — — (176) — — 570 878 (308) 570 Leasehold improvements HK$’000 — — — — 878 — — (132) — — 746 878 (132) 746	Plant and machinery HK$’000 1,256,281 (107,659) 1,148,622 1,148,622 524,150 — 106,446 (150,758) 1,940 66,368 1,696,768 1,979,255 (282,487) 1,696,768 Plant and machinery HK$’000 797,268 (547) 796,721 796,721 294,989 (88,165) — (104,824) 221,367 28,534 1,148,622 1,256,281 (107,659) 1,148,622	Furniture, fixtures and equipment HK$’000 8,221 (1,330) 6,891 6,891 4,618 — 496 (2,525) — 394 9,874 14,843 (4,969) 9,874 Furniture, fixtures and equipment HK$’000 4,582 (115) 4,467 4,467 3,623 — (52) (1,294) — 147 6,891 8,221 (1,330) 6,891	Motor vehicles HK$’000 7,434 (451) 6,983 6,983 3,398 (463) 1,295 (2,105) — 373 9,481 13,102 (3,621) 9,481 Motor vehicles HK$’000 3,536 (25) 3,511 3,511 7,000 (2,512) — (1,151) — 135 6,983 7,434 (451) 6,983	Construction in progress HK$’000 107,625 — 107,625 107,625 290,373 (22,951) 5,544 — (5,295) 12,084 387,380 387,380 — 387,380 Construction in progress HK$’000 11,882 — 11,882 11,882 316,109 — — — (221,367) 1,001 107,625 107,625 — 107,625	Total HK$’000 1,417,380 (111,792
							1,305,588
							1,305,588 823,160 (23,414 122,553 (157,880 — 81,169
							2,151,176
							2,447,875 (296,699
							2,151,176
							Total HK$’000 852,931 (1,116
							851,815
							851,815 622,599 (90,677 (52 (109,134 — 31,037
							1,305,588
							1,417,380 (111,792
							1,305,588

– 73 –

FINANCIAL INFORMATION

APPENDIX I

Company

31 December 2011 At 31 December 2010 and 1 January 2011: Cost Accumulated depreciation Net carrying amount At 1 January 2011, net of accumulated depreciation Additions Depreciation provided during the year At 31 December 2011, net of accumulated depreciation At 31 December 2011: Cost Accumulated depreciation Net carrying amount	Furniture, fixtures and equipment HK$’000 183 (28) 155 155 — (37) 118 183 (65) 118	Leasehold improvements HK$’000 878 (132) 746 746 — (176) 570 878 (308) 570	Motor vehicles HK$’000 596 (89) 507 507 — (118) 389 596 (207) 389	Total HK$’000 1,657 (249
				1,408
				1,408 — (331
				1,077
				1,657 (580
				1,077

– 74 –

FINANCIAL INFORMATION

APPENDIX I

31 December 2010 At 1 January 2010: Cost Accumulated depreciation Net carrying amount At 1 January 2010, net of accumulated depreciation Additions Depreciation provided during the year At 31 December 2010, net of accumulated depreciation At 31 December 2010: Cost Accumulated depreciation Net carrying amount	Furniture, fixtures and equipment HK$’000 — — — — 183 (28) 155 183 (28) 155	Leasehold improvements HK$’000 — — — — 878 (132) 746 878 (132) 746	Motor vehicles HK$’000 — — — — 596 (89) 507 596 (89) 507	Total HK$’000 — —
				—
				— 1,657 (249
				1,408
				1,657 (249
				1,408

– 75 –

FINANCIAL INFORMATION

APPENDIX I

15. PREPAID LAND PREMIUMS

Note Carrying amount at 1 January Acquisition of a subsidiary 32 Amortisation provided during the year Exchange realignment Carrying amount at 31 December	Group 2011 2010 HK$’000 HK$’000 12,299 12,416 2,523 — (357) (548 615 431 15,080 12,299	Group 2011 2010 HK$’000 HK$’000 12,299 12,416 2,523 — (357) (548 615 431 15,080 12,299
		12,299

The leasehold land is situated in Mainland China and is held under a medium term lease.

16. MINING RIGHTS

Note Cost at 1 January, net of accumulated amortisation Acquisition of a subsidiary 32 Amortisation provided during the year Exchange realignment At 31 December At 31 December: Cost Accumulated amortisation Exchange realignment Net carrying amount	Group 2011 2010 HK$’000 HK$’000 2,343,144 2,384,988 670,646 — (162,831) (124,202 113,977 82,358 2,964,936 2,343,144 3,055,824 2,385,180 (287,225) (124,394 196,337 82,358 2,964,936 2,343,144	Group 2011 2010 HK$’000 HK$’000 2,343,144 2,384,988 670,646 — (162,831) (124,202 113,977 82,358 2,964,936 2,343,144 3,055,824 2,385,180 (287,225) (124,394 196,337 82,358 2,964,936 2,343,144
		2,343,144
		2,385,180 (124,394 82,358
		2,343,144

The Group’s mining rights with a carrying amount of approximately HK$2,327,383,000 as at 31 December 2011 (2010: HK$2,343,144,000) were pledged to secure interest-bearing bank borrowings of the Group (note 25).

17. INTERESTS IN SUBSIDIARIES

Notes Unlisted shares or investments, at cost (a) Due from subsidiaries (b)	Company 2011 2010 HK$’000 HK$’000 1,810,195 1,810,195 237 83	Company 2011 2010 HK$’000 HK$’000 1,810,195 1,810,195 237 83
		83

– 76 –

FINANCIAL INFORMATION

APPENDIX I

Notes:

(a) Particulars of the principal subsidiaries are as follows:

	Place of	Nominal value of
	incorporation/	issued ordinary/	Percentage	of equity
	registration and	registered share	attributable to		the
Name	place of operations	capital	Company			Principal activities
			Directly	Indirectly
Triumph Fund A Limited	Cayman Islands	US$50,000	—		100	Investment holding
Shanxi Hengchuang	PRC/Mainland China	US$75,000,000	—		100	Investment holding
Industrial Co., Ltd.#
Shanxi Puhua Deqin	PRC/Mainland China	RMB150,000,000	—		99	Investment holding
Metallurgy Technology
Co., Ltd.#
Eerduosi Hengtai Coal	PRC/Mainland China	RMB180,000,000	—		95	Mining and
Co., Ltd. (‘‘Hengtai’’)#						selling of coal
Inner Mongolia Liaoyuan	PRC/Mainland China	RMB5,000,000	—		95	Mining and
Coal Mining Co., Ltd.						selling of coal
(‘‘Liaoyuan’’)#

Registered as limited liability companies under PRC law

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

(b) All balances with subsidiaries as at 31 December 2011 and 2010 are unsecured, interest-free and have no fixed terms of repayment.

18. INVESTMENT IN A JOINTLY-CONTROLLED ENTITY

Unlisted investment, at cost Share of net assets	Group 2011 HK$’000 16,651 (28
	16,623

– 77 –

FINANCIAL INFORMATION

APPENDIX I

Particulars of the jointly-controlled entity are as follows:

Name Paid-up registered capital Place of registration 聚信泰和能源投資基金管理有限責任公司 RMB30,000,000 PRC	Percentage of Ownership interest Voting power Profit sharing Principal activity 45 45 45 Financial management

The above investment in a jointly-controlled entity is indirectly held by the Company.

The following table illustrates the summarised financial information of the Group’s jointly-controlled entity:

Share of the jointly-controlled entity’s assets and liabilities: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Share of the jointly-controlled entity’s results: Revenue Total expenses Tax Loss after tax 19. INVENTORIES Raw materials Finished goods Sub-materials and parts 20. TRADE AND BILLS RECEIVABLES Notes Trade and bills receivables (a) Impairment of trade receivables (b) (c)	2011 HK$’000 15,235 2,303 (915 — 16,623 2,336 (2,364 — (28 Group 2011 2010 HK$’000 HK$’000 10,362 3,402 6,672 874 182 7 17,216 4,283 Group 2011 2010 HK$’000 HK$’000 117,100 270,360 — (7,014 117,100 263,346	2011 HK$’000 15,235 2,303 (915 —
		16,623
		2,336 (2,364 —
		(28
		263,346

– 78 –

FINANCIAL INFORMATION

APPENDIX I

Notes:

(a) The Group’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally one month, extending up to six months for major customers. Each customer has a maximum credit limit. The Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by the management. In view of the aforementioned and the fact that the Group’s trade and bills receivables relate to various diversified customers, there is no significant concentration of credit risk. The Group does not hold any collateral or other credit enhancements over its trade and bills receivable balances. Trade and bills receivables are non-interest-bearing.

An aged analysis of the trade and bills receivables as at the end of the reporting period, based on the invoice date and net of provisions, is as follows:

0 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days 181 to 365 days More than 365 days Provision for impairment	Group 2011 2010 HK$’000 HK$’000 116,427 251,318 — — — — — 6,178 — 1,477 673 11,387 117,100 270,360 — (7,014 117,100 263,346	Group 2011 2010 HK$’000 HK$’000 116,427 251,318 — — — — — 6,178 — 1,477 673 11,387 117,100 270,360 — (7,014 117,100 263,346
		270,360 (7,014
		263,346

(b) The movements in the provision for impairment of trade receivables are as follows:

At 1 January Impairment losses recognised (note 8) Amount written off as uncollectible Disposal of subsidiaries Exchange realignment At 31 December	Group 2011 2010 HK$’000 HK$’000 7,014 35,612 144 2,308 (7,158) — — (31,418 — 512 — 7,014	Group 2011 2010 HK$’000 HK$’000 7,014 35,612 144 2,308 (7,158) — — (31,418 — 512 — 7,014
		7,014

As at 31 December 2010, included in the above provision for impairment of trade receivables were full provisions for individually impaired trade receivables of HK$7,014,000. The individually impaired trade receivables in 2010 related to customers that were in financial difficulties and the receivables were not expected to be recovered. As at 31 December 2011, this amount has been fully written off as uncollectible.

– 79 –

FINANCIAL INFORMATION

APPENDIX I

(c) An aged analysis of the trade and bills receivables that are not individually nor collectively considered to be impaired is as follows:

Neither past due nor impaired Past due for less than 6 months Past due for over 6 months	Group 2011 2010 HK$’000 HK$’000 116,427 257,496 — 1,477 673 4,373 117,100 263,346	Group 2011 2010 HK$’000 HK$’000 116,427 257,496 — 1,477 673 4,373 117,100 263,346
		263,346

Receivables that were neither past due nor impaired relate to various customers for whom there was no recent history of default.

Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, the directors of the Company are of the opinion that no provision for impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable.

21. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Notes Balances with third parties Balances with related parties 37(b) Impairment of prepayments, deposits and other receivables (a) Portion classified as current assets Non-current portion	Group 2011 2010 HK$’000 HK$’000 722,108 619,510 — 2,191 722,108 621,701 — (15,526) 722,108 606,175 (566,144) (171,432) 155,964 434,743	Company 2011 2010 HK$’000 HK$’000 211,140 182,145 — — 211,140 182,145 — — 211,140 182,145 (211,140) (2,145 — 180,000	Company 2011 2010 HK$’000 HK$’000 211,140 182,145 — — 211,140 182,145 — — 211,140 182,145 (211,140) (2,145 — 180,000
			182,145 —
			182,145 (2,145
			180,000

– 80 –

FINANCIAL INFORMATION

APPENDIX I

Note:

(a) The movement in the provision for impairment of prepayments, deposits and other receivables is as follows:

At 1 January Impairment loss recognised (note 8) Amount written off as uncollectible Disposal of subsidiaries Exchange realignment At 31 December	Group 2011 2010 HK$’000 HK$’000 15,526 9,987 1,086 8,521 ( 16,612) — — (3,464 — 482 — 15,526	Group 2011 2010 HK$’000 HK$’000 15,526 9,987 1,086 8,521 ( 16,612) — — (3,464 — 482 — 15,526
		15,526

22. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS

Cash and bank balances Time deposits Less: Time deposits pledged for general bank facilities Cash and cash equivalents	Group 2011 2010 HK$’000 HK$’000 44,864 605,179 10,000 20,454 (2,936) (417) 51,928 625,216	Company 2011 2010 HK$’000 HK$’000 9,676 224,147 10,000 20,037 — — 19,676 244,184	Company 2011 2010 HK$’000 HK$’000 9,676 224,147 10,000 20,037 — — 19,676 244,184
			244,184

(a) At the end of the reporting period, the cash and bank balances of the Group denominated in Renminbi (‘‘RMB’’) amounted to HK$32,252,000 (2010: HK$381,032,000). 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 Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.
(b) Cash at banks earns interest at floating rates based on daily bank deposit rates. Time deposits are made for varying periods of between one day and three months (2010: one day to three months) depending on the immediate cash requirements of the Group, and earn interest at the respective time deposit rates. The bank balances are deposited with creditworthy banks with no recent history of default.

– 81 –

FINANCIAL INFORMATION

APPENDIX I

23. TRADE AND BILLS PAYABLES

An aged analysis of the trade and bills payables as at the end of the reporting period, based on the invoice date, is as follows:

0 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days 181 to 365 days Over 365 days	Group 2011 2010 HK$’000 HK$’000 2,539 604 582 82 75 — 6 71 1,805 143 41 3 5,048 903	Group 2011 2010 HK$’000 HK$’000 2,539 604 582 82 75 — 6 71 1,805 143 41 3 5,048 903
		903

The trade payables are non-interest-bearing and are normally settled on 60-day terms.

24. OTHER PAYABLES AND ACCRUALS

Notes Accruals Receipts in advance Interest payable Value-added tax and other tax payables Loans from third parties (a) Consideration payable for the acquisition of a subsidiary (b) Other payables (c) Portion classified as current Non-current portion	Group 2011 2010 HK$’000 HK$’000 288,854 183,520 29,048 20,970 16,399 15,641 288,845 171,822 218,347 120,713 324,007 — 16,473 13,180 1,181,973 525,846 (1,181,973) (484,748) — 41,098	Company 2011 2010 HK$’000 HK$’000 2,480 582 — — — — — — — — — — 1,203 11,387 3,683 11,969 (3,683) (11,969 — —	Company 2011 2010 HK$’000 HK$’000 2,480 582 — — — — — — — — — — 1,203 11,387 3,683 11,969 (3,683) (11,969 — —
			11,969 (11,969
			—

Notes:

(a) Except for a loan from a third party with an outstanding amount of RMB35,776,000 (equivalent to HK$44,005,000) as at 31 December 2011 (2010: RMB68,216,000 (equivalent to HK$80,256,000)) which bears interest at an annual interest rate of 7.4% and is repayable by quarterly instalments up to November 2012, the remaining balances of loans from third parties are unsecured, interest-free and have no fixed terms of repayment.
(b) The balance as at 31 December 2011 represents the unpaid consideration for the acquisition of a subsidiary in 2011, further details of which are included in note 32 to the financial statements.
(c) Other payables are non-interest-bearing and have an average term of three months.

– 82 –

FINANCIAL INFORMATION

APPENDIX I

25. INTEREST-BEARING BANK BORROWINGS

Group

2011 Effective interest rate (%) Maturity Current Bank loans — unsecured 6.31–8.58 2012 Non-current Bank loans — secured 8.39–8.58 2013–2015 Analysed into: Bank loans: Within one year or on demand In the second year In the third to fifth years, inclusive	2010 HK$’000 Effective interest rate (%) Maturity 555,075 5.31–7.97 2011 678,425 8.385–8.58 2013–2015 1,233,500 555,075 370,000 308,425 1,233,500	HK$’000 411,775
		882,375
		1,294,150
		411,775 — 882,375
		1,294,150

All bank loans of the Group are denominated in RMB. The carrying amounts of the Group’s interest-bearing bank borrowings approximated to their fair values as at the end of the reporting period.

(i) Bank loan of RMB400,000,000 (equivalent to approximately HK$493,400,000) (2010: RMB500,000,000 (equivalent to approximately HK$588,250,000)) is subject to the floating interest rate for five-year loans published by the People’s Bank of China, and is repayable by instalments in 2012 and 2013 (2010: 2011 to 2013). This bank loan is guaranteed by Mr. Zhao Ming (‘‘Mr. Zhao’’, a former shareholder and a holder of the Amended 2009 CN (as defined in note 27(a) to the financial statements) of the Company and a former shareholder of Triumph Fund A Limited, a subsidiary of the Group) and Mr. Hao Shenhai (‘‘Mr. Hao’’, a former director of Hengtai), and is secured by Hengtai’s mining rights (note 16).
(ii) Bank loan of RMB250,000,000 (equivalent to approximately HK$308,375,000) (2010: RMB250,000,000 (equivalent to approximately HK$294,125,000)) is subject to the floating interest rate for six-year loans published by the People’s Bank of China, and is repayable by instalments in 2014 and 2015. This bank loan is guaranteed by Mr. Zhao and Mr. Hao, and is secured by Hengtai’s mining rights (note 16).
(iii) Bank loan of RMB300,000,000 (equivalent to approximately HK$370,050,000) (2010: Nil) is subject to a fixed annual interest rate of 6.31% and the maturity date was 20 June 2012. This bank loan is guaranteed by 山西普大煤業集團有限公司 (an entity in which Mr. Zhao has certain shareholdings), 內蒙古伊東集團恒東能源有限責任公司 (an independent third party), and Mr. Xu Jianhua (a director of Hengtai, ‘‘Mr. Xu’’).
(iv) Bank loan of RMB30,000,000 (equivalent to approximately HK37,005,000) (2010: Nil) is subject to a floating interest rate based on 130% of the financial institution one-year borrowing rate published by the People’s Bank of China and the maturity date is 10 May 2012. This bank loan is guaranteed by an independent third party, 內蒙古東達蒙古王有限公司.
(v) Bank loan of RMB20,000,000 (equivalent to approximately HK24,670,000) (2010: Nil) is subject to a floating interest rate based on 150% of the financial institution one-year borrowing rate published by the People’s Bank of China and the maturity date is 28 December 2012. This bank loan is guaranteed by 山西普大煤業集團有限公司, an entity in which Mr. Zhao has certain shareholdings.

– 83 –

FINANCIAL INFORMATION

APPENDIX I

(vi) As at 31 December 2010, a bank loan of RMB100,000,000 (equivalent to approximately HK$117,650,000) was subject to a fixed annual interest rate of 5.31% and the maturity date was 25 February 2011. This bank loan was guaranteed by Mr. Hao.
(vii) As at 31 December 2010, a bank loan of RMB30,000,000 (equivalent to approximately HK$35,295,000) was subject to a floating interest rate based on 130% of the financial institution one-year borrowing rate published by the People’s Bank of China and the maturity date was 28 March 2011. Such bank loan was guaranteed by Mr. Hao, and two other independent third parties, 內蒙古東達蒙古王有限公司 and Ms. Bian Xiao Yan.
(viii) As at 31 December 2010, a bank loan of RMB200,000,000 (equivalent to approximately HK$235,300,000) was subject to a fixed annual interest rate of 5.31% and the maturity date was 6 April 2011. Such bank loan was guaranteed by Mr. Hao.
(ix) As at 31 December 2010, a bank loan of RMB20,000,000 (equivalent to approximately HK$23,530,000) was subject to a floating interest rate based on 120% of the financial institution one-year borrowing rate published by the People’s Bank of China and was matured on 19 December 2011. Such bank loan is guaranteed by 山西普大煤業集團有限公司, an entity in which Mr. Zhao has certain shareholdings therein.

26. CONVERTIBLE BONDS

On 24 September 2010, the Company issued one-year convertible bonds in the principal amount of HK$195,000,000 which bear interest at a rate of 2% per annum payable semi-annually in advance (the ‘‘2010 CB’’). The 2010 CB can be converted into ordinary shares at an initial conversion price of HK$4.0 per share, which has been adjusted for the twenty-toone share consolidation taken place on 24 June 2011 (note 29 (f)(i)).

The conversion option of the 2010 CB exhibited characteristics of an embedded derivative, thus is separated from its liability component. On initial recognition, the derivative component of the 2010 CB is measured at fair value as determined by reference to a valuation performed by independent professionally qualified valuers, and presented as part of the derivative liability. Any excess of the net proceeds received by the Company over the amount initially recognised as the derivative component is recognised as the liability component. Subsequently, changes in the fair value of the derivative component of the convertible bonds are recognised in profit or loss within the year in which they arise and the liability component of the convertible bonds is stated at amortised cost.

During the year, the outstanding 2010 CB was fully redeemed at maturity and the difference between the amount paid and the carrying amounts of liability and derivative components was recognised in profit or loss.

On initial recognition, the 2010 CB have been split as to the derivative and liability components, as follows:

Group and Company Notes Proceeds of nominal value of the 2010 CB issued during the year Less: Direct transaction costs attributable to the liability component Net proceeds from issue of the 2010 CB Derivative component at the issuance date (a) Liability component at the issuance date (b)	HK$’000 195,000 (9,750
	185,250 (49,833
	135,417

– 84 –

FINANCIAL INFORMATION

APPENDIX I

Notes:

(a) The movements of the derivative component of the 2010 CB are as follows:

Notes At 1 January 2010 At the issuance date Fair value change, net 6 Converted into ordinary shares of the Company (c) At 31 December 2010 and 1 January 2011 Fair value change, net 6 At 31 December 2011	HK$’000 — 49,833 (2,736 (11,645
	35,452 (35,452
	—

The fair values of the derivative component of the 2010 CB at the issuance date, at each of the dates of conversion and as at 31 December 2010 were estimated, using a binomial option pricing model, taking into account the terms and conditions of the derivative. The following table lists the inputs to the model used:

	2010
Expected volatility (%)	58–88
Risk-free interest rate (%)	0.25–0.29
Expected life of options (year)	0.73–1
Effective interest rate (%)	7.8–8.3
Share price of the Company (HK$ per share)	0.175–0.227

The 2010 CB matured on 24 September 2011 and the outstanding amount thereof has been fully redeemed on 26 September 2011 in accordance with the terms of the 2010 CB, therefore, the carrying amount of the derivative component of the 2010 CB was recognised in profit or loss during the year ended 31 December 2011.

(b) The movements of the liability component of the 2010 CB during the year are as follows:

Notes At 1 January At the issuance date Imputed interest expense 7 Converted into ordinary shares of the Company (c) Redeem on maturity (d) At 31 December	2011 HK$’000 121,896 — 37,104 — (159,000) —	2010 HK$’000 — 135,417 12,707 (26,228 —
		121,896

(c) During the year ended 31 December 2010, the 2010 CB with a principal amount of HK$36,000,000 were converted into 180,000,000 ordinary shares of the Company at the conversion price of HK$0.2 each (before the adjustment for the twenty-to-one share consolidation which took place on 24 June 2011), and a total of HK$37,873,000 (representing the sum of the derivative and the liability components of these converted 2010 CB, which amounted to HK$11,645,000 and HK$26,228,000, respectively) was transferred to the share capital and share premium accounts upon the conversion (note 29(b)).

(d) The 2010 CB matured on 24 September 2011 and the outstanding amount thereof has been fully redeemed on 26 September 2011 in accordance with the terms of the 2010 CB.

– 85 –

FINANCIAL INFORMATION

APPENDIX I

27. CONVERTIBLE NOTES

On 21 December 2009, the Company issued zero coupon redeemable convertible notes in an aggregate principal amount of HK$1,805,000,000 (the ‘‘2009 CN’’), for the acquisition of Triumph Fund A Limited and its subsidiaries. These convertible notes have a maturity term of five years, however, the Company has the right at any time after three years of the issuance date to redeem in whole or in part of the 2009 CN at par value. The 2009 CN can be converted into ordinary shares at the initial conversion price of HK$1.25 per share, which has been adjusted for the twenty-to-one share consolidation taken place on 24 June 2011 (note 29 (f)(i)).

Upon initial recognition on 21 December 2009, the 2009 CN were designated as financial liabilities at fair value through profit or loss with gains or losses on changes in fair value recognised in profit or loss in the year in which they arise.

During the year ended 31 December 2011, the 2009 CN with a principal amount of HK$324,545,000 (2010: HK$857,250,000) were converted into 3,903,720,000 (2010: 13,716,000,000) ordinary shares at the conversion price of HK$1.25 each (note 29(d)), which has been adjusted for the twenty-to-one share consolidation which took place on 24 June 2011 (note 29(f)(i)).

The movements in the carrying amounts and the principal amount of the 2009 CN are as follows:

Group and Company

Notes At 1 January Converted into ordinary shares of the Company 29(b), 29(d) Changes in fair value Derecognition of the 2009 CN (a) Issue of the Amended 2009 CN (as defined below) (a) Imputed interest expense 7 At 31 December	2011 Carrying amount Principal amount HK$’000 HK$’000 466,288 665,000 (271,408) (375,795) — — — — — — 26,902 — 221,782 289,205	2010 Carrying amount Principal amount HK$’000 HK$’000 2,411,000 1,522,250 (1,838,742) (857,250 1,133,144 — (1,705,402) (665,000 466,288 665,000 — — 466,288 665,000	2010 Carrying amount Principal amount HK$’000 HK$’000 2,411,000 1,522,250 (1,838,742) (857,250 1,133,144 — (1,705,402) (665,000 466,288 665,000 — — 466,288 665,000
			665,000

Note:

(a) On 31 December 2010, as agreed with the bond holders and approved by the independent shareholders, certain terms of the 2009 CN were amended such that its conversion options would entitle its holder to convert the 2009 CN into a fixed number of equity instruments at a fixed conversion price (the ‘‘Amended 2009 CN’’). Accordingly, the component of the Amended 2009 CN that exhibits characteristics of a liability is recognised as a liability in the statement of financial position and the conversion option is accounted for as an equity component and included in shareholders’ equity as ‘‘Equity component of convertible notes’’.

Since the existing financial liability (i.e., the 2009 CN) is replaced by another from the same lender of which the terms of an existing liability are substantially modified, such a modification is treated as a derecognition of the original liability (i.e., the 2009 CN) and a recognition of a new liability (i.e., the Amended 2009 CN).

Upon initial recognition of the Amended 2009 CN, the then fair value of the entire 2009 CN of HK$1,705,402,000 was derecognised and the Amended 2009 CN was recognised separately as a liability component of HK$466,288,000 and an equity component of HK$1,239,114,000.

– 86 –

FINANCIAL INFORMATION

APPENDIX I

The fair value of the liability component of the Amended 2009 CN of HK$466,288,000 was determined using a market rate for an equivalent non-convertible note and is carried as a non-current liability on the amortised cost basis until extinguished on conversion or redemption. In addition, the fair value of the conversion option with an amount of HK$1,239,114,000 is included in shareholders’ equity as ‘‘Equity component of convertible notes’’ (note 31(b)). The carrying amount of the conversion option recognised in shareholders’ equity is not remeasured in subsequent years.

28. DEFERRED TAX LIABILITIES

The movements in deferred tax liabilities during the year are as follows:

Group

At 1 January 2010 Deferred tax charged/ (credited) to profit or loss during the year (note 11) Exchange realignment At 31 December 2010 and 1 January 2011 Acquisition of a subsidiary (note 32) Deferred tax charged/ (credited) to profit or loss during the year (note 11) Exchange realignment At 31 December 2011	Losses available for offsetting future taxable profits HK$’000 (3,611) 3,649 (38) — — — — —	Accruals of salary and welfare HK$’000 (4,296) (18,336) (612) (23,244) (3,080) (40,341) (2,205) (68,870)	Depreciation and amortisation of non-current assets HK$’000 6,153 (353) 212 6,012 — 756 311 7,079	Fair value adjustments arising from acquisition of subsidiaries HK$’000 565,818 (29,341) 19,541 556,018 165,009 (39,127) 26,639 708,539	Total HK$’000 564,064 (44,381 19,103
					538,786 161,929 (78,712 24,745
					646,748

At 31 December 2011, deferred tax assets have not been recognised in respect of unused tax losses of HK$223,230,000 (2010: HK$199,288,000) as they have arisen in the Company and certain subsidiaries that have been lossmaking for some time and it is not considered probable that taxable profits will be available against which such tax losses can be utilised.

Pursuant to the PRC Corporate Income Tax Law, a 10% withholding tax is levied on dividends declared to foreign investors from the foreign investment enterprises established in Mainland China. The requirement is effective from 1 January 2008 and applies to earnings after 31 December 2007. A lower withholding tax rate may be applied if there is tax treaty between Mainland China and jurisdiction of the foreign investors. For the Group, the applicable rate is 10%. The Group is therefore liable for withholding taxes on dividends distributed by those subsidiaries established in Mainland China in respect of earnings generated from 1 January 2008.

At 31 December 2011, no deferred tax has been recognised for withholding taxes that would be payable on the unremitted earnings that are subject to withholding taxes of the Group’s subsidiaries established in Mainland China (2010: Nil). In the opinion of the directors of the Company, it is not probable that these subsidiaries will distribute such earnings in the foreseeable future. There were no temporary differences associated with investments in subsidiaries in Mainland China for which deferred tax liabilities have not been recognised (2010: Nil) as at 31 December 2011.

– 87 –

FINANCIAL INFORMATION

APPENDIX I

29. SHARE CAPITAL

Authorised: 15,000,000,000 (2010: 300,000,000,000) ordinary shares of HK$0.1 (2010: HK$0.01) each Issued and fully paid: 1,428,729,168 (2010: 22,629,743,370) ordinary shares of HK$0.1 (2010: HK$0.01) each	2011 HK$’000 1,500,000 142,873	2010 HK$’000 3,000,000
		226,298

A summary of the transactions during the year with reference to the movements in the Company’s issued share capital is as follows:

Notes At 1 January 2010 Issue of new shares (a) Conversion of the 2010 CB (b) Conversion of the 2009 CN (c) Share issue expenses At 31 December 2010 and 1 January 2011 Conversion of the Amended 2009 CN (d) Repurchase of shares (e) Share premium reduction (f) Capital reorganisation (f) Share issue expenses At 31 December 2011	Number of shares in issue 7,733,743,370 1,000,000,000 180,000,000 13,716,000,000 — 22,629,743,370 3,903,720,000 (38,278,000) — (25,066,456,202) — 1,428,729,168	Issued capital HK$’000 77,338 10,000 1,800 137,160 — 226,298 49,027 (523) — (131,929) — 142,873	Share premium account HK$’000 1,133,198 195,000 36,073 1,701,582 (238) 3,065,615 922,611 — (2,953,243) 131,929 (99) 1,166,813	Total HK$’000 1,210,536 205,000 37,873 1,838,742 (238
				3,291,913 971,638 (523 (2,953,243 — (99
				1,309,686

Notes:

(a) On 30 December 2010, 1,000,000,000 ordinary shares of a par value of HK$0.01 each were issued, at the issue price of HK$0.205 per share, for a total cash consideration, before expenses, of HK$205,000,000.
(b) On 8 November 2010, 180,000,000 ordinary shares of a par value of HK$0.01 each were issued upon partial conversion of the 2010 CB with a principal amount of HK$36,000,000. The aggregate value of the derivative and liability components of the 2010 CB was HK$37,873,000 (note 26), and the excess of the amount over the par value of HK$1,800,000 for the ordinary shares issued, which amounted to HK$36,073,000 was credited to the share premium account of the Company.
(c) During the year ended 31 December 2010, 13,176,000,000 ordinary shares of a par value of HK$0.01 each were issued upon partial conversion of the 2009 CN with a principal amount of HK$857,250,000. The fair value of these convertible notes was HK$1,838,742,000, and the excess of this amount over the aggregate par value of HK$137,160,000 for the ordinary shares issued, which amounted to HK$1,701,582,000 was credited to the share premium account of the Company.

– 88 –

FINANCIAL INFORMATION

APPENDIX I

(d) During the year ended 31 December 2011, 3,792,720,000 ordinary shares of a par value of HK$0.01 each and 111,000,000 ordinary shares of a par value of HK$0.1 each were issued upon partial conversion of the Amended 2009 CN with aggregate principal amount of HK$324,545,000. The carrying amount of these convertible notes (including liability component of HK$271,408,000 and equity component of HK$700,230,000) was HK$971,638,000, and the excess of the carrying amount of the convertible notes over the aggregate par value of HK$49,027,000 for the ordinary shares issued, which amounted to HK$922,611,000, was credited to the share premium account of the Company.
(e) During the year ended 31 December 2011, 36,720,000 ordinary shares of the Company of a par value of HK$0.01 each and 1,558,000 shares of par value of HK$0.1 each were repurchased on the Stock Exchange at a total consideration, before expenses, of HK$7,278,000.

Details of the shares repurchased are as follows:

	Number of
	shares	Highest price	Lowest price	Aggregate
Month/year	repurchased	paid per share	paid per share	price paid
		HK$	HK$	HK$
June 2011	36,720,000	0.1186	0.1120	4,293,000
July 2011	1,558,000	1.9945	1.78	2,985,000

The repurchased shares were cancelled and accordingly the issued share capital of the Company was reduced by the nominal value of these shares. Pursuant to Section 49H of the Hong Kong Companies Ordinance, an amount equivalent to the par value of the shares cancelled of HK$523,000 was transferred to the capital redemption reserve. The premium paid for the repurchase of the shares, including expenses incurred for repurchase, of approximately HK$7,322,000 was charged to the accumulated losses.

(f) On 24 June 2011, the shareholders of the Company approved a proposed capital reorganisation (the ‘‘Capital Reorganisation’’) which comprised:
(i) the share consolidation, i.e. consolidation of 20 existing shares of par value of HK$0.01 each into one consolidated share of par value of HK$0.20;
(ii) the capital reduction, i.e. reduction of the par value of the consolidated shares of HK$0.20 each to HK$0.10 each by cancelling HK$0.10 of the par value in each consolidated share. The paid up capital so cancelled is transferred to the share premium account of the Company; and
(iii) reduction of share premium account, i.e. reduction of share premium account by HK$2,953,243,000, being a sum representing the accumulated losses of the Company as at 31 December 2010 and the application of the credit arising from such reduction to eliminate the accumulated losses.

Details of the Capital Reorganisation were set out in the Company’s announcement dated 12 May 2011 and the circular dated 25 May 2011. The share consolidation and capital reduction were effective on 27 June 2011 when the authorised and issued capital consisted of 300,000,000,000 and 26,385,743,370 ordinary shares of HK$0.01 each, respectively, were reduced by 285,000,000,000 and 25,066,456,202 ordinary shares, respectively. Furthermore, upon completion of the capital reduction, an aggregate of paid-up capital of HK$131,929,000 was cancelled and transferred to the share premium account of the Company. The share consolidation and capital reduction were duly registered in the Companies Registry of Hong Kong on 7 July 2011. The reduction of share premium account was approved by the court on 23 December 2011 and the sealed copy of the court order has been duly registered in the Company Registry of Hong Kong on 29 December 2011. Accordingly, the reduction of share premium account was effective on 29 December 2011.

Share option

Details of the Company’s share option scheme (the ‘‘Scheme’’) and the share options issued under the Scheme are included in note 30 to the financial statements.

– 89 –

FINANCIAL INFORMATION

APPENDIX I

30. SHARE OPTION SCHEME

The Company operates the Scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Eligible participants of the Scheme include the Company’s directors, including independent non-executive directors, other employees of the Group, suppliers of goods or services to the Group, customers of the Group, and any non-controlling shareholders in the Company’s subsidiaries. The Scheme became effective on 28 May 2002 and, unless otherwise cancelled or amended, will remain in force for 10 years from that date.

The maximum number of unexercised share options currently permitted to be granted under the Scheme is an amount equivalent, upon their exercise, up to 10% of the shares of the Company in issue at any time. The maximum number of shares issuable under share options to each eligible participant in the Scheme within any 12-month period is limited to 1% of the shares of the Company in issue at any time. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.

Share options granted to a director, chief executive or substantial shareholder of the Company, or to any of their associates, are subject to approval in advance by the independent non-executive directors. In addition, any share options granted to a substantial shareholder or an independent non-executive director of the Company, or to any of their associates, in excess of 0.1% of the shares of the Company in issue at any time or with an aggregate value (based on the price of the Company’s shares at the date of the grant) in excess of HK$5 million, within any 12-month period, are subject to shareholders’ approval in advance in a general meeting.

The offer of a grant of share options may be accepted within 21 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The share option may be exercised under the Scheme at any time during a period not exceeding five years after the date when the scheme option is granted and expiring on the last date of such period.

The exercise price (which has been adjusted for the twenty-to-one share consolidation which took place on 24 June 2011 (note 29(f)(i)) is determined by the directors of the Company, but shall not be less than the higher of (i) the Stock Exchange closing price of the Company’s shares on the date of offer of the share options; (ii) the average Stock Exchange closing price of the Company’s shares for the five trading days immediately preceding the date of the offer; and (iii) the nominal value of an ordinary share.

Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.

The following share options were outstanding under the Scheme during the year:

Notes At 1 January Granted during the year (a) At 31 December (b)	2011 Weighted average exercise price Number of options HK$ per share ’000 4.80 24,616 — 4.80 24,616	2010 Weighted average exercise price Number of options HK$ per share ’000 2.50 616 4.96 24,000 4.80 24,616	2010 Weighted average exercise price Number of options HK$ per share ’000 2.50 616 4.96 24,000 4.80 24,616
			24,616

– 90 –

FINANCIAL INFORMATION

APPENDIX I

Notes:

(a) The aggregate fair value of the 480,000,000 share options granted under the Scheme during the year ended 31 December 2010 was HK$62,830,000, which was estimated as at the respective dates of grant using a binominal option pricing model, taking into account the terms and conditions upon which the options were granted. The following table lists the inputs to the model used:

Expected turnover rate (%) Expected volatility (%) Risk-free interest rate (%) Expected life of options (year) Closing share price at the date of grant (HK$ per share)	2010 5–7 105–111 0.53–1.02 3 0.154–0.231

Equity-settled share option expense of HK$30,939,000 (2010: HK$23,862,000) was recognised in profit or loss during the year ended 31 December 2011 in respect of the share options granted under the Scheme.

(b) The exercise prices and exercise periods of the share options outstanding as at the end of the reporting periods are as follows:

Number of options*	Exercise price*		Exercise period
	HK$ per share	From	To
At 31 December 2011
616,000	2.50	29 September 2008	28 September 2013
16,000,000	4.96	12 May 2011	11 May 2013
3,000,000	4.96	26 August 2011	25 August 2013
5,000,000	4.96	10 November 2011	9 November 2013
24,616,000
At 31 December 2010
616,000	2.50	29 September 2008	28 September 2013
16,000,000	4.96	12 May 2011	11 May 2013
3,000,000	4.96	26 August 2011	25 August 2013
5,000,000	4.96	10 November 2011	9 November 2013
24,616,000

The exercise price and the number of the share options are subject to adjustment in case of rights or bonus issues, or other similar changes in the Company’s share capital. As at 31 December 2011 and 2010, the exercise price and the number of the share options have been adjusted for the twenty-to-one share consolidation which took place on 24 June 2011 (note 29(f)(i)).

At the end of the reporting period, the Company had 24,616,000 (2010: 24,616,000) share options outstanding under the Scheme. The exercise in full of the outstanding share options would, under the present capital structure of the Company, result in the issue of 24,616,000 additional ordinary shares of the Company and additional share capital of HK$2,461,600 and share premium of HK$118,118,400 (before issue expenses and without taking into account of any transfer of share option reserve to the share premium account).

At the date of approval of these financial statements, the Company had 24,616,000 share options outstanding under the Scheme, which represented approximately 1.72% of the Company’s shares in issue as at that date.

– 91 –

FINANCIAL INFORMATION

APPENDIX I

31. RESERVES

(a) Group

The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity on page 39 the financial statements.

Notes:

(i) The share premium account represents the excess of the issued price net of any share issue expenses over the par value of the shares issued.
(ii) The share option reserve comprises the fair value of share options vested which are yet to be exercised, as further explained in the accounting policy of share-based payment transactions in note 3.3 to the financial statements. The amount will either be transferred to the share premium account when the related share options are exercised, or transferred to accumulated losses should the related share options expire or be forfeited.
(iii) The PRC statutory reserves refer to the PRC statutory reserve fund. Appropriations to this reserve fund are made out of the profit after tax of the statutory financial statements of the PRC subsidiaries and the amount should not be less than 10% of the profit after tax unless the aggregate amount standing to the credit of this reserve exceeds 50% of the registered capital of the PRC subsidiaries. The statutory reserve fund can be used to make up prior year losses of the PRC subsidiaries.
(iv) The exchange fluctuation reserve comprises all foreign exchange differences arising from the translation of the financial statements of operations not denominated in presentation currency of the Company.

– 92 –

FINANCIAL INFORMATION

APPENDIX I

(b) Company

Notes At 1 January 2010 Loss for the year and total comprehensive loss for the year 12 Issue of new shares 29(a) Share issue expenses Conversion of the 2010 CB 29(b) Conversion of the 2009 CN 29(c) Issue of the Amended 2009 CN 27 Equity-settled share option arrangement 30(a) At 31 December 2010 and 1 January 2011 Loss for the year and total comprehensive loss for the year 12 Share issue expenses Conversion of the 2009 CN 29(d) Share repurchase expenses 29(e) Repurchase of shares 29(e) Share premium Reduction 29(f) Share capital reduction 29(f) Equity-settled share option arrangement 30(a) At 31 December 2011	Share premium account HK$’000 (note 31 (a)(i)) 1,133,198 — 195,000 (238) 36,073 1,701,582 — — 3,065,615 — (99) 922,611 — — (2,953,243) 131,929 — 1,166,813	Capital redemption reserve HK$’000 — — — — — — — — — — — — — 523 — — — 523	Equity component of convertible notes HK$’000 — — — — — — 1,239,114 — 1,239,114 — — (700,230) — — — — — 538,884	Share option reserve HK$’000 764 — — — — — — 23,862 24,626 — — — — — — — 30,939 55,565	Accumulated losses HK$’000 (1,759,610) (1,193,633) — — — — — — (2,953,243) (80,476) — — (7,322) — 2,953,243 — — (87,798)	Total HK$’000 (625,648 (1,193,633 195,000 (238 36,073 1,701,582 1,239,114 23,862
						1,376,112 (80,476 (99 222,381 (7,322 523 — 131,929 30,939
						1,673,987

– 93 –

FINANCIAL INFORMATION

APPENDIX I

32. BUSINESS COMBINATION

On 11 August 2011, the Group acquired a 100% equity interest in a coal mine in the PRC, Liaoyuan, which owns and operates a thermal coal mine in Eerduosi City, Inner Mongolia, at a consideration of RMB512,673,000 (equivalent to approximately HK$625,668,000), inclusive of contingent consideration of RMB112,673,000 (equivalent to approximately HK$137,507,000) which is determined with reference to the net profit of Liaoyuan for the post-acquisition period up to 31 December 2011. The acquisition aims to boost the Group’s annual coal production capacity.

The fair values of the identifiable assets and liabilities of Liaoyuan as at the date of the acquisition were as follows:

Notes Property, plant and equipment 14 Prepaid land premiums 15 Mining rights 16 Deferred tax asset 28 Prepayments for non-current assets Inventories Prepayments, deposits and other receivables Cash and bank balances Trade and bills payables Other payables and accruals Other non-current liabilities Tax payable Deferred tax liabilities 28 An indemnification asset (a) Gain on bargain purchase Satisfied by: Cash Other payable	Fair value recognised on acquisition HK$’000 122,553 2,523 670,646 3,080 1,348 5,776 2,487 12,214 (7,666) (122,346) (13,410) (9,309) (165,009) 502,887 152,729 (29,948) 625,668 305,101 320,567 625,668	Previous carrying amount HK$’000 122,553 2,523 10,609 3,080 1,348 5,776 2,487 12,214 (7,666) (122,346) (13,410) (9,309) —
		7,859

An analysis of the net outflow of cash and cash equivalents in respect of the above acquisition for the year ended 31 December 2011 is as follows:

Cash consideration paid Cash and bank balances acquired Net outflow of cash and cash equivalents included in cash flows from investing activities	2011 HK$’000 305,101 (12,214)
	292,887

Notes:

(a) The balance of RMB125 million (equivalent to approximately HK$153 million) as at 31 December 2011 represented an amount receivable from the vendor (the "Vendor") in relation to the acquisition of Liaoyuan. Pursuant to the relevant sale and purchase agreement, the Vendor had agreed to undertake the repayment of all

– 94 –

FINANCIAL INFORMATION

APPENDIX I

liabilities of Liaoyuan existed prior to the completion of the acquisition. Therefore, the Group has recognised such liabilities undertaken by the Vendor upon the completion of the acquisition as an indemnification asset due from the Vendor which is included in other receivables in the consolidated statement of financial position. As at 31 December 2011 and up to the date of approval of these financial statements, the balance has remained unsettled.

In the opinion of the directors of the Company, this indemnification asset of RMB125 million (equivalent to approximately HK$153 million) is fully recoverable because the management is currently negotiating with the Vendor to set off the aforesaid indemnification asset against the unpaid consideration and other payable to the Vendor, which amounted to RMB128 million (equivalent to approximately HK$157 million) in aggregate, as at the date of approval of these financial statements. Therefore, the directors of the Company considered that no impairment is necessary for the aforesaid indemnification asset.

(b) Since the acquisition, Liaoyuan contributed HK$160,871,000 to the Group’s revenue and HK$62,971,000 to the consolidated profit for the year ended 31 December 2011.

Had the combination taken place in the beginning of the year ended 31 December 2011, the revenue of the Group for the year ended 31 December 2011 would have been HK$1,218,333,000. Due to the fact that profit or loss attributed by the combination involves assessments of fair values of consideration and the identifiable assets and liabilities of Liaoyuan as at the date of acquisition, the directors of the Company were of the opinion that it was impractical to disclose the profit or loss of the Group had the combination taken place at the beginning of the year ended 31 December 2011.

33. DISPOSAL OF SUBSIDIARIES

During the year end 31 December 2010, on 17 June 2010, the Group entered into a sale and purchase agreement with an independent third party, pursuant to which the Group agreed to dispose of its entire equity interests in Anchorage Trading Limited and Kunming Huadian Chemicals Co. Ltd., subsidiaries of the Company, for a cash consideration of HK$1,000,000. No disposal of a subsidiary occurred in the current year.

Notes Net assets disposed of: Property, plant and equipment 14 Trade receivables Prepayments, deposits and other receivables Cash and bank balances Trade payables Other payables and accruals Exchange fluctuation reserve released Gain on disposal of subsidiaries 6 Satisfied by: Cash	2010 HK$’000 52 2,587 1,295 1,422 (7,330) (15,041) (17,015) (6,769) 24,784 1,000 1,000 1,000

– 95 –

FINANCIAL INFORMATION

APPENDIX I

An analysis of the net outflow of cash and cash equivalents in respect of the disposal of subsidiaries is as follows:

Cash and bank balances disposed of Cash consideration Net outflow of cash and cash equivalents in respect of the disposal of subsidiaries	2010 HK$’000 (1,422 1,000
	(422

34. CONTINGENT LIABILITIES

At the end of the reporting period, neither the Group nor the Company had any significant contingent liabilities (2010: Nil).

35. OPERATING LEASE ARRANGEMENTS

The Group leases certain of its office premises under operating lease arrangements. Leases for office premises are negotiated for terms ranging from one to three years.

At 31 December 2011, the Group and the Company had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive	Group 2011 2010 HK$’000 HK$’000 2,765 2,663 2,953 3,356 5,718 6,019	Company 2011 2010 HK$’000 HK$’000 2,765 2,663 2,953 3,356 5,718 6,019	Company 2011 2010 HK$’000 HK$’000 2,765 2,663 2,953 3,356 5,718 6,019
			6,019

36. CAPITAL COMMITMENTS

In addition to the operating lease commitments detailed in note 35 above, the Group and the Company had the following capital commitments in respect of the acquisition of items of property, plant and equipment at the end of the reporting period:

					Group
					2011	2010
					HK$’000	HK$’000
Authorised,	but	not	contracted	for	64,854	33,859

At the end of the reporting period, the Company had no material capital commitments.

37. RELATED PARTY TRANSACTIONS

(a) Except for those transactions detailed elsewhere in these financial statements, the Group had no transactions with related parties during the year (2010: Nil).
(b) Details of the Group’s balances with related parties are disclosed in note 21 to the financial statements.

Outstanding balances with related parties are unsecured, interest-free and have no fixed terms of repayment.

– 96 –

FINANCIAL INFORMATION

APPENDIX I

Remuneration for key management personnel of the Group, including amounts paid to the Company’s directors as disclosed in note 9 and certain of the highest paid employees as disclosed in note 10, is as follows:

Short-term employee benefits Post-employment benefits Equity-settled share option expense Total compensation paid to key management personnel	2011 HK$’000 8,346 49 22,564 30,959	2010 HK$’000 5,904 21 14,828
		20,753

38. FINANCIAL INSTRUMENTS BY CATEGORY

Other than the derivative component of convertible bonds as at 31 December 2010 which was stated at fair value (note 26), all financial assets and liabilities of the Group and the Company as at 31 December 2011 and 2010 were loans and receivables and financial liabilities stated at amortised cost, respectively.

39. FAIR VALUE AND FAIR VALUE HIERARCHY

Group

Financial assets Trade and bills receivables Financial assets included in prepayments, deposits and other receivables Pledged deposits Cash and cash equivalents Financial liabilities Trade and bills payables Financial liabilities included in other payables and accruals Derivative component of convertible bonds Liability component of convertible bonds Convertible notes Interest-bearing bank borrowings	Carrying amounts 2011 2010 HK$’000 HK$’000 117,100 263,346 333,754 169,987 2,936 417 51,928 625,216 505,718 1,058,966 5,048 903 1,152,925 509,622 — 35,452 — 121,896 221,782 466,288 1,233,500 1,294,150 2,613,255 2,428,311	Fair values 2011 2010 HK$’000 HK$’000 117,100 263,346 333,754 169,987 2,936 417 51,928 625,216 505,718 1,058,966 5,048 903 1,152,925 509,622 — 35,452 — 121,896 221,782 466,288 1,233,500 1,294,150 2,613,255 2,428,311	Fair values 2011 2010 HK$’000 HK$’000 117,100 263,346 333,754 169,987 2,936 417 51,928 625,216 505,718 1,058,966 5,048 903 1,152,925 509,622 — 35,452 — 121,896 221,782 466,288 1,233,500 1,294,150 2,613,255 2,428,311
			1,058,966
			903 509,622 35,452 121,896 466,288 1,294,150
			2,428,311

– 97 –

FINANCIAL INFORMATION

APPENDIX I

Company

Financial assets Financial assets included in prepayments, deposits and other receivables Due from subsidiaries Cash and cash equivalents Financial liabilities Financial liabilities included in other payables and accruals Derivative component of convertible bonds Liability component of convertible bonds Convertible notes	Carrying amounts 2011 2010 HK$’000 HK$’000 30,790 700 237 83 19,676 244,184 50,703 244,967 3,683 11,387 — 35,452 — 121,896 221,782 466,288 225,465 635,023	Fair values 2011 2010 HK$’000 HK$’000 30,790 700 237 83 19,676 244,184 50,703 244,967 3,683 11,387 — 35,452 — 121,896 221,782 466,288 225,465 635,023	Fair values 2011 2010 HK$’000 HK$’000 30,790 700 237 83 19,676 244,184 50,703 244,967 3,683 11,387 — 35,452 — 121,896 221,782 466,288 225,465 635,023
			244,967
			11,387 35,452 121,896 466,288
			635,023

The fair values of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair values:

The fair values of cash and cash equivalents, pledged deposits, trade and bills receivables, trade and bills payables, financial assets included in prepayments, deposits and other receivables, financial liabilities included in other payables and accruals, and balances with subsidiaries and related parties approximate to their carrying amounts largely due to the short term maturities of these instruments.

The fair values of the interest-bearing bank borrowings have been calculated by discounting the expected future cash flows using rates currently available for instruments on similar terms, credit risk and remaining maturities. The fair values of the liabilities component of the convertible bonds and convertible notes are estimated using an equivalent market interest rate for a similar convertible bond.

Fair value hierarchy

The Group uses the following hierarchy for determining and disclosing the fair values of financial instruments:

Level 1: fair values measured based on quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: fair values measured based on valuation techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly
Level 3: fair values measured based on valuation techniques for which any inputs which have a significant effect on the recorded fair value are not based on observable market data (unobservable inputs)

During the year ended 31 December 2010, the fair values of the Group’s 2009 CN, the Amended 2009 CN upon their initial recognition, derivative component of the 2010 CB and share options granted to employees at grant date were measured based on Level 2 of the fair value hierarchy as referred above.

– 98 –

FINANCIAL INFORMATION

APPENDIX I

During the year ended 31 December 2011, there were no transfers into or out of Level 3 fair value measurements (2010: Nil).

40. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s principal financial instruments, comprise other receivables and payables, cash and short term deposits, and balances with related parties. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade and bills receivables and trade and bills payables, which arise directly from its operations.

It is the Group’s policy that no trading in financial instruments shall be undertaken.

The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below.

(a) Interest rate risk

The Group’s and Company’s exposure to the risk of changes in market interest rates relates primarily to the Group’s and Company’s cash at banks and the Group’s interest-bearing bank borrowings with floating interest rates. Nevertheless, in the opinion of the directors, the Group had no significant concentration of interest rate risk for the year ended 31 December 2011.

(b) Foreign currency risk

Foreign currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign exchange rates. As a result of its significant investment operations in Mainland China, the PRC, the Group’s financial position and performance can be affected significantly by movements in the RMB/HK$ exchange rate.

The Group has minimal transactional currency exposure which arises from sales or purchases by operating units in currencies other than the units’ functional currencies.

(c) Credit risk

The Group trades only with recognised and creditworthy third parties. It is the Group’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 Group’s exposure to bad debts is not significant.

The credit risk of the Group’s other financial assets, which comprise cash and cash equivalents, 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 Group trades only with recognised and creditworthy third parties, there is no requirement for collateral.

At 31 December 2011 and 2010, trade and bills receivables from external customers which individually contributed to over 10% of the Group’s total revenue for the years ended 31 December 2011 and 2010 were:

Number of individual external customers which contributed to over 10% of the Group’s total revenue for the year Trade and bills receivables (before impairment) from the above customers Percentage of total trade and bills receivables (before impairment) as at the end of the reporting period	2011 HK$’000 3 39,419 34%	2010 HK$’000 3 127,648 48%

– 99 –

FINANCIAL INFORMATION

APPENDIX I

Save as aforesaid, at the end of each of reporting period, there was no significant concentration of credit risk.

(d) Liquidity risk

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of financing facilities. The Group’s financing activities are managed centrally by maintaining an adequate level of cash and cash equivalents to finance the Group’s operations.

The maturity profile of the Group’s and the Company’s financial liabilities, as at the end of the reporting period, based on the contractual undiscounted payments, is as follows:

Group

At 31 December 2011 Trade and bills payables Other payables and accruals Interest-bearing bank borrowings Convertible notes At 31 December 2010 Trade and bills payables Other payables and accruals Interest-bearing bank borrowings Convertible bonds Convertible notes Company At 31 December 2011 Other payables and accruals Convertible notes At 31 December 2010 Other payables and accruals Convertible bonds Convertible notes	On demand HK$’000 — — — — — — — — — — — On demand HK$’000 — — — — — — —	Within 1 year HK$’000 5,048 1,152,925 631,934 — 1,789,907 903 485,573 485,826 159,000 — 1,131,302 Within 1 year HK$’000 3,683 — 3,683 11,969 159,000 — 170,969	1 to 5 years HK$’000 — — 769,904 289,205 1,059,109 — 44,139 1,037,373 — 665,000 1,746,512 1 to 5 years HK$’000 — 289,205 289,205 — — 665,000 665,000	Over 5 years HK$’000 — — — — — — — — — — — Over 5 years HK$’000 — — — — — — —	Total HK$’000 5,048 1,152,925 1,401,838 289,205
					2,849,016
					903 529,712 1,523,199 159,000 665,000
					2,877,814
					Total HK$’000 3,683 289,205
					292,888
					11,969 159,000 665,000
					835,969

– 100 –

FINANCIAL INFORMATION

APPENDIX I

(e) Capital management

The primary objectives of the Group’s capital management are to safeguard the Group’s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximise shareholders’ value.

The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders or issue new shares. The Group is not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or processes for managing capital during the years ended 31 December 2011 and 31 December 2010.

The Group monitors capital using a gearing ratio, which is net debt divided by the capital. The Group’s policy is to maintain a gearing ratio appropriate to the Group’s level of operation. Net debt includes trade and bills payables, other payables and accruals, interest-bearing bank borrowings, less cash and cash equivalents. Capital includes liability component of convertible bonds, convertible notes and equity attributable to owners of the Company. The gearing ratios as at the ends of the reporting periods were as follows:

Trade and bills payables Other payables and accruals Interest-bearing bank borrowings Less: Cash and cash equivalents Net debt Liability component of convertible bonds Convertible notes Equity attributable to owners of the Company Capital Gearing ratio	Group 2011 2010 HK$’000 HK$’000 5,048 903 1,181,973 525,846 1,233,500 1,294,150 (51,928) (625,216 2,368,593 1,195,683 — 121,896 221,782 466,288 2,376,998 1,924,933 2,598,780 2,513,117 0.91 0.48	Group 2011 2010 HK$’000 HK$’000 5,048 903 1,181,973 525,846 1,233,500 1,294,150 (51,928) (625,216 2,368,593 1,195,683 — 121,896 221,782 466,288 2,376,998 1,924,933 2,598,780 2,513,117 0.91 0.48
		1,195,683
		121,896 466,288 1,924,933
		2,513,117
		0.48

41. EVENTS AFTER THE REPORTING PERIOD

The memorandum of understanding in relation to the Group’s proposed acquisition of the interests in a coal mine in Shanxi Province, which the Company entered into with an independent third party on 31 August 2011, has been lapsed since 31 January 2012. The earnest money of HK$180 million paid was subsequently refunded to the Group in February 2012.

42. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 30 March 2012.

– 101 –

FINANCIAL INFORMATION

APPENDIX I

3. LATEST UNAUDITED FINANCIAL STATEMENTS

The following is the unaudited financial statements of the Group for the six months ended 30 June 2012 together with accompanying notes as extracted from the Company’s 2012 interim report. Reference to page numbers in the notes to the financial statements is to the page numbers in the Company’s 2012 interim report.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 30 June 2012

Notes
REVENUE
4
Cost of sales
Gross profit
Other income and gains
Selling and distribution costs
Administrative expenses
Other expenses
Finance costs
5
Share of profit of a jointly-controlled entity
Profit/(loss) before income tax
6
Income tax
7
Profit/(loss) for the period
Other comprehensive income/(loss) — exchange
differences on translation of foreign operations
Total comprehensive income/(loss) for the period

For the six months ended 30 June
2012
2011
HK$’000
HK$’000
(unaudited)
(unaudited)
396,170
532,202
(356,835)
(288,698)
39,335
243,504
32,470
46,834
(4,063)
(1,664)
(52,534)
(64,056)
(855,734)
—
(63,901)
(77,787)
2,711
—
(901,716)
146,831
180,527
(43,928)
(721,189)
102,903
(22,683)
54,201
(743,872)
157,104

– 102 –

FINANCIAL INFORMATION

APPENDIX I

Notes Profit/(loss) for the period attributable to: Owners of the Company Non-controlling interests Total comprehensive income/(loss) for the period attributable to: Owners of the Company Non-controlling interests Earnings/(loss) per share attributable to ordinary equity holders of the Company 8 Basic Diluted	For the six months ended 30 June 2012 2011 HK$’000 HK$’000 (unaudited) (unaudited) (680,196) 94,098 (40,993) 8,805 (721,189) 102,903 (701,580) 145,082 (42,292) 12,022 (743,872) 157,104 (HK$0.476) HK$0.078 (HK$0.476) HK$0.064	For the six months ended 30 June 2012 2011 HK$’000 HK$’000 (unaudited) (unaudited) (680,196) 94,098 (40,993) 8,805 (721,189) 102,903 (701,580) 145,082 (42,292) 12,022 (743,872) 157,104 (HK$0.476) HK$0.078 (HK$0.476) HK$0.064
		102,903
		145,082 12,022
		157,104
		HK$0.078
		HK$0.064

– 103 –

FINANCIAL INFORMATION

APPENDIX I

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2012 and 31 December 2011

Notes NON-CURRENT ASSETS Property, plant and equipment 9 Prepaid land premiums Mining rights Investment in a jointly-controlled entity Prepayments and deposits Total non-current assets CURRENT ASSETS Inventories Trade and bills receivables 10 Prepayments, deposits and other receivables Tax recoverable Pledged deposits Cash and cash equivalents Total current assets CURRENT LIABILITIES Trade and bills payables 11 Other payables and accruals Interest-bearing bank borrowings 12 Tax payable Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES	30 June 2012 HK$’000 (unaudited) 1,907,058 14,713 2,463,486 19,147 158,358 4,562,762 12,396 172,396 136,268 1,042 2,838 44,430 369,370 93,653 799,636 585,936 253,505 1,732,730 (1,363,360) 3,199,402	31 December 2011 HK$’000 (audited) 2,151,176 15,080 2,964,936 16,623 155,964 5,303,779 17,216 117,100 566,144 — 2,936 51,928 755,324 5,048 1,181,973 555,075 272,526 2,014,622 (1,259,298) 4,044,481

– 104 –

FINANCIAL INFORMATION

APPENDIX I

Notes NON-CURRENT LIABILITIES Other payables and accruals Interest-bearing bank borrowings 12 Convertible notes Deferred tax liabilities Total non-current liabilities Net assets EQUITY Equity attributable to owners of the Company Issued capital Reserves Non-controlling interests Total equity	30 June 2012 HK$’000 (unaudited) 94,918 671,385 231,880 440,941 1,439,124 1,760,278 142,873 1,539,169 1,682,042 78,236 1,760,278	31 December 2011 HK$’000 (audited) — 678,425 221,782 646,748
		1,546,955
		2,497,526
		142,873 2,234,125
		2,376,998
		120,528
		2,497,526

– 105 –

FINANCIAL INFORMATION

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2012 (unaudited)

		Attribu	table to own	ers of the Company	ers of the Company			Non- controlling interests HK$’000 120,528 (40,993) (1,299)	Total equity HK$’000 2,497,526 (721,189) (22,683)
Issued capital HK$’000 142,873 — —	Share premium account HK$’000 1,166,813* — —	Equity component of convertible notes HK$’000 538,884* — —	Capital redemption reserve HK$’000 523* — —	Exchange fluctuation reserve HK$’000 171,900* — (21,384)	Share option reserve HK$’000 55,565* — —	Retained earnings/ (Accumulated losses) HK$’000 300,440* (680,196) —	Total HK$’000 2,376,998 (680,196) (21,384)
— —	— —	— —	— —	(21,384) —	— 6,624	(680,196) —	(701,580) 6,624	(42,292) —	(743,872) 6,624
142,873	1,166,813*	538,884*	523*	150,516*	62,189*			78,236	1,760,278

For the six months ended 30 June 2011 (unaudited)

		Attribu	table to own	ers of the Company	ers of the Company			Non- controlling interests HK$’000 103,801 8,805 3,217	Total equity HK$’000 2,028,734 102,903 54,201
Issued capital HK$’000 226,298 — —	Share premium account HK$’000 3,065,615 — —	Equity component of convertible notes HK$’000 1,239,114 — —	Capital redemption reserve HK$’000 — — —	Exchange fluctuation reserve HK$’000 70,100 — 50,984	Share option reserve HK$’000 24,626 — —	Accumulated losses HK$’000 (2,700,820) 94,098 —	Total HK$’000 1,924,933 94,098 50,984
— 38,927 — (367) — (131,929) —	— 604,464 (59) — — 131,929 —	— (464,985) — — — — —	— — — 367 — — —	50,984 — — — — — —	— — — — — — 20,254	94,098 — — — (4,317) — —	145,082 178,406 (59) — (4,317) — 20,254	12,022 — — — — — —	157,104 178,406 (59) — (4,317) — 20,254
132,929	3,801,949	774,129	367	121,084	44,880	(2,611,039)	2,264,299	115,823	2,380,122

These reserve accounts comprise the consolidated reserves of HK$1,539,169,000 (31 December 2011: HK$2,234,125,000) in the condensed consolidated statement of financial position.

– 106 –

FINANCIAL INFORMATION

APPENDIX I

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the six months ended 30 June 2012

Net cash flows from operating activities
Net cash flows used in investing activities
Net cash flows from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Effect of foreign exchange rate changes
Cash and cash equivalents at end of period
Analysis of balances of cash and cash equivalents
Cash and bank balances other than time deposits
Time deposits
Cash and cash equivalents as stated in the consolidated
statement of financial position

Six months ended 30 June
2012
2011
HK$’000
HK$’000
(unaudited)
(unaudited)
149,436
482,392
(177,111)
(477,568)
20,113
(4,376)
(7,562)
448
51,928
625,216
64
9,649
44,430
635,313
44,430
620,240
—
15,073
44,430
635,313

– 107 –

FINANCIAL INFORMATION

APPENDIX I

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. Basis of Preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2012 are unaudited but have been reviewed by the Audit Committee of the Company.

These financial statements have been prepared under the going concern basis, notwithstanding that the Group had net current liabilities of HK$1,363,360,000 as at 30 June 2012. This is because (1) the directors estimate that the net operating cash inflow generated by the Group’s coal mining business shall be adequate to meet with the liabilities and capital commitment of the Group as and when they fall due; (2) a substantial shareholder of the Company has confirmed his ability and agreed to provide financial support to the Group to enable it to meet with its liabilities as and when they fall due in the foreseeable future; and (3) the directors are also considering/taking other alternatives to monitor and improve the cash flows of the Group including extension of repayment dates of existing bank loans and other financing arrangements.

The interim condensed consolidated financial statements have been prepared in accordance with the applicable disclosure requirements of Appendix 16 to The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ‘‘Listing Rules’’) and with the Hong Kong Accounting Standard 34 Interim Financial Reporting issued by the Hong Kong Institute of Certified Public Accountants (the ‘‘HKICPA’’).

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s 2011 annual financial statements.

The accounting policies and method of computation adopted in the preparation of the interim condensed consolidated financial statements are consistent with those used in the preparation of the Group’s annual financial statements for the year ended 31 December 2011 except as stated in note 2 below.

2. Changes in Accounting Policies

The HKICPA has issued certain new, revised or amendments to the standards and interpretations (the ‘‘new HKFRSs’’) and the Group has applied the followings new HKFRSs, which are or have become effective for the first time for the current period financial statements:

HKFRS 1 Amendments	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial Reporting
	Standards — Severe Hyperinflation and Removal of Fixed Dates for First-time
	Adopters
HKFRS 7 Amendments	Amendments to HKFRS 7 Financial Instruments: Disclosures —Transfers of
	Financial Assets
HKAS 12 Amendments	Amendments to HKAS 12 Income Taxes — Deferred Tax: Recovery of Underlying
	Assets

The adoption of the amended HKFRSs has had no significant financial effect on these interim financial statements and there have been no significant changes to the accounting policies applied in these interim financial statements.

The Group has not applied the new HKFRSs that have been issued but are not yet effective. The Group has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a material impact on its results of operations and financial position.

3. Operating Segment Information

Over 90% of the Group’s revenue, expenses and assets are generated from the business of mining and selling of coal in Mainland China. The management of the Group makes decisions about resources allocation and assesses performance of the Group based on the operating results from these business activities. Accordingly, the directors are of the opinion that mining and selling of coal in Mainland China is a single reportable segment of the Group.

The Group’s revenue from external customers is derived solely from its operations in the People’s Republic of China (‘‘PRC’’), and over 90% of the non-current assets (other than financial assets) of the Group are located in the PRC.

– 108 –

FINANCIAL INFORMATION

APPENDIX I

During the period, the Group had transactions with two individual external customers which contributed to over 10% of the Group’s total revenue (Period ended 30 June 2011: three). The revenue generated from sales to each of these customers is set out below:

		the six months ended 30 June	the six months ended 30 June
		2012	2011
		HK$’000	HK$’000
		(unaudited)	(unaudited)
Customer	A	134,410	81,777
Customer	B	63,457	*
Customer	C	*	283,020
Customer	D	*	100,862

Less than 10% of the Group’s total revenue.

4. Revenue

Revenue, which is also the Group’s turnover, represents the sales at the invoiced value of goods sold to customers, net of sales tax, value added tax, goods returns and allowances.

5. Finance Costs

An analysis of finance costs is as follows:

Interest on bank and other loans wholly repayable within five years Imputed interest of convertible notes Imputed interest of convertible bonds Interest on convertible bonds Less: Interest capitalised as property, plant and equipment	For the six months ended 30 June 2012 2011 HK$’000 HK$’000 (unaudited) (unaudited) 53,803 48,295 10,098 16,693 — 24,160 — 1,590 — (12,951 63,901 77,787	For the six months ended 30 June 2012 2011 HK$’000 HK$’000 (unaudited) (unaudited) 53,803 48,295 10,098 16,693 — 24,160 — 1,590 — (12,951 63,901 77,787
		77,787

– 109 –

FINANCIAL INFORMATION

APPENDIX I

6. Profit/(loss) Before Income Tax

Profit/(loss) before income tax is arrived at after charging/(crediting):

Cost of inventories sold Depreciation Amortisation of prepaid land premiums Amortisation of mining rights Impairment of property, plant and equipment# Impairment of mining rights# Impairment of an other receivable# Write-back of an other payable Fair value gain on derivative component of convertible bonds Other income from the termination of subscription agreements	For the six months ended 30 June 2012 2011 HK$’000 HK$’000 (unaudited) (unaudited) 356,835 288,698 123,730 82,814 211 130 76,062 70,958 300,000 — 400,000 — 153,629 — (29,349) — — (35,452 — (10,000

These items are included in ‘‘Other expenses’’ in the condensed consolidated statement of comprehensive income during the period.

7. Income Tax

No provision for Hong Kong profits tax has been made for the six months ended 30 June 2012 as the Group did not generate any assessable profits arising in Hong Kong during the period (Period ended 30 June 2011: Nil). Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the jurisdictions in which the Group operates.

Current — Mainland China Deferred	For the six months ended 30 June 2012 2011 HK$’000 HK$’000 (unaudited) (unaudited) 19,949 73,278 (200,476) (29,350 (180,527) 43,928	For the six months ended 30 June 2012 2011 HK$’000 HK$’000 (unaudited) (unaudited) 19,949 73,278 (200,476) (29,350 (180,527) 43,928
		43,928

The share of tax attributable to the jointly-controlled entity amounting to HK$996,000 (Period ended 30 June 2011: Nil) is included in ‘‘Share of profit of a jointly-controlled entity’’ in the condensed consolidated statement of comprehensive income.

8. Earnings/(loss) per Share Attributable to Ordinary Equity Holders of the Company

The calculation of the basic earnings/(loss) per share amounts is based on the profit/(loss) for the period attributable to ordinary equity holders of the Company, and the weighted average number of ordinary shares of 1,428,729,168 (Period ended 30 June 2011: 1,206,120,685) in issue during the period.

For the six months ended 30 June 2012, no adjustment has been made to the basic loss per share amounts presented in respect of a dilution as the share options of the Company outstanding during the period and the deemed conversion of the convertible notes issued by the Company have anti-dilutive effects on the basic loss per share amounts for the period.

The calculation of diluted earnings per share amount for the six months ended 30 June 2011 is based on the profit for the period attributable to ordinary equity holders of the Company, adjusted to reflect the interests on the convertible notes/ bonds and fair value gain on derivative component of convertible bonds. The weighted average number of ordinary shares used in the calculation is the weighted average number of ordinary shares in issue during the period, as used in the basic

– 110 –

FINANCIAL INFORMATION

APPENDIX I

earnings per share calculation, and the weighted average number of ordinary shares of 158,387, 332,364,000 and 39,750,000 assumed to have been issued at no consideration on the deemed exercise and conversion of share options, convertible notes and convertible bonds into ordinary shares.

The calculations of basic and diluted earnings/(loss) per share are based on:

Earnings/(Loss) Profit/(loss) attributable to ordinary equity holders of the Company, used in the basic earnings/(loss) per share calculation Imputed interest of convertible notes (note 5) Imputed interest of convertible bonds (note 5) Interest on convertible bonds (note 5) Fair value gain on derivative component of convertible bonds (note 6) Profit attributable to ordinary equity holders of the Company before financial impacts of convertible notes/bonds Shares Weighted average number of ordinary shares in issue during the period used in the basic earnings/(loss) per share calculation Effect of dilution — weighted average number of ordinary shares: Share options Convertible notes Convertible bonds	For the six months ended 30 June 2012 2011 HK$’000 HK$’000 (680,196) 94,098 16,693 24,160 1,590 (35,452 101,089 Number of shares For the six months ended 30 June 2012 2011 1,428,729,168 1,206,120,685 158,387 332,364,000 39,750,000 1,578,393,072	For the six months ended 30 June 2012 2011 HK$’000 HK$’000 (680,196) 94,098 16,693 24,160 1,590 (35,452 101,089 Number of shares For the six months ended 30 June 2012 2011 1,428,729,168 1,206,120,685 158,387 332,364,000 39,750,000 1,578,393,072
		158,387 332,364,000 39,750,000
		1,578,393,072

– 111 –

FINANCIAL INFORMATION

APPENDIX I

9. Property, Plant and Equipment

At beginning of year/period Cost Accumulated depreciation Net carrying amount At beginning of year/period, net of accumulated depreciation Additions Acquisition of a subsidiary Impairment Depreciation provided during the year/period Written back on disposal Exchange realignment At end of year/period, net of accumulated depreciation and impairment At end of year/period Cost Accumulated depreciation and impairment Net carrying amount	30 June 2012 HK$’000 (unaudited) 2,447,875 (296,699) 2,151,176 2,151,176 225,744 — (300,000) (123,730) (23,379) (22,753) 1,907,058 2,610,517 (703,459) 1,907,058	31 December 2011 HK$’000 (audited) 1,417,380 (111,792
		1,305,588
		1,305,588 823,160 122,553 — (157,880 (23,414 81,169
		2,151,176
		2,447,875 (296,699
		2,151,176

10. Trade and Bills Receivables

The Group’s trading terms with its customers are mainly on credit, except for new customers, where payments in form of bills or in advance is normally required. The credit period is generally one month, extending up to six months for major customers. Each customer has a maximum credit limit. The Group seeks to maintain strict control over its outstanding receivables and has a credit control policy to minimise credit risk. Overdue balances are reviewed regularly by the management. In view of the aforementioned and the fact that the Group’s trade and bills receivables relate to various diversified customers, there is no significant concentration of credit risk. Trade and bills receivables are non-interestbearing.

An aged analysis of the trade and bills receivables as at the end of the reporting period, based on the payment due date, is as follows:

0 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days 181 to 365 days More than 365 days	30 June 2012 HK$’000 (unaudited) 59,928 43,342 36,695 10,907 20,661 863 172,396	31 December 2011 HK$’000 (audited) 116,427 — — — — 673
		117,100

– 112 –

FINANCIAL INFORMATION

APPENDIX I

Based on past experience, the directors of the Company are of the opinion that no provision for impairment is necessary for the above balances as there has not been a significant change in credit quality and the balances are considered fully recoverable.

11. Trade and Bills Payables

An aged analysis of the trade and bills payables as at the end of the reporting period, based on the invoice date, is as follows:

0 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days 181 to 365 days More than 365 days	30 June 2012 HK$’000 (unaudited) 1,151 4,850 86,333 259 520 540 93,653	31 December 2011 HK$’000 (audited) 2,539 582 75 6 1,805 41
		5,048

The trade and bills payables are non-interest-bearing and are normally settled on a term of 60-day for trade payables and 180-day for bills payable.

12. Interest-bearing Bank Borrowings

Current Bank loans — unsecured Non-current Bank loans — secured Analysed into: Bank loans: Within one year In the second year In the third to fifth years, inclusive	Effective interest rate (%) 6.31%–9.84% 6.90%–7.05%	Maturity 2012–2013 2013–2015	30 June 2012 HK$’000 (unaudited) 585,936 671,385 1,257,321 585,936 366,210 305,175 1,257,321	31 December 2011 HK$’000 (audited) 555,075
				678,425
				1,233,500
				555,075 370,000 308,425
				1,233,500

All bank loans of the Group are denominated in RMB. The carrying amounts of the Group’s interest-bearing bank borrowings approximate to their fair values as at the end of the reporting period.

(i) Bank loan of RMB400,000,000 (equivalent to HK$488,280,000) (31 December 2011: RMB400,000,000 (equivalent to HK$493,400,000, at the then exchange rate)) is subject to the floating interest rate for five-year loans published by the People’s Bank of China, and is repayable by instalments in 2012 and 2013. This bank loan is guaranteed by Mr. Zhao Ming (‘‘Mr. Zhao’’, a former holder of the convertible notes of the Company

– 113 –

FINANCIAL INFORMATION

APPENDIX I

and a former shareholder of Triumph Fund A Limited, a subsidiary of the Group) and Mr. Hao Shenhai (‘‘Mr. Hao’’, a former director of a subsidiary of the Group, Eerduosi Hengtai Coal Company Limited, ‘‘Hengtai’’), and is secured by Hengtai’s mining rights.

(ii) Bank loan of RMB250,000,000 (equivalent to HK$305,175,000) (31 December 2011: RMB250,000,000 (equivalent to HK$308,375,000, at the then exchange rate)) is subject to the floating interest rate for six-year loans published by the People’s Bank of China, and is repayable by instalments in 2014 and 2015. This bank loan is guaranteed by Mr. Zhao and Mr. Hao, and is secured by Hengtai’s mining rights.
(iii) Bank loan of RMB20,000,000 (equivalent to HK$24,414,000) (31 December 2011: RMB20,000,000 (equivalent to HK$24,670,000, at the then exchange rate)) is subject to a floating interest rate based on 150% of the financial institution one-year borrowing rate published by the People’s Bank of China and the maturity date is 28 December 2012. This bank loan is guaranteed by 山西普大煤業集團有限公司, an entity in which Mr. Zhao has certain shareholdings.
(iv) As at 30 June 2012, a bank loan of RMB300,000,000 (equivalent to HK$366,210,000) is subject to a fixed annual interest rate of 6.31% and the maturity date is 17 June 2013. This bank loan is guaranteed by 山西普大煤業集團有限公司, an entity in which Mr. Zhao has certain shareholdings.
(v) As at 30 June 2012, a bank loan of RMB30,000,000 (equivalent to HK$36,621,000) is subject to a floating interest rate based on 130% of the financial institution one-year borrowing rate published by the People’s Bank of China and the maturity date is 10 May 2013. This bank loan is guaranteed by 山西煤業集團有限公司, an entity in which Mr. Zhao has certain shareholdings.
(vi) As at 30 June 2012, a bank loan of RMB30,000,000 (equivalent to HK$36,621,000) is subject to a fixed annual interest rate of 7.87% and the maturity date is 31 March 2013. This bank loan is guaranteed by an independent third party, 內蒙古蒙發煤炭有限責任公司.
(vii) As at 31 December 2011, a bank loan of RMB300,000,000 (equivalent to HK$370,050,000, at the then exchange rate) is subject to a fixed annual interest rate of 6.31% and the maturity date was 20 June 2012. This bank loan was guaranteed by 山西普大煤業集團有限公司 (an entity in which Mr. Zhao has certain shareholdings), 內蒙古伊東集團恒東能源有限責任公司 (an independent third party), and Mr. Xu Jianhua (a director of Hengtai).
(viii) As at 31 December 2011, a bank loan of RMB30,000,000 (equivalent to HK$37,005,000, at the then exchange rate) is subject to a floating interest rate based on 130% of the financial institution one-year borrowing rate published by the People’s Bank of China and the maturity date was 10 May 2012. This bank loan was guaranteed by an independent third party, 內蒙古東達蒙古王有限公司.

13. Share Option Scheme

The Company operated a share option scheme which was expired on 28 May 2012 (the ‘‘Old Scheme’’) and a new share option scheme (the ‘‘New Scheme’’) was approved by the shareholders of the Company and was effective from 30 May 2012 for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Upon the expiry of the Old Scheme, no further share options can be granted under the Old Scheme but in all other respects, the provisions of the Old Scheme shall remain in full force and effect. Further details of the New Scheme were disclosed in the circular of the Company dated 26 April 2012.

– 114 –

FINANCIAL INFORMATION

APPENDIX I

All share options vested upon the commencement of the exercise period. There were no movements of share options during the period. The exercise price and exercise period of the share options outstanding as at 1 January 2012 and 30 June 2012 are as follows:

Number of options Directors Employees — 616,000 2,875,000 5,125,000 2,875,000 5,125,000 1,500,000 — 1,500,000 — 2,500,000 — 2,500,000 — 13,750,000 10,866,000	Total Exercise price Exercise period HK$ per share 616,000 2.5 29 September 2008 to 28 September 2013 8,000,000 4.96 12 May 2011 to 11 May 2013 8,000,000 4.96 12 May 2012 to 11 May 2013 1,500,000 4.96 26 August 2011 to 25 August 2013 1,500,000 4.96 26 August 2012 to 25 August 2013 2,500,000 4.96 10 November 2011 to 9 November 2013 2,500,000 4.96 10 November 2012 to 9 November 2013 24,616,000

During the period ended 30 June 2012, equity-settled share-based payment expenses amounted to HK$6,624,000 (Period ended 30 June 2011: HK$20,254,000) was recognised in profit or loss.

At the end of the reporting period, the Company had 24,616,000 (31 December 2011: 24,616,000) share options outstanding. The exercise in full of the outstanding share options would, under the present capital structure of the Company, result in the issue of 24,616,000 additional ordinary shares of the Company and additional share capital of HK$2,461,600 and share premium of HK$118,118,400 (before issue expenses and transfer from the share option reserve).

At the date of approval of these interim financial statements, the Company had 24,616,000 share options outstanding, which represented approximately 1.72% of the Company’s shares in issue as at that date.

14. Operating Lease Commitments

The Group leases certain of its office premises under operating lease arrangements. Leases for the office premises are negotiated for a term of three years. None of the leases includes contingent rentals.

At 30 June 2012, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to the fifth years, inclusive	30 June 2012 HK$’000 (unaudited) 1,949 — 1,949	31 December 2011 HK$’000 (audited) 2,765 2,953
		5,718

– 115 –

FINANCIAL INFORMATION

APPENDIX I

15. Capital Commitments

The Group had the following capital commitments in respect of acquisition of property, plant and equipment at the end of the reporting period:

Contracted, but not provided for Authorised, but not provided for	30 June 2012 HK$’000 (unaudited) 53,557 — 53,557	31 December 2011 HK$’000 (audited) — 64,854
		64,854

4. INDEBTEDNESS STATEMENT

At the close of business on 30 September 2012, being the latest practicable date for the purpose of ascertaining the indebtedness of the Group prior to the printing of this circular, the Group had secured bank loans of approximately HK$793 million which were secured by:

(i) guarantees given by Mr. Zhao Ming (former shareholder of Triumph Fund A Limited, a subsidiary of the Company) 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$1,984 million held by the Group as at that date.

In addition, at the close of business on 30 September 2012, the Group had unsecured bank and other loans of approximately HK$549 million and approximately HK$173.9 million, respectively and outstanding zero coupon redeemable convertible notes with aggregate principal amount of HK$289.2 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 30 September 2012, the Group did not have any significant contingent liabilities.

Save as disclosed in this section 4 above and apart from intra-group liabilities, the Group did not have, at the close of business on 30 September 2012, 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$122.

– 116 –

FINANCIAL INFORMATION

APPENDIX I

5. MATERIAL CHANGE

Save for the (i) significant decrease in turnover and gross profit due to both fall in average selling prices and sales volume of raw coal produced attributable to weak demand in coal market in China; (ii) impairments of property, plant and equipment, mining rights and other receivables of approximately HK$853.6 million in aggregate; (iii) decrease in cash and cash equivalents balance and (iv) expected continuing tightening policies adopted by the Chinese government to suppress domestic inflation by limiting the upside of oil and coal prices as all disclosed in the interim report of the Company for the six months ended 30 June 2012, and save for the transactions contemplated under the Subscription Agreement, there has been no material change in the financial or trading condition or outlook of the Group since 31 December 2011, being the date of which the latest audited financial statements of the Group were made up, and up to the Latest Practicable Date.

– 117 –

GENERAL INFORMATION

APPENDIX II

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Takeovers Code and the Listing Rules for the purpose of giving information with regard to the Group.

The Directors jointly and severally accept full responsibility for the accuracy of the information contained in this circular (other than those relating to the Subscriber, its associates and parties acting in concert with it) and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular (other than those expressed by the Subscriber, its associates and parties acting in concert with it) have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement in this circular misleading.

The directors of the Subscriber jointly and severally accept full responsibility for the accuracy of the information contained in this circular (other than those relating to the Group) and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular (other than those expressed by the Group) have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement in this circular misleading.

2. SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date and immediately after Completion are and will be as follows:

Authorised: Issued and fully paid or credited as fully paid: As at the Latest Practicable Date Subscription Shares to be issued to the Subscriber	Number of Shares 15,000,000,000 1,428,729,168 1,555,555,000 2,984,284,168	Amount HK$’000 1,500,000
		142,872.9 155,555.5
		298,428.4

All the Shares currently in issue rank pari passu in all respects with each other, including in particular, as to dividends, voting rights and capital. No part of the share capital of the Company is listed or dealt in on any stock exchange other than the Stock Exchange.

No Shares have been issued since 31 December 2011, 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.

– 118 –

GENERAL INFORMATION

APPENDIX II

As at the Latest Practicable Date, the Company has: (i) outstanding convertible notes in the principal amount of HK$289,205,000 which confers the right on its holder to convert into 231,364,000 new Shares at the conversion price of HK$1.25 per Share (subject to adjustments); and (ii) outstanding 616,000 and 24,000,000 share options exercisable into a total of 24,616,000 new Shares at the subscription prices of HK$2.50 and HK$4.96 respectively. Save as disclosed in this paragraph, the Company did not have any outstanding options, warrants and other convertible securities or rights affecting the Shares as at the Latest Practicable Date.

3. DISCLOSURE OF INTERESTS

(a) Director’s and chief executive’s interests in the Company

As at the Latest Practicable Date, the chief executive of the Company and following Directors and their respective associates were interested, or were deemed to be interested in the following long and short positions in the Shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of the SFO) which (i) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO; or (ii) were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules (the ‘‘Model Code’’) adopted by the Company, to be notified to the Company and the Stock Exchange:

Long position in the Shares and underlying shares of the Company:

						Approximate
				Interest in		percentage of the
		Interest in		underlying	Total	Company’s issued
Name of Director	Capacity	the	Shares	shares	interest	Share capital
Mr. Wang Da Yong	Through controlled	278,784,500		5,000,000	283,784,500	19.86%
(note 1)	corporation/spouse/
	beneficial owner
Mr. Tian Wenwei	Beneficial owner		—	3,750,000	3,750,000	0.26%
(note 2)
Mr. Wang Tongtian	Beneficial owner		—	1,500,000	1,500,000	0.10%
(note 3)
Mr. Chiu Sui Keung	Beneficial owner		—	500,000	500,000	0.03%
(note 4)
Notes:

These Shares and underlying shares are held by Mr. Wang Da Yong under the below capacities:
(a) 160,082,000 Shares are held by Joint Ascent Limited which is held as to 80% and 20% by Mr. Wang Da Yong and Mr. Tian Wenwei, respectively.
(b) 43,838,500 Shares are held by China Coal and Coke Investment Holding Company Limited which is wholly owned by Sino Bridge Investments Limited, a company wholly owned by Mr. Wang Da Yong.

– 119 –

GENERAL INFORMATION

APPENDIX II

(c) 65,885,000 Shares are held by Sky Circle International Limited which is wholly owned by Mr. Wang Da Yong.
(d) 2,671,000 Shares are held by Ms. Yuan Hong, the spouse of Mr. Wang Da Yong.
(e) 6,308,000 Shares are held personally by Mr. Wang Da Yong.
(f) 5,000,000 underlying shares represent share options granted to Mr. Wang Da Yong under the share option scheme of the Company which are exercisable at the subscription price of HK$4.96 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.
These represent share options granted to Mr. Tian Wenwei under the share option scheme of the Company which are exercisable at the subscription price of HK$4.96 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.
These represent 1,000,000 share options and 500,000 share options granted to Mr. Wang Tongtian under the share option scheme of the Company which are exercisable at the subscription price of HK$4.96 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.
These represent share options granted to Mr. Chiu Sui Keung under the share option scheme of the Company which are exercisable at the subscription price of HK$4.96 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.

Save as disclosed in this section 3(a) above, as at the Latest Practicable Date, none of the Directors or the chief executive of the Company and their respective associates had or was deemed to have any interests in the long or short positions in the Shares, underlying shares and debentures of the Company and its associated corporation (within the meaning of Part XV of the SFO) which (i) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO; or (ii) were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) were required, pursuant to the Model Code adopted by the Company, to be notified to the Company and the Stock Exchange.

– 120 –

GENERAL INFORMATION

APPENDIX II

(b) Substantial shareholders and other persons’ interests in Shares and underlying shares

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 interests disclosed above in respect of certain Directors and chief executive of the Company) had, or was deemed to have, interests or short positions in the Shares or underlying shares of the Company which fall to be disclosed to the Company under the provisions of Division 2 and 3 of Part XV of the SFO as recorded in the register to be kept under Section 336 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 a general meeting of the Company or any member of the Group:

		Total interests in	Approximately
		long position of	percentage of the
		Shares/underlying	Company’s issued
Name	Capacity	shares	share capital
Jade Bird Strategic Investment	Beneficial owner	1,555,555,000	108.88%
Simsen International Corporation	Beneficial owner and	231,364,000	16.19%
(note 1)	through controlled
	corporation
Joint Ascent Limited (note 2)	Beneficial owner	160,082,000	11.20%
Simsen Asset Management	Beneficial owner	119,364,000	8.35%
(Asia) Limited (note 1)
Chrism Investments Limited	Beneficial owner	93,250,000	6.53%
(note 3)
Notes:

Simsen International Corporation Limited, a listed company in Hong Kong with stock code 993, together with its subsidiary, Simsen Asset Management (Asia) Limited, held convertible notes which entitle the holder thereof to convert into an aggregate of 231,364,000 Shares at the conversion price of HK$1.25 per Share (subject to adjustment).
Joint Ascent Limited is held as to 80% and 20% by Mr. Wang Da Yong and Mr. Tian Wenwei, respectively.
The number of Shares held by Chrism Investments Limited was 1,865,000,000 pursuant to disclosure of interests notice dated 20 May 2011. The number of Shares disclosed in the above table has been adjusted for the share consolidation effective from 27 June 2011.

Save as disclosed in this section 3(b) above, as at the Latest Practicable Date, the Directors and chief executive of the Company are not aware of any other persons (other than the Directors and the chief executive of the Company) who had, or was deemed to have, an interest and/or short position in the Shares or underlying shares of the Company which is required to be disclosed to the Company and the Stock Exchange under the provisions of Division 2 and 3 of Part XV of the SFO, or as recorded in

– 121 –

GENERAL INFORMATION

APPENDIX II

the register required to be kept under Section 336 of the SFO, or who was, 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 the Company or any other member of the Group.

4. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date:

(a) none of the Directors had entered or proposed to enter into a service contract with the Company or any of its subsidiaries or associated companies which is not determinable by the Company within one year without payment of compensation, other than statutory compensation;
(b) none of the Directors had entered into or amended any service contracts (including both continuous and fixed term contracts) with the Company or any of its subsidiaries or any of its associated companies within six months before the date of the Announcement;
(c) none of the Directors had any continuous service contracts with the Company or any of its subsidiaries or associated companies with a notice period of 12 months or more; and
(d) none of the Directors had any fixed term service contracts with the Company or any of its subsidiaries or associated companies with more than 12 months to run irrespective of the notice period.

5. NO MATERIAL LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries was involved in any litigation or arbitration of material importance and no litigation or claim of material importance known to the Directors to be pending or threatened by or against the Company or any of its subsidiaries.

6. QUALIFICATION AND CONSENT OF EXPERT

The following is the name and qualification of the expert who has given opinion or advice which is contained in this circular:

Name Qualification Quam Capital Limited A licensed corporation to carry on type 6 (advising on corporate finance) regulated activity under the SFO

As at the Latest Practicable Date, Quam Capital was not beneficially interested in the share capital of any member of the Group nor did it have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for any Shares, convertible securities, warrants, options or derivatives which carry voting rights in any member of the Group nor did it have any interest, either direct or indirect, in any assets which have been acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2011, being the date to which the latest published audited financial statements of the Group were made up.

– 122 –

GENERAL INFORMATION

APPENDIX II

Quam Capital has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and/or references to its name in the form and context in which they respectively appear.

7. ADDITIONAL DISCLOSURE OF INTERESTS AND DEALINGS IN SECURITIES

(a) As at the Latest Practicable Date, save for the Subscription and the 23,190,000 Shares held by CCBIAML, neither the Subscriber nor any parties acting in concert with it held any securities, options, warrants, convertible securities and derivatives of the Company or had dealt in the securities, options, warrants, convertible securities and derivatives of the Company during the Relevant Period.
(b) Save for the assignment and novation of all the rights and obligations of the Subscriber under the Subscription Agreement to the SPV, no Shares acquired by the Subscriber and any person acting in concert with it in pursuance of the Subscription will be transferred, charged or pledged to any other persons.
(c) Save for the Subscription Agreements entered into by the Subscriber, the directors of the Subscriber are not interested in any securities, options, warrants, convertible securities and derivatives of the Company and they had not dealt for value in any securities, options, warrants, convertible securities and derivatives of the Company during the Relevant Period.
(d) As at the Latest Practicable Date, no person had irrevocably committed themselves to vote for or against the resolution to be proposed at the EGM to approve the Subscription and/or the Whitewash Waiver.
(e) As at the Latest Practicable Date, no arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code existed between the Subscriber or any party acting in concert with it, and any other person.
(f) As at the Latest Practicable Date, no agreement, arrangement or understanding (including any compensation arrangement) existed between (i) the Subscriber or any party acting in concert with it; and (ii) any Directors, recent Directors, Shareholders or recent Shareholders having any connection with or dependence upon the Subscription and/or the Whitewash Waiver.
(g) As at the Latest Practicable Date, there were no agreements or arrangements to which the Subscriber is a party which relate to the circumstances in which it may or may not invoke or seek to invoke a condition to the Subscription and the consequences of its doing so, including details of any break fees payable as a result.
(h) As at the Latest Practicable Date, the Company did not have any interest in the securities, options, warrants, convertible securities and derivatives of the Subscriber and had no dealings in the securities, options, warrants, convertible securities and derivatives of the Subscriber during the Relevant Period.
(i) As at the Latest Practicable Date, none of the Directors had any interest in the securities, options, warrants, convertible securities and derivatives of the Subscriber.

– 123 –

GENERAL INFORMATION

APPENDIX II

(j) Save for: (i) the acquisition of 11,046,000 Shares by Mr. Wang Da Yong at HK$0.87 per Share on 20 April 2012, (ii) the acquisition of 839,000 Shares by Mr. Wang Da Yong at HK$0.395 per Share on 18 July 2012; and (iii) an off-market transfer of 30,000,000 Shares between companies controlled by Mr. Wang Da Yong on 18 July 2012, none of the Directors had dealt for value in the securities, options, warrants, convertible securities and derivatives of the Company or the Subscriber during the Relevant Period.
(k) As at the Latest Practicable Date, none of (i) the subsidiaries of the Company; (ii) the pension fund of the Company or of any of its subsidiaries; nor (iii) any adviser to the Company (as specified in class (2) of the definition of ‘‘associate’’ under the Takeovers Code), had any interest in the securities, options, warrants, convertible securities and derivatives of the Company and/or had dealt in the securities, options, warrants, convertible securities and derivatives of the Company during the Relevant Period.
(l) As at the Latest Practicable Date, no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Company or with any person who is an associate of the Company by virtue of classes (1), (2), (3) and (4) of the definition of associate under the Takeovers Code.
(m) As at the Latest Practicable Date, no securities, options, warrants, convertible securities and derivatives of the Company were managed on a discretionary basis by any fund managers connected with the Company, nor did any such fund managers deal in any securities, options, warrants, convertible securities and derivatives of the Company during the Relevant Period.
(n) As at the Latest Practicable Date, Mr. Wang Da Yong is the only Director who hold Shares. As he was involved in the negotiation for the Subscription, he will abstain from voting on the Subscription and the Whitewash Waiver at the EGM though his intention is to vote in favour of the resolutions in respect of the Subscription and the Whitewash Waiver at the EGM.
(o) As at the Latest Practicable Date and during the Relevant Period, no securities, options, warrants, convertible securities and derivatives of the Company had been borrowed or lent by any of the Directors or by the Company or by the Subscriber or any party acting in concert with it.
(p) As at the Latest Practicable Date, there was no agreement or arrangement between any of the Directors and any other person which was conditional or dependent on the outcome of the Subscription and the Whitewash Waiver or otherwise connected with the Whitewash Waiver.
(q) As at the Latest Practicable Date, no benefit had been given or will be given to any Directors as compensation for loss of office or otherwise in connection with the Whitewash Waiver.
(r) As at the Latest Practicable Date, there was no material contract entered into by the Subscriber or any party acting in concert with it in which any Director had a material personal interest.

– 124 –

GENERAL INFORMATION

APPENDIX II

8. MATERIAL CONTRACTS

The following contracts (not being contracts in the ordinary course of business carried on or intended to be carried on by the Company or any of its subsidiaries) have been entered into by members of the Group after the date two years immediately preceding the date of the Announcement and up to the Latest Practicable Date and are or may be material:

(a) the supplemental deed dated 3 December 2010 and entered into between the Company and Mr. Zhao Ming to amend certain terms of the convertible notes issued by the Company on 21 December 2009;
(b) the subscription agreement dated 28 December 2010 entered into between the Company and Everest Project I Limited as subscriber in relation to the subscription for 1,000,000,000 new shares of the Company at a subscription price of HK$0.205 per share;
(c) the subscription agreement dated 30 December 2010 entered into between the Company and Chinarise Financial Limited as subscriber in relation to the subscription for 500,000,000 new shares of the Company at a subscription price of HK$0.21 per share (which was terminated on 30 June 2011);
(d) the subscription agreement dated 30 December 2010 entered into between the Company and Success Business Holdings Limited as subscriber in relation to the subscription for 500,000,000 new shares of the Company at a subscription price of HK$0.21 per share (which was terminated on 30 June 2011);
(e) the joint venture agreement dated 2 June 2011 entered into among Shanxi Puhua Deqin Metallurgy Technology Company Limited (being a subsidiary of the Company), CITIC Trust Co., Ltd. (being an independent third party) and Shanxi Lang Qian Mineral Company Limited Company (being an independent third party) for the establishment of a jointly controlled entity for development and investment in the areas of coal resources and clean energy;
(f) the sale and purchase agreement dated 25 July 2011 entered into between Eerduosi Hengtai Coal Company Limited (being a subsidiary of the Company) as purchaser and Shanghai Kuntana Investment Management Centre (being an independent third party) as vendor in relation to the acquisition of 100% equity interests in Inner Mongolia Liaoyuan Coal Mining Company Limited at a consideration of RMB500 million (subject to adjustment in accordance with the terms thereof); and
(g) the Subscription Agreement.

– 125 –

GENERAL INFORMATION

APPENDIX II

9. MARKET PRICE

The table below shows the closing prices of the Shares on the Stock Exchange (i) at the end of each of the six calendar months immediately preceding the date of the Announcement and ending on the Latest Practicable Date (ii) on 12 October 2012 (being the last trading day immediately preceding the date of the Announcement) and (iii) on the Latest Practicable Date:

	Closing price
	per Share
	HK$
2012
30 April	0.600
31 May	0.560
29 June	0.490
31 July	0.355
31 August	0.385
28 September	0.530
12 October	0.480
31 October	0.490
Latest Practicable Date	0.495

The lowest and highest closing market prices of the Shares recorded on the Stock Exchange during the Relevant Period were HK$0.680 on 18 April 2012 and HK$0.345 on 1 August 2012 respectively.

10. MISCELLANEOUS

(a) The registered office and the correspondence address of the Subscriber are PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands and Room 1002, 10/F, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong respectively. The registered address of Beijing Beida Jade Bird Universal Sci-Tech Company Limited is at 3rd Floor, Beida Jade Bird Building, Yanyuan District Area 3, No. 5 Haidian Road, Haidian District, Beijing 100080, China, with a principal place of business in Hong Kong at Room 1002, 10/F., Bank of America Tower, 12 Harcourt Road, Central, Hong Kong. The address of Mr. Benjamin Clark Danielson is at 14A, China World Apartment North, 1 Jian Guo Men Wai Avenue, Beijing 100004, China.
(b) The directors of the Subscriber are Mr. Xu Zhendong, Mr. Zhang Yongli, Mr. Zhang Wanzhong, Mr. Benjamin Clark Danielson, Mr. Zong Hao, Mr. Li Juncai and Mr. Wang Guohua. The directors of Beijing Beida Jade Bird Universal Sci-Tech Company Limited are Mr. Xu Zhendong, Mr. Xu Zhixiang, Mr. Zhang Wanzhong, Mr. Cai Weimin, Mr. Chen Zongbing, Ms. Zheng Zhong, Mr. Cai Chuanbing, Mr. Li Juncai, Mr. Shao Jiulin and Mr. Lin Yan.
(c) The registered office and principal place of business of the Company in Hong Kong is at Room 3603, 36th Floor, One Exchange Square, Central, Hong Kong.

– 126 –

GENERAL INFORMATION

APPENDIX II

(d) The share registrar and transfer office of the Company is Tricor Secretaries Limited at Level 25, Three Pacific Place, 1 Queen’s Road East, Hong Kong.
(e) The secretary of the Company is Mr. Lee Tao Wai.
(f) The registered office of both CCBIAML and CCB International Capital Limited, the financial adviser to the Subscriber, is at 34th Floor, Two Pacific Place, 88 Queensway, Admiralty, Hong Kong.
(g) The registered office of the Independent Financial Adviser is at 18th Floor, Aon China Building, 29 Queen’s Road Central, Hong Kong.
(h) The registered office of Ernst & Young, the auditors of the Company, is at 22nd Floor, CITIC Tower, 1 Tim Mei Avenue, Central, Hong Kong.
(i) The English text of this circular and the accompany form of proxy shall prevail over their respective Chinese texts for the purpose of interpretation.

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection (i) during normal business hours from 9:30 a.m. to 12:30 p.m. and from 2:30 p.m. to 5:30 p.m. on any weekday (except for Saturday and public holidays) at the head office and principal place of business of the Company in Hong Kong at Room 3603, 36th Floor, One Exchange Square, Central, Hong Kong, (ii) on the transaction specific website (www.663hk.com), and (iii) on the website of the SFC (www.sfc.hk), from the date of this circular up to and including the date of the EGM:

(a) the memorandum and articles of association of the Company;
(b) the memorandum and articles of association of the Subscriber;
(c) the annual reports of the Company for each of the two years ended 31 December 2011;
(d) the interim report of the Company for the six months ended 30 June 2012;
(e) the letter from the Board, the text of which is set out in this circular;
(f) the letter from the Independent Board Committee, the text of which is set out in this circular;
(g) the letter from the Independent Financial Adviser, the text of which is set out in this circular;
(h) the material contracts as referred to in the paragraph headed ‘‘Material contracts’’ in this appendix; and
(i) the written consent referred to in the paragraph headed ‘‘Qualification and consent of expert’’ in this appendix.

– 127 –

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: 00663)

NOTICE IS HEREBY GIVEN THAT an extraordinary general meeting (the ‘‘EGM’’) of King Stone Energy Group Limited (the ‘‘Company’’) will be held at 12:00 p.m. on Wednesday, 5 December 2012 at Room 3603, 36th Floor, One Exchange Square, Central, Hong Kong for the following purpose of considering and, if thought fit, passing with or without amendments, the following resolutions as ordinary resolutions:

ORDINARY RESOLUTIONS

‘‘THAT:
(a) the subscription agreement (the ‘‘Subscription Agreement’’) entered into between the Company and Jade Bird Strategic Investment (the ‘‘Subscriber’’) dated 12 October 2012 in relation to the subscription for 1,555,555,000 new shares (the ‘‘Subscription Shares’’) of HK$0.10 each in the capital of the Company by the Subscriber at HK$0.45 per Subscription Share, a copy of the Subscription Agreement having been produced to the EGM and marked ‘‘A’’ and initialled by the chairman of the EGM for the purpose of identification, and the transactions contemplated thereby be and are hereby approved, confirmed and ratified;
(b) the allotment and issue of the Subscription Shares to the Subscriber pursuant to the terms of the Subscription Agreement and the transactions contemplated thereby be and are hereby approved; and
(c) any one or more directors of the Company be and are hereby authorised to allot and issue the Subscription Shares in accordance with the terms of the Subscription Agreement and to do all such acts and things as they consider necessary or expedient for the purpose of giving effect to the Subscription Agreement and completing the transactions contemplated thereby.’’
‘‘THAT, subject to the granting of the Whitewash Waiver (as defined below) by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission of Hong Kong (or any delegate of the Executive Director) and any conditions that may be imposed thereon, the waiver of the obligation on the part of the Subscriber and parties acting in concert with it to make a mandatory general offer to the shareholders of the Company for all the issued shares of the Company not already owned or agreed to be acquired by them which might otherwise arise as a result of the Subscriber subscribing for

– 128 –

NOTICE OF EGM

the Subscription Shares under the Subscription Agreement pursuant to Note 1 on Dispensations from Rule 26 of the Hong Kong Code on Takeovers and Mergers (the ‘‘Whitewash Waiver’’) be and is hereby approved.’’

Yours faithfully By the order of the Board KING STONE ENERGY GROUP LIMITED Wang Da Yong Chairman

Hong Kong, 15 November 2012

Registered office and Principal Place of

Business in Hong Kong:

Room 3603, 36th Floor One Exchange Square Central Hong Kong

Notes:

A member entitled to attend and vote at the EGM is entitled to appoint one or if he is the holder of two or more shares more than one proxy to attend and, subject to the provisions of the articles of association of the Company, to vote on his behalf. A proxy need not be a member of the Company but must be present in person at the EGM to represent the member. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed.
A form of proxy for use at the EGM is enclosed with the circular of the Company dated 15 November 2012. Whether or not you intend to attend the EGM in person, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon. Completion and return of a form of proxy will not preclude a member from attending in person and voting at the EGM or any adjournment thereof, should he so wish.
In order to be valid, the form of proxy, together with a power of attorney or other authority, if any, under which it is signed, or a certified copy of such power or authority must be deposited at the Company’s share registrar in Hong Kong, Tricor Secretaries Limited, at Level 25, Three Pacific Place, 1 Queen’s Road East, Hong Kong, not less than 48 hours before the time appointed for holding the EGM or any adjournment thereof.
In the case of joint holders of shares, any one of such holders may vote at the EGM, either personally or by proxy, in respect of such share as if he was solely entitled thereto, but if more than one of such joint holders are present at the EGM personally or by proxy, that one of the said persons so present whose name stands first on the register of members of the Company in respect of such shares shall alone be entitled to vote in respect thereof.

– 129 –

AI assistant

Design Capital Limited — Proxy Solicitation & Information Statement 2012

49990_rns_2012-11-14_e58fa55f-be27-4f00-94e8-77d5ecede55d.pdf

KING STONE ENERGY GROUP LIMITED

金 山 能 源 集 團 有 限 公 司

(I) PROPOSED ISSUE OF NEW SHARES; AND (II) APPLICATION FOR WHITEWASH WAIVER

CONTENTS

KING STONE ENERGY GROUP LIMITED

金 山 能 源 集 團 有 限 公 司

Executive Directors:

Non-executive Directors:

Independent non-executive Directors:

To the Shareholders

(I) PROPOSED ISSUE OF NEW SHARES; AND (II) APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

SUBSCRIPTION AGREEMENT

The Subscription

The Subscription Price

LETTER FROM THE BOARD

Conditions of the Subscription

Completion

Ranking of the Subscription Shares

Mandate

Shareholding Structure of the Company

Reasons for the Subscription and use of proceeds

LETTER FROM THE BOARD

Background and information on the Subscriber

Dealing and interest of the Subscriber in the securities of the Company

LETTER FROM THE BOARD

Future intentions of the Subscriber regarding the Group

NO FUND RAISING EXERCISE FOR THE PAST 12 MONTHS

APPLICATION FOR WHITEWASH WAIVER

GENERAL

EGM

LETTER FROM THE BOARD

RECOMMENDATION

ADDITIONAL INFORMATION

KING STONE ENERGY GROUP LIMITED

金 山 能 源 集 團 有 限 公 司

(I) PROPOSED ISSUE OF NEW SHARES; AND (II) APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

RECOMMENDATION

Yours faithfully, For and on behalf of

PROPOSED ISSUE OF NEW SHARES AND APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

BASIS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Review of historical performance of the Group

2. Background and reasons for the Subscription and use of proceeds

3. Other alternative methods of financing

4. Principal terms of the Subscription

Historical performance of Share price

Trading liquidity of the Shares

5. Financial effects of the Subscription

Working capital

Net asset value

Gearing and current ratios

6. Effect on the shareholding structure of the Company

7. Whitewash Waiver

RECOMMENDATIONS

1. FINANCIAL SUMMARY

2. LATEST AUDITED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

STATEMENT OF FINANCIAL POSITION

NOTES TO FINANCIAL STATEMENTS

1. CORPORATE INFORMATION

2. BASIS OF PREPARATION, PRESENTATION AND CONSOLIDATION

Basis of preparation

Basis of presentation

Basis of consolidation

3.1 CHANGES IN ACCOUNTING POLICY AND DISCLOSURES

3.2 ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

3.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Subsidiaries

Joint ventures

Jointly-controlled entities

Design Capital Limited Proxy Solicitation & Information Statement 2012

金山能源集團有限公司

金山能源集團有限公司

金山能源集團有限公司