The Group are the largest Local Coal Enterprise in Inner Mongolia, China, and one of the largest coal enterprises in China, in terms of revenue in 2011, according to the CNCA. Inner Mongolia has the largest total proved coal reserves according to the MLR, and the highest coal production volume in 2009, 2010 and 2011 according to the NBSC, among all provinces in China. The Group have grown rapidly in recent years, primarily from the successive completion of internal consolidations and technology upgrades in the Group’s coal mines, which has led to increased production capacity, production equipment mechanization and recovery rate. From 2006 to 2011, the Group’s coal output increased from 9.7 million tonnes to 35.1 million tonnes, and the Group’s primary mining method changed from room-and-pillar mining to fully mechanized longwall mining, which enabled us to extract substantially all coal of mining faces without having to leave a significant portion of coal as pillars, as would be the case in room-and-pillar mining. Accordingly, the mechanization ratios of the Group’s mines increased from under 50% to above 95%; and the overall mining-zone recovery rates increased from under 50% to around 80% from 2006 to 2011. For 2009, 2010 and 2011, the Group sold 27.7 million tonnes, 35.7 million tonnes and 38.3 million tonnes of coal, respectively, representing a CAGR of 17.6% from 2009 to 2011. The Group’s total revenue for 2009, 2010 and 2011 was RMB10,252.2 million, RMB13,853.8 million and RMB16,515.8 million, respectively, representing a CAGR of 26.9% from 2009 to 2011. The Group’s profit for 2009, 2010 and 2011 was RMB3,148.4 million, RMB5,316.0 million and RMB5,749.3 million, respectively, representing a CAGR of 35.1% from 2009 to 2011.
The Group’s Coal Operations
The Group have seven operating mines and two mines under development. All of the Group’s coal mines are located in the Ordos region, Inner Mongolia. The Group have a large and high quality coal reserves base, with geological and depositary conditions favorable to low-cost mining. The majority of the Group’s coal reserves are deposited in the Dongsheng Coalfield, which is renowned for high quality coal deposits and, combined with the adjacent Shenfu Coalfield, is listed by the State Council as one of the 14 large-scale coal production bases in China. The total proved and probable recoverable coal reserves of the Group’s operating mines and mines under development amounted to 1,432.9 million tonnes as of December 31, 2011, which the Group expect to be sufficient for more than 40 years of production based on the Group’s 2011 annual production of 35.1 million tonnes of coal. The estimated remaining life of the Group’s Suancigou Mine, in which the Group hold a 52% interest, is 41 years, while the estimated remaining lives of the Group’s other operating mines ranges from two years to nine years according to the Competent Person’s Report. Talahao, Bulamao West and Bulamao East, which are under development, have estimated mine lives of 103, 18 and nine years respectively, according to the Competent Person’s Report.
The output of certain mines in certain years has exceeded the Assessed Capacities as recorded on its coal production permit. In addition, the mining right permits for Fuhua Mine and Kaida Mine will expire in November 2013 and June 2013, respectively. According to applicable PRC laws and regulations, a mining right permit can be renewed by filing an extension application at least 30 days prior to the expiry date. The mining right permits for Fuhua Mine and Kaida Mine will be renewed in line with the applicable laws and regulations.
The Group have obtained mining rights for all of the Group’s operating mines. In respect of the Group’s two mines under development, namely Talahao Mine and Bulamao Mine, the Group have obtained approvals from the MLR regarding the demarcation of their respective mining areas. Based on such approvals, the Group will formulate the Group’s production plans for these two mines, and will apply for mining right permits from the MLR in due course. Jingtian & Gongcheng Attorneys at Law, the Group’s PRC legal advisors, have advised that there is no material legal impediment to obtaining the relevant mining rights provided that the Group submit application documents in compliance with applicable laws and regulations to the MLR to apply for the grant of the relevant mining rights and the issuance of the relevant mining right permits, and that the Group will not need to pay mining right prices as the Group have already paid exploration right prices in full and there has been no subsequent investment by the government on these two mines. The Group cannot legally produce coal from Talahao Mine and Bulamao Mine before obtaining these mining right permits and other relevant permits and licenses.
The Group’s coal products primarily comprise high-quality thermal coal produced from raw coal excavated at the Group’s own mines with commercially attractive characteristics, including medium to high calorific value, high volatile matter content, low sulphur content, medium to low ash content and low phosphorous content. The major criteria to classify thermal coals are ash content, sulphur content and calorific value. According to the PRC national standard for the classification of the quality of coal for power generation, low ash content refers to ash content between 10.01% and 20.00%, ultra-low sulphur content refers to sulphur content below 0.50%, and medium-to-high calorific value refers to calorific value between 24.31mj/kg and 27.20mj/kg. According to the Competent Person’s Report, the average ash content of the Group’s seven operating mines is approximately 12.49%, the average sulphur content is approximately 0.34%, and the average gross calorific value* is approximately 6,100kcal/kg (equivalent to approximately 25.50mj/kg). In addition, according to the evaluation report issued by the Beijing Research Institute of Coal Chemistry of China Coal Research Institute, the Group’s coal products are highquality thermal coal with low ash content, low sulphur content and low phosphorous content. In addition to the sales of self-produced coal, the Group also purchase a small percentage of coal from third-party coal companies for resale.
The Group sell all of the Group’s coal products in China by means of both long-term sales contracts and spot market sales, and procure customers through the Group’s own sales force. The Group’s high-quality thermal coal products are mainly sold to large-scale industrial customers, particularly power producers. As of the Latest Practicable Date, Yitai Group had entered into 22 long-term agreements with customers, most of which are large scale power producers. All rights and obligations of Yitai Group under these long-term agreements will be transferred to us. Each of these agreements has a duration of five years, with fixed purchase and sales volume for each year, and provide that selling prices should be either set by reference to market prices or negotiated annually. The expiry dates of these agreements are December 31, 2014, which may be extended upon mutual agreement between the parties. Yitai Group’s sales commitments under these long-term agreements was 42.1 million tonnes and 48.0 million tonnes for 2010 and 2011, respectively, and will be 56.4 million tonnes, 67.4 million tonnes and 77.4 million tonnes for 2012, 2013 and 2014, respectively. Pursuant to these long-term agreements, the parties should enter into annual coal sales and purchase contracts, in which the parties will set forth the selling prices and adjust the sales volume as necessary. Certain of the Group’s sales are made by signing annual coal sales and purchase contracts under the long-term agreements. The actual sales volume of Yitai Group generated from these agreements was 23.9 million tonnes, 27.0 million tonnes and 25.9 million tonnes for 2009, 2010 and 2011, respectively. The Group’s actual sales volume generated from the annual coal sales and purchase contracts under the long-term agreements was 15.6 million tonnes, 17.6 million tonnes and 14.9 million tonnes for 2009, 2010 and 2011, respectively, representing 56.3%, 49.2% and 38.8% of the Group’s total sales volume for 2009, 2010 and 2011, respectively.
Over the years, the Group have made continuous investments in railway and highway transportation system, and integrated the Group’s production, transportation and sales of coal. Through the Group’s integrated transportation network, the Group transport the Group’s coal products from the Group’s mines to the national ground transportation network for delivery. The Group obtain railway capacity on the national railway system primarily through allocations of annual planned railway capacity made by the MOR and the NDRC to Yitai Group. Yitai Group also grants us additional transportation capacity that it obtains from the MOR from time to time in addition to the annual quotas originally allocated to it, subject to the national railway system’s ability to meet the additional demand. Please refer to “— Coal Operations—Coal Transportation” for details.
The Group have high production efficiency and maintain an excellent safety record. With reference to the data in the 2011 Analytical Report on the Top 100 Chinese Coal Enterprises published by the CNCA, the Group ranked No. 1 in average raw coal output per worker, No. 1 in average revenue per worker, No. 1 in average profit per worker, No. 1 in return on equity and No. 1 in net profit margin among the top 20 coal enterprises in China in terms of revenue in 2010. The Group maintain strict cost control. The estimated average operating costs for the Group’s coal operations increased from RMB67 per tonne in 2009 to RMB81 per tonne for 2010 and RMB85 tonne for 2011 primarily because the Inner Mongolia government required coal enterprises in Inner Mongolia to contribute to a coal price-regulation fund that it managed, and accordingly the Group are required to contribute RMB15 for each tonne of coal the Group produced, starting from 2009. The Group had maintained a record of zero fatalities per million tonnes of coal production during the Track Record Period. By comparison, the average fatalities per million tonnes of coal production for coal mines in China was 0.89, 0.75 and 0.56 for 2009, 2010 and 2011, respectively, according to the NBSC.
The main supplies the Group purchase for the Group’s coal operations include coal, mining equipment, replacement parts, steel, cement, explosives, fuel and lubricants. The Group also use third party railway companies to transport the Group’s coal. The main supplies the Group purchase for the Group’s coal transportation operations are locomotives and other rolling stock, spare parts, fuel and power.
The Group’s Transportation Operations
The Group own and operate two local railway lines, namely Yitai Zhundong and Huzhun Railway Lines, and a local railway branch line, namely Suancigou Railway Line, with a total main line length, constructed and under construction, of approximately 398.3 kilometers. The Group also own a 122.0-kilometer Caoyang Tollway?
These transportation lines form an integrated transportation network connecting the Group’s mines to the national ground transportation system, which the Group believe would provide us with competitive advantages in securing allocation of coal transportation capacity in the national railway system and facilitate the Group’s coal sales to both local customers and customers in the more developed coastal regions of China. The Group also provide coal transportation services to third parties through the Group’s two local railway lines and trucking subsidiaries. The freight charge rates for both Yitai Zhundong Railway Line and Huzhun Railway Line were RMB0.15 per tonne per kilometer during the Track Record Period and as of the Latest Practicable Date. In addition, the Group collect tolls from third party vehicles utilizing the Group’s tollway.
The Group’s Coal-related Chemical Operations
The Group are the first enterprise to successfully use indirect coal-to-oil technologies on an industrial scale in China. Yitai Group obtained an approval from the IMDRC in 2005 for developing a coal-to-oil project. The Group carry out this project through the Group’s subsidiary, Yitai Coal-to-oil, and have completed the construction of the demonstration phase of the project with a designed annual output of 160,000 tonnes of synthetic fuels. The project commenced its operations in July 2011, and it is in full-load operation at its designed annual capacity. For 2011, revenue derived from the Group’s coal-related chemical operation was approximately RMB677.8 million.
By leveraging the Group’s successful launch of the coal-to-oil project, the Group plan to expand into the second phase of the Group’s coal-related chemical operations in the next five years, which includes (i) Yitai Yili’s 1.0 Mtpa coal-to-oil project; (ii) Yitai Xinjiang’s 1.8 Mtpa coal-related chemical project; and (iii) Yitai Chemical’s 1.2 Mtpa coalrelated chemical project. Although all of the three projects are at preliminary stage and have not obtained the approvals from the NDRC, the Group have obtained confirmation from the local arms of the NDRC approving us to begin preliminary works.
The Group believe that the Group enjoy the first-mover advantage in the coal-related chemical industry in China. The Group’s coal-related chemical operations enable us to improve the Group’s vertical integrated operations by providing high-value added downstream coal products to the market. Furthermore, by leveraging the favorable governmental policies of Inner Mongolia and Xinjiang towards the resource allocation for the coal-related chemical industry, the advantage of the development of western China and the policy support under the Twelfth Five-year Plan on the Development of Coal Industry in respect of orderly development of advanced and demonstrative projects of modern coal-related chemical operations, the Group expect to obtain new coal resources, achieve economies of scale by expanding the Group’s coal-related chemical business, and further reduce operating costs.
The Group’s Other Operations
The Group’s other operations include mainly the development, production and sale of traditional Chinese medicine through the Group’s wholly-owned subsidiary, Yitai Pharmaceutical. The Group incorporated Yitai Pharmaceutical in 1998 to engage in Chinese medicine operations. Yitai Pharmaceutical has obtained the medicine production license and the medicine Good Manufacture Practice certificate in the PRC. The Group’s Directors expect that, in the foreseeable future, revenue generated from the Group’s other operations will continue to be insignificant as compared to the Group’s total revenue. | |