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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, StateD.C. 20549
----------------
FORM 6-K
----------------
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of June 2006
Commission File Number 0-26046
China Natural Resources, Inc.
-----------------------------------------------
(Translation of registrant's name into English)
Room 2105, West Tower, Shun Tak Centre,
200 Connaught Road C., Sheung Wan, Hong Kong
--------------------------------------------
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F. Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12b3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X].
If "Yes" is marked, indicated below the file number assigned to the registrant
in connection with Rule 12b3-2(b): 82-_________.
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OTHER INFORMATION
On June 19, 2006, China Natural Resources, Inc. issued a press release
announcing its results of operations for the year ended December 31, 2005. A
copy of the press release is included as an exhibit to this report on Form 6-K.
The Company is also including with this Report (a) audited consolidated
financial statements of Feishang Mining Holdings Limited for the year ended
December 31, 2005 and (b) unaudited pro-forma consolidated financial
information, giving effect to the Company's February 3, 2006 acquisition of
Feishang Mining Holdings Limited.
FINANCIAL STATEMENTS
(a) Financial statements of Feishang Mining Holdings Limited:
Audited consolidated financial statements of Feishang Mining
Holdings Limited for the years ended December 31, 2004 and 2005
are included with this report on Form 6-K.
(b) Proforma financial information:
Unaudited consolidated proforma financial information, giving
effect to the Company's February 3, 2006 acquisition of Feishang
Mining Holdings Limited is included with report on Form 6-K.
EXHIBITS
Exhibit No. Description
----------- ---------------------------------------------------
99.1 Press Release dated June 19, 2006
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunder duly authorized.
CHINA NATURAL RESOURCES, INC.
Date: June 19, 2006 By: /s/ Li Feilie
----------------------------------
Li Feilie, Chief Executive Officer
3
FEISHANG MINING HOLDINGS LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
FEISHANG MINING HOLDINGS LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
Pages
Report of independent registered public accounting firm F-1
Consolidated statements of operations F-2
Consolidated balance sheet F-3
Consolidated statements of shareholder's equity F-4
Consolidated statements of cash flows F-5 - F-6
Notes to consolidated financial statements F-7 - F-19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Feishang Mining Holdings Limited
We have audited the accompanying consolidated balance sheet of Feishang Mining
Holdings Limited and subsidiary as of December 31, 2005, and the related
consolidated statements of operations, shareholder's equity, and cash flows for
each of the two years in the period ended December 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Feishang Mining
Holdings Limited and subsidiary at December 31, 2005, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
GHP Horwath, P.C.
Denver, Colorado
May 19, 2006
F-1
FEISHANG MINING HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS)
Year ended December 31,
----------------------------------
Notes 2004 2005 2005
RMB RMB US$
-------- -------- --------
NET SALES 77,939 98,962 12,263
COST OF SALES (31,518) (38,402) (4,759)
-------- -------- --------
GROSS PROFIT 46,421 60,560 7,504
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (4,597) (9,172) (1,136)
-------- -------- --------
INCOME FROM OPERATIONS 41,824 51,388 6,368
INTEREST INCOME 162 1,216 151
OTHER INCOME (EXPENSE), NET 4 6 (223) (28)
-------- -------- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 41,992 52,381 6,491
INCOME TAXES 5 -- (8,335) (1,033)
-------- -------- --------
INCOME FROM CONTINUING
OPERATIONS 41,992 44,046 5,458
DISCONTINUED OPERATIONS
Income from discontinued
bleaching earth segment 3 12 -- --
-------- -------- --------
NET INCOME 42,004 44,046 5,458
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
F-2
FEISHANG MINING HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Notes RMB US$
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents 41,202 5,105
Trade receivables, net of allowance of RMB165 4,622 573
Bills receivable 450 56
Other receivables, deposits and prepayments 422 52
Amount due from a related company 9 20,503 2,541
Inventories 6 3,788 469
-------- --------
TOTAL CURRENT ASSETS 70,987 8,796
PROPERTY AND EQUIPMENT, NET 7 33,656 4,171
-------- --------
TOTAL ASSETS 104,643 12,967
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable 934 116
Other payables 8 18,881 2,340
Advances from customers 1,174 145
Accrued liabilities 1,319 164
Amount due to a director 9 23,644 2,930
Amount due to a related company 9 6,476 802
Dividends payable 5 1
Taxes payable 2,545 315
-------- --------
TOTAL LIABILITIES - ALL CURRENT 54,978 6,813
-------- --------
SHAREHOLDER'S EQUITY
Share capital
Authorized - 50,000 shares US$1 par value
Issued - 1 share 13 -- --
Reserves 3,912 484
Other comprehensive income 240 30
Retained earnings 45,513 5,640
-------- --------
TOTAL SHAREHOLDER'S EQUITY 49,665 6,154
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY 104,643 12,967
-------- --------
The accompanying notes are an integral part of these financial statements.
F-3
FEISHANG MINING HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS)
Retained comprehensive
Share Share Other
capital capital Reserves earnings income Total
Shares RMB RMB RMB RMB RMB
------- ------- ------- -------- -------- --------
Balances at January 1, 2004 -- -- -- 7,380 -- 7,380
Issue of share 1 -- -- -- -- --
Net income for the year -- -- -- 42,004 -- 42,004
------- ------- ------- -------- -------- --------
Balances at December 31, 2004 1 -- -- 49,384 -- 49,384
Transfer to reserves -- -- 3,912 (3,912) -- --
Dividends declared -- -- -- (44,005) -- (44,005)
Net income for the year -- -- -- 44,046 -- 44,046
Currency translation adjustments -- -- -- -- 240 240
_______
Comprehensive income -- -- -- -- -- 44,286
------- ------- ------- -------- -------- --------
Balances at December 31, 2005 00001 -- 3,912 45,513 240 49,665
======= ======= ======= ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
FEISHANG MINING HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS)
Year ended December 31,
----------------------------------
2004 2005 2005
RMB RMB US$
-------- --------- --------
OPERATING ACTIVITIES
Net income 42,004 44,046 5,458
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 1,715 2,414 299
Amortization of mining rights 312 370 46
Loss on disposal of property and equipment 255 92 11
Interest accrued on loan to related company -- (503) (63)
Changes in operating assets and liabilities:
Trade receivables 2,705 (3,910) (485)
Bills receivable (697) 597 74
Inventories 767 (270) (33)
Other receivables, deposits and prepayments 426 (3) --
Accounts payable (472) (416) (52)
Other payables 724 3,302 409
Advances from customers (5,911) (1,026) (127)
Accrued liabilities 131 (187) (23)
Taxes payable 902 395 49
Discontinued operations * 886 -- --
-------- --------- --------
Net cash provided by operating activities 43,747 44,901 5,563
-------- --------- --------
INVESTING ACTIVITIES
Advances to related companies (33,069) (83,140) (10,303)
Repayment from related companies -- 50,623 6,273
Advances from a director 431 11,213 1,389
Purchases of property and equipment (1,981) (2,304) (285)
Proceeds from disposal of property and equipment -- 22 3
-------- --------- --------
Net cash used in investing activities (34,619) (23,586) (2,923)
-------- --------- --------
FINANCING ACTIVITIES
Proceeds from bank loan -- 10,000 1,239
Repayment of bank loan -- (10,000) (1,239)
-------- --------- --------
Net cash used in financing activities -- -- --
-------- --------- --------
(Continued)
F-5
FEISHANG MINING HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS)
Year ended December 31,
----------------------------------
2004 2005 2005
RMB RMB US$
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,128 21,315 2,640
EFFECT OF EXCHANGE RATES ON CASH -- 240 30
CASH AND CASH EQUIVALENTS, BEGINNING 10,519 19,647 2,435
-------- -------- --------
CASH AND CASH EQUIVALENTS, ENDING 19,647 41,202 5,105
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes -- 7,145 885
======== ======== ========
Supplemental disclosure of non-cash investing
and financing activities:
Transfer of interest in WFM -- 12,000 1,487
======== ======== ========
Dividends declared -- 44,005 5,453
======== ======== ========
Offset dividends against amount due from a
former shareholder and amounts due from
related companies -- 44,000 1,115
======== ======== ========
Offset amount due to a former shareholder against
amount due from a related company -- 25,183 3,121
======== ======== ========
Amount due from related company for sale of assets
of discontinued operations 8,050 -- --
======== ======== ========
Offset other receivables against amount due to a
related company (68) -- --
======== ======== ========
------------
* Cash flows from investing and financing activities of discontinued
operations were not significant in 2004.
The accompanying notes are an integral part of these financial statements.
F-6
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. ORGANIZATION, PRINCIPAL ACTIVITIES AND INTERIM FINANCIAL STATEMENTS
Feishang Mining Holdings Limited ("FMH" or the "Company") is a British
Virgin Islands company which was incorporated on September 3, 2004.
The Company beneficially owns 100% Wuhu Feishang Mining Development
Co. Ltd. ("WFM") (the Company and WFM, collectively, the "Group").
WFM was established as a Sino-foreign joint venture company in the PRC
with the venturers being Wuhu Feishang Enterprise Development Limited
("WFE") ("50%") and FIH ("50%") on June 21, 2002 with a tenure of 20
years from the date of the business license. The tenure can be extended
by agreement between the joint venture partners with the necessary
approval from the relevant government agencies. The registered capital
of WFM is RMB12,000 (US$1,487), of which RMB6,000 (US$743) was each
contributed by WFE and FIH. WFM commenced operations in May 2003 upon
its acquisition of Anhui Fanchang Zinc and Iron Mine
("Anhui"), a PRC state-owned entity.
In April 2005, WFE and FIH transferred their interests in WFM to the
Company at cost (RMB12,000). WFE, FIH and FMH are all controlled by the
same individual, Mr. Li Feilie. The Company has recorded the transfer
of WFE's and FIH's interests in WFM at historical net book value and
has accounted for the transfer as a transfer of assets between entities
under common control in a manner similar to the pooling of interests;
accordingly, all prior period consolidated financial statements of the
Company have been restated to include the results of operations,
financial position, and cash flows of WFM.
The Company's operations are conducted through WFM, a mining enterprise
principally engaged in the mining of zinc, iron and other minerals for
distribution in the People's Republic of China ("PRC"). WFM owns the
mining rights to two mines: Yang-chong Mine contains iron and zinc
minerals and Zao-yun Mine contains mainly iron minerals. The cash flows
and profitability of WFM's current operations are significantly
affected by the market price of zinc and iron. These commodity prices
can fluctuate widely and are affected by factors beyond WFM's control.
F-7
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Accounting principles and principles of consolidation
-----------------------------------------------------
The consolidated financial statements of the Company are prepared
in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"), and include the accounts of
the Company and its subsidiary. Significant intercompany accounts
and transactions have been eliminated on consolidation.
(b) Use of estimates
----------------
The preparation of the financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
(c) Cash and cash equivalents
-------------------------
The Company considers all highly liquid investments and cash
deposits with financial institutions with original maturities of
three months or less to be cash equivalents.
(d) Inventories
-----------
Inventories are stated at the lower of average cost or net
realizable value. For products, the Company determines net
realizable value by estimating value based on current metals
prices, less cost to convert stockpiled and in-process inventories
to finished products. Major types of inventories include:
Raw materials consists of raw ore extracted and auxiliary material
- costs are limited to those directly related to mining
Work in progress consists of semi-finished iron and zinc ore -
valued at the cost of production through the point at which
inventory has been processed
Finished goods - valued at the lower of full cost of production or
net realizable value based on current metal prices
F-8
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(e) Property and equipment
----------------------
Property and equipment are stated at cost less accumulated
depreciation. Expenditures for routine repairs and maintenance are
expensed as incurred.
Depreciation is calculated on the straight-line basis to write off
the cost less estimated residual value of each asset over its
estimated useful life.
In April 2004, the FASB issued FASB Staff Position ("FSP") FAS
141-1 and FAS 142-1 "Interaction of FASB Statements No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, and Emerging Issues Task Force ("EITF") Issue 04-2,
"Whether Mineral Rights are Tangible or Intangible Assets". This
FSP amends SFAS Nos. 141 and 142 and requires mineral rights to be
accounted for as tangible assets based on the consensus reached in
EITF 04-2.
The Company has determined that its mining rights are mineral
rights, and accordingly they are classified as property and
equipment.
Mining rights are stated at cost less accumulated amortization and
any impairment losses. The mining rights are amortized based on
actual units of production over the estimated reserves of the
mines, not to exceed 20 years. The weighted average remaining
amortization period for these reserves is 17 years as of December
31, 2005. The Company's rights to extract minerals are
contractually limited by time. However, the Company believes that
it will be able to extend licenses, as it has in the past, without
incurring substantial costs, and therefore, believes that assigned
lives are appropriate.
Estimated useful lives are as follows:
Buildings and mine development 15 - 35 years
Machinery and equipment 6 - 15 years
Motor vehicles 8 years
Mining rights 17 years
F-9
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(e) Property and equipment (continued)
----------------------------------
Management assesses the carrying values of its long-lived assets
for impairment when circumstances warrant such a review. Generally,
long-lived assets are considered impaired if the estimated fair
value is less than the assets' carrying values. If an impairment is
indicated, the loss is measured based on the amounts by which the
carrying values of the assets exceed their fair values.
(f) Revenue recognition
-------------------
Revenue from product sales is recognized when title passes to the
customer in accordance with the sales agreement, generally upon
product acceptance by the customer.
Freight and handling costs paid to third party carriers are
recorded as cost of sales.
(g) Income taxes
------------
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
(h) Foreign currency translation
----------------------------
The functional currency of all the operations of the Company is the
Renminbi ("RMB"), the national currency of the PRC.
Transactions denominated in currencies other than the RMB are
translated into RMBs at the applicable rates of exchange prevailing
at the dates of the transactions. Monetary assets and liabilities
denominated in other currencies have been translated into RMBs at
the rate of exchange at the balance sheet date. The resulting
exchange gains or losses are credited or charged to the
consolidated statements of operations.
The financial statements are stated in RMB. The translation of
amounts from RMB into US$ is included solely for the convenience of
the reader and has been made at the rate of exchange quoted by the
People's Bank of China on December 31, 2005 of US$1.00 = RMB8.07.
No representation is made that the RMB amounts could have been, or
could be, converted into US$ at that rate on December 31, 2005 or
at any other date.
(i) Interest income
Interest on bank balances is recorded when earned.
F-10
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(j) Recently issued accounting pronouncements
-----------------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (R) "Share Based Payment" which addresses the
accounting for share-based payment transactions. SFAS No. 123 (R)
eliminates the ability to account for share-based compensation
transactions using APB No. 25, and generally requires instead that
such transactions be accounted and recognized in the statement of
income based on their fair values. SFAS No. 123 (R) will be
effective for public companies that file as small business issuers
as of the first interim period in fiscal years that begin after
December 15, 2005. The Company is evaluating the provisions of SFAS
No. 123 (R). Depending upon the numbers and terms of options that
may be granted in future periods, the implementation of this
standard could have a material impact on the Company's financial
position and results of operations.
In March 2005, the Emerging Issues Task Force ("EITF") issued EITF
04-6, "Accounting for Stripping Costs Incurred during Production in
the Mining Industry". EITF 04-6 requires that stripping costs
incurred during the production phase of a mine should be included
in the cost of inventory produced during the period the stripping
costs are incurred. EITF 04-6 is effective for the first reporting
period in fiscal years beginning after December 15, 2005, with
initial adoption being accounted for in a manner similar to a
cumulative-effect adjustment. Management is assessing the impact
that the adoption of EITF 04-6 will have on its financial
statements.
(k) Reclassifications
-----------------
Certain 2004 balances have been reclassified to conform to the
current presentation.
3. DISCONTINUED OPERATIONS
Pursuant to a January 1, 2004 agreement, WFM disposed of its interest
in the mining of activated bleaching earth operations to a related
party, Wuhu Feishang Non-Metal Material Co. Ltd. ("WFNM"), for total
consideration of RMB8,050 (US$998), which was paid in November 2005.
Inventories of the bleaching earth segment with a carrying value of
RMB796 (US$99) were not sold to WFNM and were sold by WFM to unrelated
third parties in 2004. The sale price of the bleaching earth segment
equaled its carrying value and accordingly there was no gain or loss on
the sale. As a result of the disposition, WFM has ceased its activated
bleaching earth operations. The results of the activated bleaching
earth segment have been retroactively restated as discontinued
operations. Revenues from the discontinued activated bleaching earth
segment were RMB808 (US$100) and nil, respectively, for the years ended
December 31, 2004 and 2005. Income before income taxes from the
discontinued activated bleaching earth segment was RMB12 (US$1) and
nil, respectively, for the years ended December 31, 2004 and 2005. Cash
flows from discontinued operations of RMB886 (US$110) are from
operating activities. There were no cash flows from discontinued
operations from investing or financing activities.
F-11
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
4. OTHER INCOME(EXPENSE), NET
Other income (expense), net represents:
Years ended December 31,
---------------------------
2004 2005 2005
RMB RMB US$
----- ----- -----
Loss on disposal of property & equipment - (92) (11)
Other 6 (131) (17)
----- ----- -----
6 (223) (28)
===== ===== =====
5. INCOME TAXES
Pre-tax income for the years ended December 31, 2004 and 2005 was
taxable in the PRC.
The reconciliation of income taxes/(tax benefit) computed at the PRC
federal statutory tax rate applicable to foreign investment enterprises
operating in Anhui Province in the PRC, to income tax expense is as
follows:
Year ended September 30,
------------------------------------
2004 2005 2005
RMB RMB US$
-------- -------- --------
PRC Federal statutory tax rate 30% 30% 30%
Computed expected income tax
expense (12,598) (15,714) (1,947)
Non-deductible expenses -- (956) (119)
Preferential tax treatment 12,598 8,335 1,033
-------- -------- --------
Income tax expense, all current -- (8,335) (1,033)
======== ======== ========
WFM is governed by the Income Tax Laws of the PRC. Being a Sino-foreign
joint venture, the Company is exempt from income taxes for a period of
two years commencing from its first profitable year (2003) and is
entitled to a preferential income tax rate of 15% for three consecutive
years commencing from its third profitable year (2005). Beginning in
2007, income will be taxed at the full rate of 30%.
Under the current laws of the BVI, dividends and capital gains arising
from the Company's investments in the BVI are not subject to income
taxes and no withholding tax is imposed on payments of dividends to the
Company.
F-12
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
6. INVENTORIES
At December 31, 2005, inventories consisted of:
RMB US$
-------- --------
Raw materials 2,425 301
Work in progress 392 48
Finished goods 971 120
-------- --------
3,788 469
======== ========
7. PROPERTY AND EQUIPMENT
At December 31, 2005, property and equipment consisted of:
RMB US$
-------- --------
At cost:
Buildings and mine development 24,009 2,975
Machinery and equipment 4,860 602
Motor vehicles 1,473 182
Mining rights 9,229 1,144
-------- --------
39,571 4,903
Accumulated depreciation and depletion (5,915) (732)
-------- --------
33,656 4,171
======== ========
At December 31, 2005, accumulated depreciation and depletion included
accumulated depletion of mining rights of RMB889.
F-13
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
8. OTHER PAYABLES
At December 31, 2005, other payables consisted of:
RMB US$
-------- --------
Fanchang County Economic Development
Department (a) 2,257 280
Natural resources fee (b) 4,508 560
Staff compensation fund (c) 4,110 509
Provision for production maintenance (d) 4,274 530
Safety management fee (e) 1,788 221
Provision for staff bonus and welfare (f) 947 117
Other 997 123
-------- --------
18,881 2,340
======== ========
(a) This balance represents a liability assumed by WFM upon its
May 2003 acquisition of its mining business from Anhui. The
liability is for financing the working capital of Anhui.
(b) Natural resources fee represents fees payable to the PRC
Government and is calculated as a percentage of sales. WFM has
no asset retirement obligations in connection with its mining
operations.
(c) The staff compensation fund represents a PRC government
required contribution to a fund established to compensate
employees for the loss of their state-sponsored pension and
post employment benefits upon the acquisition of Anhui by WFM
in May 2003. The fund will be distributed to employees at the
termination of their employment with WFM. WFM is not required
to make any additional contributions to the fund.
(d) The provision for production maintenance represents a PRC
government required contribution for future mine maintenance
and production. It is calculated based on tons of ore
extracted.
(e) The safety management fee represents a PRC required
contribution for accident prevention programs and accident
related costs. The safety management fee is calculated as a
percentage of sales.
(f) The provision for staff bonus and welfare represents a PRC
government required contribution and is calculated as a
percentage of PRC net income.
F-14
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. RELATED PARTY BALANCES AND TRANSACTIONS
At December 31, 2005, amounts due from related companies and to and
from a shareholder comprise:
RMB US$
Due from a related company
Anhui Xinke New Materials Co. Ltd. ("Xinke") (a) 20,503 2,541
======== ========
Due to a related company:
Wuhu Feishang Non-Metal Material
Co. Ltd. ("WFNM") (b) 6,476 802
======== ========
Due to a director
Mr. Li Feilie (c) 23,644 2,930
======== ========
The transactions with related companies are summarized as follows:
Year ended December 31,
-----------------------------------------
2004 2005 2005
RMB RMB US$
Sales of finished goods to WFNM 428 -- --
Sales of finished goods to Pingxiang Iron and Steel
Co. Ltd. ("Pingxiang") 57 -- --
Purchases of raw materials from WFNM 82 -- --
Sale of property and equipment to WFNM 8,050 -- --
Expenses paid on behalf of WFNM 2,670 1,809 224
Interest income earned from Xinke - 503 63
Interest income received from Xinke 447 55
(a) On February 23, 2005, the Company advanced RMB20,000 to Xinke. The
balance increased to RMB20,503 at December 31, 2005 due to the
accrual of interest income.
(b) At December 31, 2004, WFNM owed WFM RMB11,122, and through
November 30, 2005, WFM made additional advances of RMB8,140
(including expenses paid on behalf of WFNM of RMB1,810) to WFNM
and WFNM paid expenses of RMB623 on behalf of WFM. Also at
December 31, 2004, WFM owed WFE RMB25,115. WFNM's obligation to
WFM was assumed by WFE. On November 30, 2005, WFM and WFE agreed
to offset RMB25,182, resulting in WFM, owing WFNM RMB6,476 at
December 31, 2005. These advances are interest free, unsecured and
are due on demand.
(c) The amount due to a director represents advances made by Mr. Li
Feilie to the Company and expenses he paid on behalf of the
Company of RMB431 and RMB11,213 in 2004 and 2005, respectively.
F-15
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(d) At December 31, 2004, Wuhu Hengxin Copper Co. Ltd. ("Hengxin")
owed WFM RMB30,000 and an additional RMB20,000 was advanced in
2005. All advances were fully repaid in 2005.
(e) At December 31, 2004 WFE owed WFM RMB9,000. On February 4, 2005,
the Company advanced RMB25,000 to Pingxiang and on November 29,
2005, the Company advanced RMB10,000 to Anhui Wuhu Port Storage
Transportation Co., Ltd. ("Port"). On February 28, 2005, the
board of directors of WFM declared dividends of RMB44,005. On
October 31, 2005 and November 30, 2005, the advances of RMB44,000
were offset against dividends payable to Mr. Li Feilie.
The above transactions with related parties can be summarized as
follows:
WFNM WFED Hengxin Li Felie Pingxiang Port Xinke
RMB RMB RMB RMB RMB RMB RMB
------- ------- ------- -------- -------- -------- --------
Due from at January 1, 2005 11,122 9,000 30,000 -- -- -- --
Due to at January 1, 2005 -- (25,115) -- (12,431) -- -- --
Advanced to (from) in 2005 6,331 -- 20,000 (11,213) 25,000 10,000 20,000
Expenses paid on behalf
of WFNM 1,809 -- -- -- -- -- --
Expenses paid on behalf
of WFM (556) (67) -- -- -- -- --
Interest accrued -- -- -- -- -- -- 503
Repaid -- -- (50,000) -- -- -- --
Offset (25,182) 25,182 -- -- -- -- --
Offset against dividends -- (9,000) -- -- (25,000) (10,000) --
------- ------- ------- -------- -------- -------- --------
Due (to) from at
December 31, 2005 (6,476) -- -- (23,644) -- -- 20,503
======= ======= ======= ======== ======== ======== ========
Xinke, WFNM, Pingxiang Port and Hengxin are controlled by Mr. Li Feilie
who is also a director and beneficial shareholder of the Company.
The balance with Xinke is unsecured, bears interest at 5.22% per annum
and was repaid in March 2006 by offset against dividends payable to Mr.
Li Felie. The balances with the other related companies and director
are unsecured, interest-free and are repayable on demand.
F-16
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
10. BANK LOAN
In December 2005, the Company entered into a bank loan agreement with a
PRC bank. RMB10,000 was borrowed under the agreement bearing interest
at 5.7% per annum. The loan was repaid in full as of December 31, 2005.
11. CONCENTRATION OF RISK
Concentration of credit risk:
Financial instruments that potentially subject the Group to significant
concentration of credit risk consist principally of cash deposits,
trade receivables and bills receivable.
(i) Cash and cash deposits
The Group maintains its cash and cash deposits primarily with
various PRC State-owned banks. The Group performs periodic
evaluations of the relative credit standing of those financial
institutions.
(ii) Trade receivables
The Group sells zinc and iron products to companies in the PRC.
Management considers that the Group's current customers are
generally creditworthy and credit is extended based on an
evaluation of the customers' financial conditions and, therefore,
generally collateral is not required. The Company maintains
reserves for potential credit losses based on its loss history
and aging analysis. Such losses have been within management's
expectations. At December 31, 2005, the largest five customers
accounted for 99% trade receivables. During the year ended
December 31, 2004, three customers accounted 47%, 24% and 10%,
respectively, of the Company's sales. During the year ended
December 31, 2005, three customers accounted 65%, 12% and 8%,
respectively, of the Company's sales.
(iii) Bills receivable
Bills receivable represent letters of credit obtained by the
customers of the Group to finance purchases which have been
presented to banks for payment after delivery of goods to
customers. As of December 31, 2005, bills receivable amounted to
RMB450 and their collectability was guaranteed by banks. The
bills receivable have normal terms of maturity of six months.
F-17
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Group in
estimating the fair value of its financial instruments:
(i) Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheet
for cash and cash equivalents approximate their fair value.
(ii) Trade receivables, bills receivable, other receivables, accounts
payable and other payables
The carrying amounts reported in the consolidated balance sheet
for trade receivables, bills receivable, other receivables,
accounts payable and other payables approximate their fair values
due to their short maturities.
(iii) Amounts due from/to related parties
The fair values of amounts due from/to the related parties cannot
be determined due to the related party nature of those balances.
13. REGISTERED CAPITAL, RESERVES AND DISTRIBUTION OF PROFITS
The authorized capital of FMH is US$50,000 divided into 50,000 shares
of US$1 each, of which 1 share was issued and fully paid.
In accordance with the relevant PRC regulations and the Articles of
Association of WFM (the "Articles of Association"), appropriations of
net income as reflected in its PRC statutory financial statements are
to be allocated to each of the general reserve and enterprise expansion
reserve, respectively, as determined by the resolution of the Board of
Directors annually.
On February 28, 2005, the Board of Directors approved appropriations of
RMB1,956 and RMB1,956 to the general reserve and the enterprise
expansion reserve, respectively. The Board of Directors also declared
dividends of RMB44,005.
On January 27, 2006, the Board of Directors approved appropriations of
RMB1,709 and RMB1,709 to the general reserve and the enterprise
expansive reserve, respectively. The Board of Directors also declared
dividends of RMB38,462.
F-18
FEISHANG MINING HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
14. FOREIGN CURRENCY EXCHANGE
The RMB is not freely convertible into foreign currencies.
From January 1, 1994 through July 2, 2005, a single rate of exchange
was quoted daily by the People's Bank of China (the "Unified Exchange
Rate"). Beginning July 23, 2005, the rate of exchange was revalued by
2.1% and the RMB is now to fluctuate according to the value of a group
of currencies (the "managed float"). However, the unification or
managed float of the exchange rates does not imply convertibility of
RMB into US$ or other foreign currencies. All foreign exchange
transactions continue to take place either through the People's Bank of
China or other banks authorized to buy and sell foreign currencies at
the exchange rates quoted by the People's Bank of China.
15. SUBSEQUENT EVENT
On February 3, 2006, China Natural Resources, Inc. ("CNRI"), a British
Virgin Islands company listed on the Nasdaq Capital Market in the
United States, consummated the acquisition of all of the issued and
outstanding capital stock of the Company. Under the terms of the
agreement governing the acquisition, CNRI issued 9,980,593 of CNRI's
common shares, representing 86.4% of CNRI's issued and outstanding
common shares, as well as warrants to purchase an additional 4,500,000
of CNRI's common shares in exchange for the Company's one issued share.
F-19
CHINA NATURAL RESOURCES, INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
On February 3, 2006 ("the Acquisition Date"), China Natural Resources,
Inc. ("CNRI"), a British Virgin Islands ("BVI") corporation, acquired all of the
outstanding capital stock of Feishang Mining Holdings Limited ("FMH"), a BVI
corporation. The transaction was structured as a reorganization of FMH with and
into CNRI. The acquisition of FMH by CNRI has been accounted for as a reverse
acquisition because on a post-merger basis, the former FMH shareholder holds
86.4% of the outstanding common shares of CNRI. As a result, FMH is deemed to be
the acquirer for accounting purposes. As consideration for the acquisition, CNRI
issued to the former FMH shareholder 9,980,593 restricted common shares and
warrants (the "Warrants") to purchase an additional 4,500,000 common shares. In
connection with the acquisition, CNRI converted 320,000 series B preferred
shares into 320,000 common shares. The Warrants entitle the holder to purchase:
2,000,000 common shares of CNRI at an exercise price of $4.00 per share for a
period of two years from the Acquisition Date; 1,500,000 common shares at an
exercise price of $4.50 per share for a period of three years from the
Acquisition Date; and 1,000,000 common shares at an exercise price of $5.00 per
share for a period of four years from the Acquisition Date. Other than the
exercise price and exercise period, all other terms and conditions of the
Warrants are identical.
The pro forma consolidated statements of operations for the year ended
December 31, 2005 are based on the historical financial statements of CNRI and
FMH. The acquisition of CNRI has been accounted for using the purchase method of
accounting. The pro forma consolidated statements of operations for the year
ended December 31, 2005 have been prepared assuming the transaction was
completed on January 1, 2005. The pro forma consolidated balance sheet as of
December 31, 2005 assumes the transaction was completed on December 31, 2005.
The unaudited pro forma financial information is presented for informational
purposes only. The pro forma balance sheet and statements of operations do not
purport to represent what CNRI's actual financial position or results of
operations would have been had the acquisition of FMH occurred as of such dates,
or to project CNRI's financial position or results of operations for any period
or date, nor does it give effect to any matters other than those described in
the notes thereto. The unaudited pro forma financial information should be read
in conjunction with CNRI's consolidated financial statements and notes thereto
for the year ended December 31, 2005 included with CNRI's Annual Report on Form
20-F, filed with the Securities and Exchange Commission on June 12, 2006, and
the historical financial statements of FMH for the year ended December 31, 2005
which are included with this report on Form 6K.
Certain assumptions, estimates and adjustments are preliminary and have
been made solely for purposes of developing the pro forma information. The pro
forma adjustments are based on preliminary estimates and certain assumptions
that the Company believes are reasonable under the circumstances. The purchase
price allocation is preliminary and subject to change.
The functional currency of all the operations of the Company is the
Renminbi ("RMB"), the national currency of the PRC. Transactions denominated in
currencies other than the RMB are translated into RMBs at the applicable rates
of exchange prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in other currencies have been translated into RMBs at
the rate of exchange at the balance sheet date. The resulting exchange gains or
losses are credited or charged to the consolidated statements of operations. The
financial statements are stated in RMB. The translation of amounts from RMB into
US$ is included solely for the convenience of the reader and has been made at
the rate of exchange quoted by the People's Bank of China on December 31, 2005
of US$1.00 = RMB8.07. No representation is made that the RMB amounts could have
been, or could be, converted into US$ at that rate on December 31, 2005 or at
any other date.
P-1
CHINA NATURAL RESOURCES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2005
(Amounts in thousands)
China Feishang
Natural Mining
Resources, Holdings Pro Forma
Inc. Limited Adjustments Pro Forma Pro Forma
RMB RMB RMB RMB US$
---------- ---------- ----------- ---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 1,297 41,202 42,499 5,266
Trading securities 4,257 -- 4,257 528
Trade receivables 617 4,622 5,239 649
Bills receivable -- 450 450 56
Other receivables, deposits
and prepayments 123 422 545 68
Amount due from a related company -- 20,503 20,503 2,540
Inventories -- 3,788 3,788 469
---------- ---------- ---------- ----------
TOTAL CURRENT ASSETS 6,294 70,987 77,281 9,576
INVESTMENTS 24,700 -- 24,700 3,061
GOODWILL 830 -- 18,192 a,b 19,022 2,357
PPROPERTY AND EQUIPMENT, NET 890 33,656 34,546 4,281
---------- ---------- ---------- ----------
TOTAL ASSETS 32,714 104,643 155,549 19,275
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 432 934 1,366 169
Other payables and accrued 2,825 20,200 (862) c 22,163 2,746
liabilities
Advances from suppliers -- 1,174 1,174 145
Current portion of capital lease 167 -- 167 21
Amount due to related companies 122 6,476 862 c 7,460 925
Amount due to a director -- 23,644 23,644 2,930
Dividend payable -- 5 5 1
Income taxes payable 15 2,545 2,560 317
---------- ---------- ---------- ----------
TOTAL CURRENT LIABILITIES
3,561 54,978 58,539 7,254
Capital lease, net of current 36 -- 36 4
portion
---------- ---------- ---------- ----------
TOTAL LIABILITIES 3,597 54,978 58,575 7,258
---------- ---------- ---------- ----------
SHAREHOLDERS' EQUITY
Common shares 13 -- 19,268 a,b 19,281 2,389
Additional paid-in capital 186,622 -- (186,622) a,b -- --
Reserves 28,028 3,912 31,940 3,958
(Accumulated deficit)/retained (185,833) 45,513 185,833 a 45,513 5,640
earnings
Accumulated other comprehensive
income 287 240 (287) a 240 30
---------- ---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 29,117 49,665 96,974 12,017
---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 32,714 104,643 155,549 19,275
========== ========== ========== ==========
Notes to Unaudited Proforma Balance Sheet as of December 31, 2005 (amounts in
thoursands):
(a) To eliminate CNRI's goodwill, equity accounts and accumulated deficit; to
eliminate CNRI's accumulated other comprehensive income; to conform FMH's
equity accounts to CNRI's capital structure.
(b) To record the fair value of the goodwill of RMB19,022 (US$2,354).
(c) To reclassify certain CNRI payables owed to companies that are affiliated
with FMH.
P-2
CHINA NATURAL RESOURCES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 2005
(Amounts in thousands)
China Feishang
Natural Mining
Resources, Holding Pro Forma
Inc. Limited Adjustments Pro Forma Pro Forma
RMB RMB RMB US$
--------- --------- ---------- ----------
NET SALES 3,890 98,962 102,852 12,745
COST OF SALES (3,322) (38,402) (41,724) (5,170)
--------- --------- ---------- ----------
GROSS PROFIT 568 60,560 61,128 7,575
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (14,265) (9,172) 770 a (22,667) (2,809)
---------- --------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (13,697) 51,388 38,461 4,766
INTEREST INCOME 8 1,216 1,224 152
INTEREST EXPENSE (13) -- (13) (2)
OTHER INCOME(EXPENSE), NET (132) (223) (355) (44)
--------- ---------- --------- ---------
INCOME(LOSS) BEFORE INCOME
TAXES (13,834) 52,381 39,317 4,872
INCOME TAXES (30) (8,335) (8,365) (1,037)
--------- ---------- --------- ---------
NET INCOME(LOSS) (13,864) 44,046 30,952 3,835
========= ========== ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING
- BASIC 1,247,823 -- 10,300,593 b 11,548,416 11,548,416
- DILUTED 1,247,823 -- 10,430,036 b,c 11,677,859 11,677,859
BASIC INCOME/(LOSS) PER SHARE
- BASIC (11.11) 2.68 0.33
- DILUTED (11.11) 2.65 0.33
Notes to Unaudited Proforma Statement of Operations for the Year Ended December
31, 2005:
(a) To reverse a goodwill impairment charge recorded by CNRI. This goodwill
does not carryforward to the merged entity.
(b) To record the issuance of 9,980,593 shares of CNRI and the conversion of
320,000 preferred shares into 320,000 common shares.
(c) To record the weighted average impact of the 4,500,000 warrants issued by
CNRI using the treasury stock method.
P-3