In the ordinary course of business, mining companies are required to seek governmental permits for expansion of existing operations or for the commencement of new operations. In addition to requiring permits for the development of our mines, we will need to obtain various mining permits during the life of the project. Obtaining and renewing the necessary governmental permits is a complex and time-consuming process.  Obtaining or renewing necessary permits may increase costs and cause delays depending on the nature of the activity to be permitted and the interpretation of applicable requirements implemented by the permitting authority.  There can be no assurance that all necessary permits will be obtained and, if obtained, will be renewed, or that in each case the costs involved will not exceed those that we previously estimated. It is possible that the costs and delays associated with compliance with such standards and regulations could become such that we would not proceed with the development or operation of a mine or mines.

Any material inaccuracies in our production estimates could adversely affect our results of operations

We have prepared estimates of future production. We cannot assure you that we will ever achieve our production estimates or any production at all. Our production estimates depend on, among other things:

 

§	the accuracy of our mineralization and reserves estimates;

 

§	the accuracy of assumptions regarding ore grades and recovery rates;

 

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§	ground conditions and physical characteristics of the mineralization, such as hardness and the presence or absence of particular metallurgical characteristics;

§	the accuracy of estimated rates and costs of mining and processing; and

§	our ability to obtain and keep effective all permits for our mines and facilities.

Our actual production may vary from our estimates if any of our assumptions prove to be incorrect.

Expansion of our business may put added pressure on our management and operational infrastructure, impeding our ability to meet any increased demand for our products and possibly hurting our operating results. 

Our business plan is to significantly grow our operations to meet anticipated growth in demand for our products. Our planned growth includes the expansion of exploration and mining over the next few years.  Although most of management personnel have extensive experience in the mining industry, their training is in mining operations rather than contemporary management principles.  They may be not able to cope with the challenges presented by being a U.S. public company and the competitive business environment due to globalization.  In addition, growth in our business may place a significant strain on our personnel, management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges, including:

§	the continued demand of our products by the iron and steel, and fluorite chemical industries;

§	our ability to successfully and rapidly expand our operations in response to potentially increasing demand;

§	the costs associated with such growth, which are difficult to quantify, but could be significant;

§	rapid technological change; and

§	the highly cyclical nature of the mining industry.

If we are successful in obtaining rapid market growth of our products, we will be required to deliver large volumes of quality products to customers on a timely basis and at a reasonable cost to those customers. Meeting any such increased demand will require us to expand our manufacturing facilities, to increase our ability to purchase raw materials, to increase the size of our work force, to expand our quality control capabilities and to increase the scale upon which we provide our products. Such demands would require more capital (including working capital) than we currently have available and we may be unable to meet the needs of our customers.

We may not succeed in listing our common stock on a U.S. stock exchange, resulting in the payment of increased interest and liquidated damages to our primary lender.

On December 27, 2006, we issued $28,000,000 original principal amount of convertible notes to Citadel Equity Fund Ltd.  The convertible notes are further described in the Managements Discussion and Analysis section under “CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS - Convertible Notes”.   The indenture relating to the convertible notes contains a covenant that we will finalize the listing of our common stock on the New York Stock Exchange, the American Stock Exchange or NASDAQ by November 15, 2007.  If we fail to obtain such listing by that time, the interest rate on the Notes will increase from 6.75% to 10.50% (dropping to 8.5% once we obtain the listing), and we will be required to pay liquidated damages to the holders of the convertible notes of $750,000.  The convertible notes provide for additional liquidated damages if we fail to keep other covenants relating to (i) appointment of auditors, (ii) appointment of a chief financial officer with U.S. listed company experience, or (iii) honoring a right of the holder of the notes to nominate a director to our board of directors.  Consequently, if we are unable to procure a listing on a U.S. stock exchange by November 15, 2007, or to honor our other covenants under the Notes, we will incur additional expenses and our profitability will suffer.

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Risks Related to Our Industry

Fluctuations in the market price of fluorite and nonferrous metals could adversely affect the value of our company and our securities

The profitability of our operations will be directly related to the market price of the metals we mine and refine. The market prices of fluorite and nonferrous metals fluctuate widely and are affected by numerous factors beyond the control of any mining company. These factors include fluctuations with respect to the rate of inflation, the exchange rates of the Renminbi and other currencies, interest rates, global or regional political and economic conditions, banking industry fluctuations, global and regional demand, production costs in major metal producing areas and a number of other factors. Any drop in the price of the metals important to our operations would adversely impact our revenues, profits and cash flows. In particular, a sustained drop in prices could:

 

§	cause suspension of our development and, ultimately our mining operations, if such operations become uneconomic at the then-prevailing prices, thus further reducing revenues;

 

§	prevent us from fulfilling our obligations under our agreements or under our permits and licenses which could cause us to lose our interests in, or be forced to sell, our properties; and

 

§	reduce financing available to us.

§

Furthermore, the need to reassess the feasibility of any of our projects if metals prices decline could cause substantial delays or might interrupt operations until the reassessment can be completed. Mineral reserve calculations and life-of-mine plans using significantly lower metal prices could result in reduced estimates of mineral reserves and in material write-downs of our investment in mining properties and increased amortization, reclamation and closure charges.

Mining is inherently dangerous and subject to conditions or events beyond our control, and any operating hazards could have a material adverse effect on our business

Mining involves various types of risks and hazards, including: environmental hazards, industrial accidents, metallurgical and other processing problems, unusual or unexpected rock formations, structure cave-in or slides, flooding, fires and interruption due to inclement or hazardous weather conditions.

These risks could result in damage to, or destruction of, mineral properties, production facilities or other properties, personal injury or death, environmental damage, delays in mining, increased production costs, monetary losses and possible legal liability. We may not be able to obtain insurance to cover these risks at economically feasible premiums and some types of insurance may be unavailable or too expensive to maintain. We may suffer a material adverse effect on our business and the value of our securities may decline if we incur losses related to any significant events that are not covered by our insurance policies.

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There is no guarantee that legal title to the properties in which we have an interest will not be challenged, which could result in the loss of our rights in those properties

The ownership and validity, or title, of unpatented mining claims are often uncertain and may be contested. A successful claim contesting our title or interest to a property could cause us to lose our rights to mine that property. In addition, the success of such a claimant could result in our not being compensated for our prior expenditures relating to the property.

The mining industry is intensely competitive, and we may have difficulty effectively competing with other mining companies in the future

Mines have limited lives and, as a result, we must continually seek to replace and expand our mineralization and reserves through the acquisition of new properties. Significant competition exists for the acquisition of properties producing or capable of producing fluorite and nonferrous metals. We may be at a competitive disadvantage in acquiring additional mining properties because we must compete with other individuals and companies, many of which may have greater financial resources and larger technical staffs than we have. As a result of this competition, we may be unable to acquire attractive mining properties on acceptable terms.

Shortages of critical parts, equipment and skilled labor may adversely affect our development projects

The industry has been impacted by increased worldwide demand for critical resources such as input commodities, drilling equipment, tires and skilled labor. These shortages have caused and may continue to cause unanticipated cost increases and delays in delivery times, potentially impacting operating costs, capital expenditures and production schedules.

Costs estimates and timing of new projects are uncertain

The capital expenditures and time required to develop new mines or other projects are considerable and changes in costs or construction schedules can affect project economics. There are a number of factors that can affect costs and construction schedules, including, among others:

 

§	availability of labor, power, transportation, commodities and infrastructure;

§	increases in input commodity prices and labor costs;

§	fluctuations in exchange rates;

§	availability of financing;

§	difficulty of estimating construction costs over a period of years; and

§	delays in obtaining environmental or other government permits.

Risks Relate to Doing Business in China

 

The Company’s business will be affected by PRC government regulation and the country’s economic environment because most of our sales will be in the China market.

Although we export products to other countries, most of our sales are in the PRC.  It is anticipated that our products in China will continue to represent a significant portion of sales in the near future.  As a result of our reliance on the China markets, our operating results and financial performance could be affected by any adverse changes in economic, political and social conditions in China.

 

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There can be no assurance that future regulatory, judicial and legislative changes will not have a material adverse effect on us, that regulators or third parties will not raise material issues with regard to compliance or non-compliance with applicable laws or regulations, or that any changes in applicable laws or regulations will not have a material adverse effect on our business.

 

The economy of the PRC has been transitioning from a planned economy to market oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reforms, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in the PRC are still owned by the Chinese government. For example, all lands are state owned and are leased to business entities or individuals through governmental granting of state-owned land use rights or mining and exploration rights.  The granting process is typically based on government policies at the time of granting and it could be lengthy and complex. This process may adversely affect our future business expansion. The Chinese government also exercises significant control over the PRC’s economic growth through the allocation of resources, controlling payment of foreign currency and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental policies and measures. At present, our mining and exploration activities are subject to approvals from the relevant government authorities in China.  Such governmental approval processes are typically lengthy and complex, and never certain to be obtained. 

There are risks inherent in doing business in China.

The PRC is a developing country with a young market economic system overshadowed by the state. Its political and economic systems are very different from the more developed countries and are still in the state of change.  China also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and in its relationship with other countries, including but not limited to the United States. Such shocks, instabilities and crises may in turn significantly and adversely affect our performance.

 

Certain political and economic considerations relating to the PRC could adversely affect CSZM.

While the PRC government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the PRC economy is still operating under five-year plans and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental, and are expected to be refined and improved.  Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development.  Our operating results may be adversely affected by changes in the PRC’s economic and social conditions as well as by changes in the policies of the PRC government, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of additional restrictions on currency conversion.

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The recent nature and uncertain application of many PRC laws applicable to CSZM create an uncertain environment for business operations and they could have a negative effect on us.

The PRC legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, the PRC began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in the PRC and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.

A new Chinese law may impact our ability to make acquisitions of Chinese businesses.

On August 8, 2006, six PRC regulatory agencies namely, the PRC Ministry of Commerce, the State Assets Supervision and Administration Commission (“SASAC”), the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission (“CSRC”), and the State Administration of Foreign Exchange (“SAFE”), jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “New M&A Rule”), which became effective on September 8, 2006. The New M&A Rule purports, among other things, to require offshore Special Purpose Ventures, or SPVs, formed after the effective date, for overseas listing purposes, through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.

The Company intends to make acquisitions of Chinese businesses in the future. There are uncertainties regarding the interpretation and application of current or future PRC laws and regulations, including the New M&A Rule and those uncertainties could make it difficult or impossible to make acquisitions of Chinese businesses in the future.

Foreign Investment Policy Change

On March 16, 2007, China's parliament, the National People's Congress, adopted the Enterprise Income Tax Law, which will take effect on January 1, 2008. The new income tax law sets a unified income tax rate for domestic and foreign companies at 25 percent and abolishes the favorable policy for foreign invested enterprises. After this law takes effect, newly established foreign invested enterprises will not enjoy favorable tax treatment as in effect under current tax laws. Some of our subsidiaries are benefiting from the preferred tax rates for foreign companies and will be subject to the new tax rate when their respective term of preferred tax rates expires. Our net income margin may be affected at that time.

Risks Related to the Market for Our Stock

The market for our Common Stock is limited.

The trading market in our common stock is the Over the Counter Bulletin Board. The Bulletin Board is an unorganized, inter-dealer, over-the-counter market that provides significantly less liquidity than NASDAQ or Amex, and quotes for stocks included on the Bulletin Board are not listed in the financial sections of newspapers, as are those for the NASDAQ or Amex Stock Market.

 

Trading in our common stock has been sporadic and does not constitute an active market. From September 15, 2006 to July 13, 2007, our trading volume has been very low and inconsistent, ranging from no trading at all to a high of 56,500 shares. During the same period, the high sale price was $9.00 and the low sale price was $1.50. Prior to the acquisition of AFMG, we were a publicly traded shell and the transactions in our stock while we were a shell are not relevant. On July 13, 2007, the closing price was $3.63.

 

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We currently have approximately 675 shareholders. But the trading volume has been low.  A viable public trading market may not develop for our shares or may take a period of time to develop. Such a market, if it does develop, could be subject to extreme price and volume fluctuations. In the absence of an active trading market: 

§	Shareholders may have difficulty buying and selling or obtaining market quotations;

§	market visibility for our Common Stock may be limited; and

§	a lack of visibility for our Common Stock may have a depressive effect on the market price for our Common Stock.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, as our subsidiaries are incorporated in non-U.S. jurisdictions, we conduct substantially all of our operations in China, and all of our officers reside outside the United States. 

We conduct substantially all of our operations in China through our wholly owned subsidiaries in China. All of our officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. As a result of all of the above, our public stockholders may have more difficulty in protecting their interests through actions against our management, directors or major stockholders than would stockholders of a corporation doing business entirely within the United States.

The trading prices of many companies that have business operations only in China have been volatile which may result in large fluctuations in the price of our Common Stock and losses for shareholders. 

The stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many companies that have business operations only in China. These fluctuations have often been unrelated or disproportionate to the operating performance of many of these companies. Any negative change in the public’s perception of these companies could depress our stock price regardless of our operating results. The market price of our Common Stock has been and may continue to be volatile. We expect our stock price to be subject to fluctuations as a result of a variety of factors, including factors beyond our control. These factors include:

§	actual or anticipated variations in our quarterly operating results;

§	announcements of technological innovations or new products or services by us or our competitors;

§	announcements relating to strategic relationships or acquisitions;

§	additions or terminations of coverage of our Common Stock by securities analysts;

§	statements by securities analysts regarding us or our industry;

§	conditions or trends in the our industry; and

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§	changes in the economic performance and/or market valuations of other mining companies.

 

The prices at which our Common Stock trades will affect our ability to raise capital, which may have an adverse affect on our ability to fund our operations.

Our Common Stock may be considered to be a “penny stock” and, as such, the market for our Common Stock may be further limited by certain SEC rules applicable to penny stocks. 

To the extent the price of our common stock remains below $5.00 per share, we have net tangible assets of $2,000,000 or less, or if we fall below certain other thresholds, our common shares will be subject to certain “penny stock” rules promulgated by the SEC. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm. These rules and regulations adversely affect the ability of brokers to sell our common shares and limit the liquidity of our securities.

We may seek to make acquisitions that prove unsuccessful or strain or divert our resources. 

We may seek to expand our business through the acquisition of related businesses and assets. We may not be able to complete any acquisitions on favorable terms or at all. Acquisitions present risks that could materially and adversely affect our business and financial performance, including:

§	the diversion of our management’s attention from our everyday business activities;

§	the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, the acquired business; and

§	the need to expand management, administration, and operational systems.

If we make such acquisitions we cannot predict whether:

§	we will be able to successfully integrate the operations and personnel of any new businesses into our business;

§	we will realize any anticipated benefits of completed acquisitions; or

§	there will be substantial unanticipated costs associated with acquisitions, including potential costs associated with environmental liabilities undiscovered at the time of acquisition.

§	In addition, future acquisitions by us may result in:

§	potentially dilutive issuances of our equity securities;

§	the incurrence of additional debt;

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§	restructuring charges; and

§	the recognition of significant charges for depreciation and amortization related to intangible assets.

We do not intend to pay any dividends on our Common Stock in the foreseeable future. 

We currently intend to retain all future earnings, if any, to finance our current and proposed business activities and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We may also incur indebtedness in the future that may prohibit or effectively restrict the payment of cash dividends on our Common Stock.

 

We are not currently compliant with certain Sarbanes-Oxley Act standards. 

The enactment of the Sarbanes-Oxley Act in July 2002 created a significant number of new corporate governance and internal control requirements.  Since our Common Stock is currently quoted on the OTCBB, it is not currently subject to a number of such requirements. Although we expect to implement the requisite changes to become compliant with existing requirements, and new requirements when they do apply to us, we may not be able to do so, or to do so in a timely manner. If we do not come into compliance with the Sarbanes-Oxley Act corporate governance requirements, we may not be able to list our securities on either AMEX or Nasdaq markets in the event we ever attempt to do so.

Certain stockholders can exert control over the Company and may not make decisions that further the best interests of all stockholders. 

Our officers, directors and principal stockholders (greater than 5% stockholders) together will own an aggregate of approximately 72.47% of our outstanding Common Stock on a fully diluted basis. Consequently, these stockholders, if they act individually or together, may exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change of control of us and might affect the market price of our Common Stock, even when a change of control may be in the best interest of all stockholders. Furthermore, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider.

Our investors may lose their entire investment in our securities.

An investment in our securities is highly speculative and may result in the loss of the entire investment. Only potential investors who are experienced investors in high risk investments and who can afford to lose their entire investment should consider an investment in our securities.

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BUSINESS OF THE COMPANY

Corporate History

Unless otherwise indicated, or unless the context otherwise requires, all references in this Annual Report to the terms “Company,” “CSZM,” “we,” “our,” or “us” mean China Shen Zhou Mining & Resources, Inc., a Nevada corporation.

We are the result of a share exchange/reverse takeover among Earth Products & Technologies, Inc., a Nevada corporation (“EPTI”) with American Federal Mining Group, Inc., an Illinois company (hereinafter “AFMG”), and the shareholders of AFMG.  The effective date of the transaction was September 15, 2006.  Pursuant to the transaction, EPTI issued a total of 20,000,000 shares of common voting stock to AFMG Shareholders, in exchange for 100% of AFMG’s common stock.  The common stock was issued in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended.  This transaction will be accounted for as a reverse takeover (recapitalization) with AFMG deemed the acquirer for accounting purposes and EPTI the legal acquirer.

As a result of the share exchange/reverse takeover, AFMG became a wholly-owned subsidiary of EPTI, with EPTI, which previously had no material operations, becoming a holding company for the business of AFMG and its subsidiaries.  AFMG is a holding company, incorporated in Illinois, whose principal business is the ownership of entities in the People’s Republic of China (“PRC” or “China”) engaged in the acquisition, exploration, extraction and development of mining properties.

The share exchange/reverse takeover resulted in a change in voting control of EPTI.  The former shareholders of AFMG now hold a total of 20,000,000 shares of common stock, or approximately 94% of the outstanding common stock of EPTI, and the original EPTI shareholders now hold a total of 1,297,700 shares of common stock, or approximately 6% of the outstanding common stock.  At the closing, EPTI’s officers and directors resigned, and Xiao-Jing Yu was appointed as President of EPTI.   Effective October 20, 2006, EPTI changed its name to China Shen Zhou Mining & Resources, Inc.

AFMG owns all of the registered capital of Inner Mongolia Wulatehouqi Qianzhen Ore Processing Co., Ltd. (“Qianzhen Mining”), a limited liability company organized in the PRC.   Qianzhen Mining holds 67% of the registered capital of Inner Mongolia Xiangzhen Mining Group Co., Ltd., a limited liability company organized in the PRC (“Xiangzhen Mining”), with the remaining 33% of the registered capital of Xiangzhen Mining being held by AFMG, thus effectively making Xiangzhen Mining a wholly-owned subsidiary of AFMG.  Xiangzhen Mining also holds 99% of the registered capital of Xinjiang Wuqia Tianzhen Mining Co., Ltd. (“Tianzhen Mining”), and the remaining 1% of Tianzhen Mining is held by Yu Xiao-Jing, President of AFMG, in trust for Qianzhen Mining.   Qianzhen Mining owns 60% of Wulatehouqi Qingshan Nonferrous Metal Development Co., Ltd. (“Qingshan Metal”).   The other 40% of Qingshan Metal is owned by several individual shareholders.   Xiangzhen Mining owns 80% of Xinjiang Buerjin County Xingzhen Mining Co., Ltd. (“Xingzhen Mining”).  The other 20% is owned by Xinjiang Tianxiang New Technology Development Co., Ltd.

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The table below illustrates the corporate structure of the Company:

 

 

We are a public company.  Our securities are quoted on the OTC Bulletin Board under the symbol “CSZM.OB.”

Our executive offices are located at No. 166 Fushi Road, Zeyang Tower, Suite 305 Shijingshan District, Beijing, China 100043.  Our telephone number is 86-010-68867292.

 

Our Industry

 

Our primary business activity is mining, processing and distributing of fluorite ore, copper, zinc, lead, and other mineral products.  Along with China’s modernization drive, its economy has witnessed significant growth in the past three decades, which brought about a rapid growth in its manufacturing capacity. Moreover, due to its investment environment and cheap labor, China has attracted many manufacturers from the developed countries. The increasing industrial capacity of China has caused, and is anticipated to cause, a high level of demand for industrial raw materials including fluorite and nonferrous metals.

 

Fluorite is mainly used by the steel industry as a melting agent and the fluorite chemical industry to manufacture hydrofluoric acid, a widely used raw material for the chemical industry.  With a rapid growth of the steel industry and the chemical industry in China, the demand for fluorite and nonferrous metals has increased significantly.  China produced 2.6 million metric tons of fluorite ore in 2004, 2.9 million metric tons in 2005, and 3.0 million metric tons in 2006.　About 76% of the annual output is for domestic consumption and 24% for export in 2006, according to the information published in the papers of the World Fluorite Conference of Shanghai and based on the estimates by China’s Fluorite Industry Association.  In 2010 the demand is expected to increase from 1.94 million to 2.25 million metric tons.  In recent years, large exports of fluorite and hydrofluoric acid have depleted fluorite resources in China.  In order to protect fluorite reserves, the Chinese government instituted an export quota system in 2001.

As a result of rapid economic development, the demand for nonferrous metals in China has also significantly increased in recent years.  According to the statistics of China’s Ministry of Land and Resources, China was only able to satisfy less than 40% of its demand for copper with domestic resources in 2006, and in 2010 the demand is expected to increase from 5.8 million to 6.5 million metric tons.  In 2005, China’s domestic consumption of zinc was 3.2 million metric tons, which exceeded its production of 2.78 million metric tons.

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Due to limited natural resources, the prices for fluorite and nonferrous metals have increased in recent years.  According to the data of the Shanghai Future Exchange, the price for fluorite ore increased approximately 30% per year from 2004 to 2006.  The price of zinc increased 27% from 2004 to 2005 and over 90% from 2005 to 2006.  The price for copper increased 26% from 2004 to 2005 and over 65% from 2005 to 2006.

We expect the price of zinc and lead will continue to increase and the price of copper will remain high though it may experience significant fluctuations.

We anticipate the fluorite and nonferrous markets will provide excellent opportunities for us to grow.

 

Current Business Operations

 

Our primary business activity is mining, processing and distributing of fluorite ore, copper, zinc, lead, and other mineral products.  All of our business is conducted through our China-based subsidiaries.  We operate mines in the Inner Mongolia Autonomous Region and Xingjiang Uygur Autonomous Region, which are known for their rich reserves of high-grade minerals of fluorite, copper, lead and zinc. Regional human resources of general labor and specialized professional mining teams are available to us at a low cost.  We maintain good relationships with the local governments by providing employment opportunities to the people and tax revenues to the government.  We have also achieved strategic cooperative alliances with several large-scale domestic steel or chemical enterprises after years of experience and relationships in the mineral markets.  Such alliances combined with the large resources available on hand provide the Company with a competitive advantage over others in the same industry.

The following table summarizes the business activities of AFMG’s subsidiaries:

 

Subsidiaries		Current Business Activities
Qianzhen Mining		Engage mainly in the processing of zinc-lead ore
Xiangzhen Mining		Engage mainly in the extraction and processing of fluorite ore
Xingzhen Mining		Engage mainly in exploration of zinc-copper mine
Tianzhen Mining		Engage mainly in the exploration of copper, zinc and lead mine
Qingshan Metal		Engage mainly in the extraction of copper-zinc ore, some processing

Description of Products

Fluorite:

We produce fluorite ore and refined fluorite powder.  Fluorite ore is mainly sold to steel companies such as Taiyuan Steel, Baotou Steel and Capital Steel.  In 2006, we produced approximately 51,000 metric tons of fluorite ore and had 17,000 metric tons of inventory.  Total sales were approximately US$4,340,000, accounting for approximately 82% of the revenues from our fluorite business.  Our refined fluorite is used mainly by fluorite chemical companies.  In 2006, we produced 14,800 metric tons of refined fluorite powder of which 12,800 metric tons was sold for approximately US$917,000, accounting for approximately 18% of our revenues from fluorite.  

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Nonferrous:

We produce refined zinc powder, refined lead powder and refined copper powder.  We extract zinc-lead-copper ore and process it into these powders which are sold to metallurgical companies which in turn produce zinc, lead and copper ingots.  In 2006, we produced approximately 15,000 metric tons of refined zinc powder, 2,300 metric tons of refined lead powder and 790 metric tons of refined copper powder, which accounts for approximately 82.9%, 12.7% and 4.4% of our revenues from our nonferrous business, respectively.

Sales and Marketing

Currently, we do not have any marketing staff.  Our customers send their orders to us, usually with cash paid in advance.  Our in-house sales staff would then try to fill these orders based on our actual production level.  These customers have a long term relationship with us.  We expect this to continue for some time because we believe that the demand for mineral products will remain high for the foreseeable future.

Major Supplier

We have one major supplier.  During the year 2006, Wulatehouqi Zijin Mining Co., Ltd. was the only supplier of Qianzhen Mining’s raw minerals.  In 2006, Qianzhen Mining purchased approximately 134,000 metric tons of zinc-lead ore at a price of RMB 63 per ton and processed them into 14,000 metric tons of refined zinc powders and 1,900 metric tons of refined lead powder. In the first six month ended 30 June 2007, Wulatehouqi Zijin supplied approximately 14,000 tons of zinc ore to Qianzhen Mining. According to the supply contract between Wlatehouqi Zijin and the company, Wulatehouqi Zijin is still committed to provide additional 52,000 tons of zinc ores, which we expect to be supplied to Qianzhen Mining in 2007. Upon expiration of this supply contract, Qianzhen Mining will have to enter into a new supply contract with Wulatehouqi Zijin for zinc ores  at negotiated prices or secure ore supply from other third parties at market price. Qianzhen Mining even may have difficulties in securing zinc ore for its processing demand and his will have a significant negative impact on the company’s operations.

On 1^st of July and 20^th of September 2007, Qianzhen Mining entered into two supplimental agreements with Wulatehouqi Zijin that Wulatehouqi Zijin will provide Qianzhen Mining an additional 15,000 tons of zinc ores at the market price of RMB 589 per ton and that the price for the remaining amount of zinc ores (52,000 tons in aggregate) will be changed from current RMB 63 per ton to RMB 368 per ton effective from 1^st of July 2007. This change in purchase price will increase the cost of zinc powder processed by approximately RMB 14 million for the second half of 2007 and 2008 in aggregate.

In 2006, Qingshan Metal produced on its own 41,000 metric tons of copper ores (processed into 790 metric tons of refined copper powder) and 5,500 metric tons of zinc-lead ores (supplied to Qianzhen Mining). In 2007, Qingshan Metals has applied to local government to increase the licensed area of extraction and the permit for exploration in potential areas. The management believe Qingshan Metals has the potential to supply to Qianzhen Mining mineralores for its processing demand.

Major Customers

In 2006, our revenues from our fluorite business and nonferrous business were $5.3 million and $17.1 million, respectively.

 

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The following table shows our major customers (5% or more) for our nonferrous business as of December 31, 2006:

Number		Customer			Revenue ($1,000)			Percentage (%)
1		Baiyin Nonferrous Metals Company				7,907			46	%
2		Wulatehouqi Zijin Mining Co., Ltd.				5,689			33	%
3		Beijing Henghua Wanji Trading Co., Ltd.				1,388			8	%
TOTAL									87	%

The following table shows our major customers (5% or more) for our fluorite business as of December 31, 2006:

Number		Customer			Revenue ($1,000)			Percentage (%)
1		Taiyuan Iron and Steel Co., Ltd.				770			15	%
2		Jinhe Chemical Industry Co., Ltd.				732			14	%
3		Inner Mongolia Huadesanli Trading Co.				539			10	%
4		Capital Steel Qian An Steel Co., Ltd.				476			9	%
5		Inner Mongolia Baotou Steel Co., Ltd.				308			6	%
TOTAL									54	%

 

Competition

In the current markets for nonferrous metals and fluorite, supply in general cannot meet demand.  In the the near term, we do not expect that we will have difficulty selling our products.  At this point, our business strategy is not to devote large financial resources to sales and promotion. Our competitors mainly are similar companies in the same geographical region.

Our main competitors in the fluorite business are:

 

§	Gansu Gaotai Hongyuan Mining Co., Ltd., which produced 60,000 metric tons of fluorite ore and 20,000 metric tons of refined fluorite in 2006.

 

§	Shandong Hongxing Fluorite Co., Ltd., which produced 110,000 metric tons of fluorite ore and 30,000 metric tons of refined fluorite in 2006.

 

§	Henan Tongbai Yinhe Mining Co., Ltd., which produced 40,000 metric tons of fluorite and 5,000 metric tons of refined fluorite in 2006.

 

Our competitors in the refined zinc powder and refined lead powder markets are local mining enterprises such as Dongshengmiao Mining Industry Co, Ltd, (Dongshengmiao Mining) and Wancheng Trading & Mining Co., Ltd. (Wancheng Trading & Mining).  

Competitor		Capacity
Dongshengmiao Mining		600,000 metric tons of extracting capacity
Wancheng Trading & Mining		400,000 metric tons of extracting capacity

Compared to our competitors, we believe we enjoy superior experience, better management of projects and a good and stable management team.

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Business Strategy

 

Expansion of Production Capacity to Meet Demand

 

▼ Fluorite

 

We extracted approximately 68,000 metric tons of fluorite ore in 2006.  In 2007, we expect to extract 150,000 metric tons of fluorite ore.  In early 2006, we started a 300,000 metric ton fluorite ore project at Xiangzhen Mining.  In 2008, this project is expected to reach 70% of its designed annual capacity and by 2009, our Company is expected to have the capacity to extract 300,000 metric tons of fluorite ore per year.

 

We produced approximately 14,800 metric tons of refined fluorite powder in 2006.  In early 2006, we started to build a 200,000 metric ton/year fluorite ore processing plant in Sumochaganaobao. The new plant is expected to go into full production by the fourth quarter of 2007.  We expect to produce about 30,000 metric tons of refined fluorite powder in 2007.  In 2008, this project is expected to reach 70% of its designed annual capacity.  After completion of the project in 2009, we project that we will produce approximately 100,000 metric tons of refined fluorite powder.

 

▼Copper, Lead and Zinc

 

In 2006, Qianzhen Mining purchased approximately 130,000 metric tons of zinc-lead ore and processed them into 14,000 metric tons of refined zinc powders and 1,900 metric tons of refined lead powder.  In 2006, Qingshan Metal produced 41,000 metric tons of copper ores (to be turned into 790 metric tons of refined copper powder) and 5,500 metric tons of zinc-lead ore (supplied to Qianzhen Mining).   In 2007, Qianzhen Mining is expected to continue to purchase raw materials from third parties.  Qingshan Metal plans to produce 65,000 metric tons of copper-zinc ore.  Since its capacity is 70,000 metric tons, it may have to purchase copper-zinc ores from third parties.  Qingshan Metal is planning expand its extracting capacity in June 2007 and by April 2008, it is expected be able to produce 100,000 metric tons of copper ores per year which will supply Qianzhen Mining, and thereafter an additional 50,000 metric tons of zinc ore per year which Qingshan Metal itself will process.

In July 2006, we started to build a 200,000 metric ton/year zinc-copper ore mining and processing project at Keyinbulake Multi-Metal Mine in Buerjin County, Aletal Zone, Xinjiang Uygur Autonomous Region.  This project will initially go into production in early September of 2007 and will produce 5,000 metric tons zinc ore powder and 2,500 metric tons copper ore powder in 2007. In 2008, we expect to produce 200,000 metric tons of zinc and /or copper powder which will be processed into 14,000 metric tons zinc ore powder and 7,100 metric tons copper ore powder.

Increase Exploration Activities

Tianzhen Mining has just finished exploration activities at the Yangye Copper Mine & Huayuan Copper Mine and we expect to obtain a mining license from Xinjiang Bureau of Land and Resources by the end of 2007.

The Huayuan, Yangye and Yangshugou copper mines owns three properties situated in the same district with one prospecting license. We expect that there is a possibility to find more and high category mineral resources in this area. Once the mining license is issued, a general exploration program will be launched to upgrade the resource category and define the extensions of mineralization by drilling and tunneling. The budget for this program is shown in table 1-1. This exploration program is expected to be funded by the Company.

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Table 1-1: Exploration budget for Huayuan, Yangye and Yangshugou Properties

		Item			Unit			Quantity			Budget (USD)			Budget (RMB)
1			Drilling			m			200		$	26,000		Ұ	200,000
2			Tunnel			m			1783.2		$	154,708		Ұ	1,175,784

Currently, our company is conducting exploration activities in Wuzunagen Lead & Zinc Mine and Jiangejier Lead & Zinc Mine owned by Tianzhen Mining. We plan to further increase exploration activities there to update resource category and extend mineralization layer. The exploration plan and budget is shown in table 1-2. We signed a contract with Xinjiang Nonferrous Geology Prospecting Bureau to do the exploration work for us and we expect to complete a reserve evaluation report which is a requirement for applying for mining licenses for these two mines in 2007.

Table 1-2: Exploration budget for Jiangejier Property

		Item			Unit			Quantity			Budget (USD)			Budget (RMB)
1			Drilling			m			2700		$	25,000		Ұ	3,000,000
2			Tunnel			m			500		$	130,000		Ұ	1,000,000

Keyinbulake Cu-Zn Mine is another important property of our company. The development of this mine is planned with two steps. The first step is to obtain a mining license as soon as possible. The second step is to conduct an exploration program to define the mineral resources of the property, which provides basis for mine plan and engineering. The exploration details and budget are shown in table 1-3. This exploration program is expected be funded by the Company.

Table1-3: Exploration Program and budget for Keyinbulake Property

 

		Item			Unit			Quantity			Budget (USD) ×1000 $			Budget (RMB) ×1000Ұ
1			Topographical survey			km2			25			17.1			130.00
2			Geological survey			km2			25			29.6			220.00
3			Geophysical prospecting									52.6			400.00
4			Drilling			m			8000			842.00			6400.00
5			Trenching			m3			6500			85.50			650.00
6			Assaying			Pies			2600			40.60			300.00
7			Other geology item									105.30			800.00
8			Infrastructure									78.9			600.00
			Total									1,250.00			9,500.00

A preliminary exploration schedule is as follows:

From January to February 2007, information collection, desk-top study, field work plan and arrangement;

From May to October 2007, field work begins, including geological survey, geophysical prospecting, trenching and drilling.

From November 2007 to March 2008, data analysis and geological report preparation.

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Acquire More Mineral Properties

To increase our potential reserve and ensure supply to our processing facilities, we plan to acquire domestic and foreign large-scale mines when the right opportunity arises in order to expand rapidly in the short term.  The Company is in the process of acquiring a gold-copper mine in Kyrgyzstan. We also expect to acquire additional nonferrous metal mines domestically which have good conditions and possess all necessary governmental licenses.

Expand into Down Stream Chemical Business

To increase the profit margin of our business, we may plan to expand into the fluorite chemical industry which enjoys a very high margin and a rapidly growing market through the acquisition of some fluorite chemical companies.

Competitive Advantages

We believe we have the following competitive advantages:

§	One of the best fluorite mines in China which has high purity fluorite minerals and good extracting conditions.

§	Experienced management team.  Most of our officers have more than 20 years of experience in this industry.

§	We have good relationships with local government agencies.

§	Compared to our competitors, we believe we possess relatively more exploration rights.

§	Many of our subsidiaries are located in the western part of China and therefore enjoy many preferential tax and regulatory policies.

Government Regulation

The following is a summary of the principal governmental laws and regulations that are or may be applicable to our operations in the PRC. The scope and enforcement of many of the laws and regulations described below are uncertain. We cannot predict the effect of further developments in the Chinese legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement of laws.

The mining industry, including certain exploration and mining activities, is highly regulated in the PRC. Regulations issued or implemented by the State Council, the Ministry of Land and Resources, and other relevant government authorities cover many aspects of exploration and mining of natural resources, including entry into the mining industry, the scope of permissible business activities, interconnection and transmission line arrangements, tariff policy and foreign investment.

The principal regulations governing the mining business in the PRC include:

§	China Mineral Resources Law, which requires a mining business to have exploration and mining licenses from provincial or local land and resources agencies.

 

§	China Mine Safety Law, which requires a mining business to have a safe production license and provides for random safety inspections of mining facilities.

 

§	China Environmental Law, which requires a mining project to obtain an environmental feasibility study of the project.

 

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§

Foreign Exchange Controls. The principal regulations governing foreign exchange in the PRC are the Foreign Exchange Control Regulations (1996) and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations (1996), (“the Foreign Exchange Regulations”). Under the Foreign Exchange Regulations, Renminbi (“RMB”) is freely convertible into foreign currency for current account items, including the distribution of dividends. Conversion of RMB for capital account items, such as direct investment, loans and security investment, however, is still subject to the approval of the State Administration of Foreign Exchange (“SAFE”). Under the Foreign Exchange Regulations, foreign-invested enterprises are required to open and maintain separate foreign exchange accounts for capital account items. In addition, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE.

 

All of our operating subsidiaries in China have been authorized by land and resources departments of local governments.  Chinese regulations require that mining enterprises must procure an exploration or mining license from land and resource department of local governments before they can carry out exploration or mining activities. This license ensures that an enterprise follow proper procedures in its own exploring or mining activities and in selling its products to customers. We have secured the necessary exploration or mining licenses from local governments.  Most of our mining companies possess exploration or mining licenses and some of them are applying for mining licenses after exploration.

 

Chinese regulations also require that a mining company must have a safety certification from the PRC Administration of Work Safety before it can engage in mining and extracting activities. All of our operating subsidiaries have obtained safety certification from the Administration of Work Safety of local governments.   In addition, all of our operating subsidiaries have passed government safety inspections.

 

We also have been granted environmental certification from the PRC Bureau of Environmental Protection.

Employees

As of December 31, 2006, we employed 463 full-time employees, of whom approximately 18% are with Qianzhen Mining, 56% are with Xiangzhen Mining, 8% are with Tianzhen Mining (nonferrous copper, zinc, lead and other ore mining and processing), 13% are with Qingshan Metal (copper and zinc ore mining) and 5% are with Xingzhen Mining (holding exploration rights). Approximately 18% of our employees are management personnel, and 3% are sales and procurement staff.  In terms of education level, 8.5% of our employees have a college degree or higher.

Under Chinese law, our employees have formed trade unions which protect employees’ rights, aim to assist in the fulfillment of our economic objectives, encourage employee participation in management decisions and assist in mediating disputes between us and union members. We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations.

As required by applicable Chinese law, we have entered into employment contracts with all of our employees. We have also entered into a confidentiality agreement with all of our employees under which such employees are prohibited from disclosing confidential information of the Company or using it for other purposes than the benefit of the Company. Directors, officers, mid-level managers and some key employees in sales and R&D are required to sign a non-compete agreement which prohibits them from competing with the Company while they are employees of the Company and within two years after their employment with the Company is terminated.

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Our employees in China participate in a state pension arrangement organized by Chinese municipal and provincial governments. We are required to contribute to the arrangement at the rate of 20% of the average monthly salary. In addition, we are required by Chinese law to cover employees in China with other types of social insurance. Our total contribution may amount to 30% of the average monthly salary. We have purchased social insurance for all of our employees. Expense related to social insurance was approximately $29,335, for fiscal year 2006

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following management’s discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this item. In addition to historical information, the following discussion contains certain forward-looking statements within the “safe harbuor” provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as “may”, “will”, “could”, “expect”, “anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this

Current Report on Form 8-K. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

Our financial statements are prepared in US Dollars and in accordance with accounting principles generally accepted in the United States. See “Exchange Rates” below for information concerning the exchanges rates at which Renminbi (“RMB”) were translated into US Dollars (“USD”) at various pertinent dates and for pertinent periods.

OVERVIEW

We are principally engaged in the exploration, development, mining, and processing of fluorite, zinc, lead, copper, and other nonferrous metals, through our subsidiaries in the PRC.

BUSINESS STRATEGY

Expansion of Production Capacity to Meet Demand

 

▼ Fluorite

 

We extracted approximately 68,000 metric tons of fluorite ore in 2006.  In 2007, we expect to extract 150,000 metric tons of fluorite ore.  In early 2006, we started a 300,000 metric ton fluorite ore project at Xiangzhen Mining.  In 2008, this project will reach 70% of its designed annual capacity and by 2009, our Company will have the capacity to extract 300,000 metric tons of fluorite ore per year.

 

We produced approximately 14,800 metric tons of refined fluorite powder in 2006.  In early 2006, we started to build a 200,000 metric ton/year fluorite ore processing plant in Sumochaganaobao. The new plant will go into full production by the fourth quarter of 2007.  We expect to produce about 30,000 metric tons of refined fluorite powder in 2007.  In 2008, this project will reach 70% of its designed annual capacity.  After completion of the project in 2009, we project that we will produce approximately 100,000 metric tons of refined fluorite.

 

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▼Copper, Lead and Zinc

 

In 2006, Qianzhen Mining purchased approximately 130,000 metric tons of zinc-lead ore and turned them into 14,000 metric tons of refined zinc powders and 1,900 metric tons of refined lead powder.  In 2006, Qingshan Metal produced 41,000 metric tons of copper ore (to be turned into 790 metric tons of refined copper powder) and 5,500 metric tons of zinc-lead ore (supplied to Qianzhen Mining).   In 2007, Qianzhen Mining will continue to purchase raw materials from third parties.  Qingshan Metal plans to produce 65,000 metric tons of copper-zinc ore.  Since its capacity is 70,000 metric tons, it may have to purchase copper-zinc ore from third parties.  Qingshan Metal will expand its extracting capacity in June 2007 and by April 2008, it will be able to produce 100,000 metric tons of copper ore per year which will supply Qianzhen Mining, and thereafter an additional 50,000 metric tons of zinc ore per year which Qingshan Metal itself will process.

In July 2006, we started to build a 200,000 metric ton/year zinc-copper ore mining and processing project at Keyinbulake Multi-Metal Mine in Buerjin County, Aletal Zone, Xinjiang Uygur Autonomous Region.  This project will initially go into production in early September of 2007 and will produce 5,000 metric tons zinc ore powder and 2,500 metric tons copper ore powder in 2007. In 2008, we expect to produce 200,000 metric tons of zinc and /or copper powder which will be processed into 14,000 metric tons zinc ore powder and 7,100 metric tons copper ore powder.

Increase Exploration Activities

Tianzhen Mining has just finished exploration activities at the Yangye Copper Mine & Huayuan Copper Mine and we expect to obtain a mining license from Xinjiang Bureau of Land and Resources by the end of 2007.

The Huayuan, Yangye and Yangshugou copper mines owns three properties situated in the same district with one prospecting license. We expect that there is a possibility to find more and high category mineral resources in this area. Once the mining license is issued, a general exploration program will be launched to upgrade the resource category and define the extensions of mineralization by drilling and tunneling. The budget for this program is shown in table 1-1.

 

Table 1-1: Exploration budget for Huayuan, Yangye and Yangshugou Properties

 

		Item			Unit			Quantity			Budget (USD)			Budget (RMB)
1			Drilling			m			200		$	26,000		Ұ	200,000
2			Tunnel			m			1783.2		$	154,708		Ұ	1,175,784

Currently, our company is conducting exploration activities in Wuzunagen Lead & Zinc Mine and Jiangejier Lead & Zinc Mine owned by Tianzhen Mining. We plan to further increase exploration activities there to update resource category and extend mineralization layer. The exploration plan and budget is shown in table 1-2. We signed a contract with Xinjiang Nonferrous Geology Prospecting Bureau to do the exploration work for us and we expect to complete a reserve evaluation report which is a requirement for applying for mining licenses for these two mines in 2007.

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Table 1-2: Exploration budget for Jiangejier Property

 

		Item			Unit			Quantity			Budget (USD)			Budget (RMB)
1			Drilling			m			2700		$	25,000		Ұ	3,000,000
2			Tunnel			m			500		$	130,000		Ұ	1,000,000

 

Keyinbulake Cu-Zn Mine is another important property of our company. The development of this mine is planned with two steps. The first step is to obtain a mining license as soon as possible. The second step is to conduct an exploration program to define the mineral resources of the property, which provides basis for mine plan and engineering. The exploration details and budget are shown in table 1-3. This program is expected to be funded by the Company.

 

Table1-3: Exploration Program and budget for Keyinbulake Property

 

		Item			Unit			Quantity			Budget (USD)×1000$			Budget (RMB)×1000Ұ
1			Topographical survey			km2			25			17.1			130.00
2			Geological survey			km2			25			29.6			220.00
3			Geophysical prospecting									52.6			400.00
4			Drilling			m			8000			842.00			6400.00
5			Trenching			m3			6500			85.50			650.00
6			Assaying			Pies			2600			40.60			300.00
7			Other geology item									105.30			800.00
8			Infrastructure									78.9			600.00
			Total									1,250.00			9,500.00

 

A preliminary exploration schedule is as follows::

 

From January to February 2007, information collection, desk-top study, field work plan and arrangement;

 

From May to October 2007, field work begins: geological survey, geophysical prospecting, trenching and drilling.

 

From November 2007 to March 2008, data analysis, geological report preparation.

Acquire More Mineral Properties

To increase our reserve and insure supply to our processing facilities, we plan to acquire domestic and foreign large-scale mines when the right opportunities arises in order to expand rapidly in the short term.  The Company is in the process of acquiring a gold-copper mine in Kyrgyzstan.  We also expect to acquire additional nonferrous metal mines domestically which have good conditions and possess all necessary governmental licenses.

Expand into Down Stream Chemical Business

To increase the profit margin of our business, we may plan to expand into the fluorite chemical industry which enjoys a very high margin and a rapidly growing market through the acquisition of some fluorite chemical companies.

 

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RECAPITALIZATION AND REORGANIZATION

On July 14, 2006, American Federal Mining Group, Inc. (“AFMG”, the then holding company of China Shenzhou’s PRC subsidiaries) completed the terms of a stock exchange agreement with Earth Products & Technologies, Inc. (“EPTI”).  Pursuant to the stock exchange agreement, and as instructed by the Company, EPTI issued 20,000,000 shares of its common stock, of which 17,687,000 shares were issued to shareholders of AFMG, 1,013,000 shares to management of AFMG and 1,300,000 shares to the financial advisors of AFMG, in exchange for a 100% equity interest in AFMG, making AFMG a wholly-owned subsidiary of EPTI.  

The above stock exchange transaction resulted in those shareholders of AFMG obtaining a majority voting interest in EPTI. Generally accepted accounting principles in the United States of America require that the Company whose shareholders retain the majority interest in a combined business be treated as the acquirer for accounting purposes. Consequently, the stock exchange transaction has been accounted for as a recapitalization of AFMG as AFMG acquired a controlling equity interest in EPTI as of September 15, 2006. The reverse acquisition process utilizes the capital structure of EPTI and the assets and liabilities of AFMG recorded at historical cost. Although AFMG is deemed to be the acquiring corporation for financial accounting and reporting purposes, the legal status of EPTI as the surviving corporation did not change.  

Subsequent to completion of the reverse takeover transaction, on October 5, 2006, EPTI changed its name to China Shen Zhou Mining and Resources, Inc.

ACQUISITIONS IN 2006

Qingshan Metal

On April 27, 2006, we completed the acquisition of a 60% ownership interests in Qingshan Nonferrous Metal Development Co., Ltd. (“Qingshan Metal”). Under the terms of the acquisition agreement, Qingshan Metal shareholders received an aggregate consideration of approximately $2.561 million. Qingshan Metal has been granted the mining right certificate for a copper-zinc-lead mine in Wulatehouqi by the Ministry of Land and Resources of the PRC with a current term from October 2005 to October 2008.

We consider the stable and sufficient supply of raw zinc and copper minerals to be one of the critical success factors of Qianzhen Mining’s ore-dressing operations.  Qingshan Metal is well established and owns considerable copper and zinc reserves.  Moreover, its location is not far away from Qianzhen Mining. We believe that the acquisition of Qingshan Metal is to the benefit of the Company and the shareholders.

The total purchase consideration of the acquisition is as follows: (in thousands)

Cash		$	1,409
Value of stock payable to the original shareholders of Qingshan Metal*			1,152
Total purchase consideration		$	2,561

The amount of approximately $1.409 million was paid as a down payment in April 2006. The remaining portion of $1.152 was subsequently settled on March 15, 2007 by issuing 284,810 shares of China Shen Zhou’s common shares at a market price of $4 per share.

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Allocation of initial purchase consideration (in thousands):

 

Net assets of Qingshan Metal as of April 12, 2006:
Extraction rights ( Value beyond proven and probable reserves )		$	1,149
Inventories			132
Property, plant and mining assets, net			457
Other current assets			90
Net assets		$	1,828
Minority interest			(268	)
Net book value of assets acquired and liabilities assumed		$	1,560
Total purchase consideration			2,561
Goodwill		$	1,001

Xingzhen Mining

On April 28, 2006, we completed the acquisition of an 80% ownership interest in Xingzhen Mining from Mr. Li Leyi. Under the terms of the acquisition agreement, Mr. Li received an aggregate consideration of approximately $3.587 million.  

Xingzhen Mining holds the exploration right to the Xinjiang Buejin Kerbulaiker Copper-Zinc Mine, which expired on July 14, 2006. The Kerbulaiker Copper-Xinc Mine is considered by experts to have quality copper and zinc reserves.

Given the continued increase in the trading price of nonferrous metals, we believe that the acquisition of Xingzhen Mining will enable the Company to capture business opportunities in the future.

As of the date of this report, Xingzhen Mining is in the final process of applying for the extraction rights  for the Kerbulaiker Copper-Xinc Mines. We believe that as soon as the extraction rights are issued by the PRC Government, it can commence extraction of copper and zinc ore.  

The total purchase price and the allocation of the purchase price discussed below. The total purchase price of the acquisition is as follows: (in thousands)

 

Cash		$	1,025
Value of stock payable to Mr. Li			2,561
Total purchase consideration		$	3,586

 

Approximately $1.025 million was paid in cash as of September 30, 2006.  The remaining portion of $2.561 million was subsequently settled on March 15, 2007 by issuing 632,910 shares of China Shen Zhou’s common shares at a market price of $4 per share.

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Allocation of initial purchase consideration (in thousands):

Net assets of Xingzhen Mining as of April 28, 2006:
Extraction rights(Value beyond proven and probable reserves)		$	3,475
Property, plant and mining assets, net			10
Bank balances and cash			122
Other receivables, deposits and prepayments			50
Other payables			(45	)
Net assets			3,612
Minority interest			(26	)
Net book value of assets acquired and liabilities assumed			3,586
Total purchase consideration			3,586
		$	-

 

The above two acquisitions were significant to the Company. The significance tests indicate that Qingshan Metal does not meet the 20% threshold of significance and hence financial statements are not required. Xingzhen Mining’s income test exceeds 40%, so pursuant to Item 310(c)(3) of Regulation S-B, financial statements shall be furnished for the most recent fiscal year and any interim periods. However, Xingzhen was established in April 10,2006 so it does not have prior-year financial statements.

 

RESULTS OF OPERATIONS

Comparison of Six Months Ended June 30, 2006 and 2005

Selected information from the Consolidated Statements of Operations

		For the six months ended June 30,
		2006			2005
		(in thousands)			(in thousands)
Net revenue		$	7,657		$	2,867
Gross profit			4,694			577
-  Gross profit margin			61.2	%		20.1	%
General and administrative expenses			773			495
Interest expense			129			161
Net income		$	3,725		$	17

NET REVENUE. As a result of capital investments in Inner Mongolia Wulatehouqi Qianzhen Ore-Processing Co., Ltd (“Qianzhen”), the processing capacity of nonferrous metals and ore dressing increased significantly. The amount of for refined zinc powder produced for the six month periods ended June 30, 2006 and 2005 were, 4,600 tons and 6,400 tons, respectively, representing a 38 % increase. Other than improved production capacity, the average market price of refined zinc powder in PR China increased from $600 per ton to $1730 per ton representing a 188% increase. The additional capacity and the market price increase for refined zinc powder together contributed to the increase of net revenue by approximately $4.8 million, representing a 167.7% increase

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GROSS PROFIT AND GROSS PROFIT MARGIN.  For the six months ended June 30, 2006, gross profit was $4.7 million, representing an increase of approximately $4.1 million as compared to $0.6 million for the six months ended June 30, 2005. Gross profit increase was primarily due to the significant increase in production quantity as mentioned above. As the production quantity increased, by achieving economy of scale, gross profit increased significantly. Gross profit margin increased by 40.1% to 61.2% for the six months end June 30, 2006, as compared to the same period of 2005 due mainly to the increased market price of refined zinc powder, which increased approximately 188%.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by $0.3 million to approximately $0.77 million for the six months ended June 30 2006 as compared to the same period of 2005. The increase in the production and sales activities caused an increase in the Company’s administrative expenses. The increase was mainly attributable to the increased staffing cost and consulting fees associated with corporate restructure and reverse takeover transactions.

INTEREST EXPENSE. The interest expense decreased from $161,000 to $129,000, representing a 20% decrease, which was mainly due to the repayment of short term bank loans.

NET INCOME.  Net profit for the six months ended June 30, 2006 was $3.7 million, whereas net profit for the corresponding period of 2005 was only $0.017 million. The increase in net income was primarily due to i) increased gross profit of $4.7 million associated with the improved refined zinc powder sales and profitability, ii) the decrease in interest expenses as a result of the repayment of short term bank loans.

Comparison of Year Ended on December 31, 2005 and 2004:

Selected information from the Consolidated Statements of Operations

		Year ended
		December 31,
		2005			2004
		(in thousands)			(in thousands)
Net revenue		$	7,047		$	5,054
Gross profit			2,755			1,640
-  Gross profit margin			39.1	%		32.4	%
General and administrative expenses			1,129			721
Interest expense			320			147
Net income		$	1,073		$	805

 

NET REVENUE. Net revenue increased 39.4% from $5.05 million to $7.05 million. This increase was mainly attributable to an average market price increase of zinc powder of 55% from $560 per ton in 2004 to $870 in 2005, as well as a slight increase of 7.4% in the amount of refined zinc powder sold in 2005 as compared to 2004.

 

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GROSS PROFIT AND GROSS PROFIT MARGIN. For the year ended December 31, 2005, gross profit was $2.76 million, representing an increase of approximately $1.12 million as compared to $1.64 million for the year ended December 31,2004. Gross profit margin increased by 6.7%, reflecting a gross margin of 39.1% for fiscal year 2005 as compared to 32.4% for 2004. The increase in gross profit margins is mainly attributable to the average market price increase as mentioned above.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by $408,000 from $721,000 for 2004 to $1,129,000 for2005.  General and administrative expense as a percentage of sales increased from 14.3% for 2004 to 16% for 2005.  This unfavorable increase was mainly attributable to an increase in salaries and benefits for administrative staff, and depreciation and amortization expenses.

Depreciation and amortization increased by $650,000 to $1,263,000 for 2005 compared to $613,000 for 2004.  At the end of 2004, the Company purchased over $2 million additional mineral rights to enhance operations. The additional depreciation expenses for the new mineral rights significantly increased the depreciation and amortization expenses.

INTEREST EXPENSE.  The interest expense increased from $147,000 in 2004 to $320,000 in 2005, representing a 117.7% increase, which is mainly due to the increase of short term bank loans in the year 2005. The average short term bank loans outstanding for the year ended December 31, 2005 and 2004 were $3.55 million and $2.57 million, respectively.

Segment performance analysis

		Segment revenue						Segment profit(loss)
		Year ended December 31,						Year ended December 31,
		2005			2004			2005			2004
		(in thousand)			(in thousand)			(in thousand)			(in thousand)
Fluorite			2,267			2,238			(135	)		96
Non-ferrous metals			4,780			2,816			1,493			611

 

Fluorite

 

There was insignificant increase of 1.3% in fluorite segment revenue from around $2.24 million for 2004 to $2.27 million for 2005. Fluorite segment turned from a profit of around $0.96 million for 2004 to a loss of around $0.14 million for 2005, due to increases in salaries and benefits for administrative staff.

 

Non-ferrous metals

 

Non-ferrous metals segment revenue increased significantly by 70% from $2.8 million for 2004 to $4.8 million for 2005, due to expansion of production facility and capacity. In line with increased sales, segment profit also increased by 144% from $0.6 million for 2004 to $1.5 million for 2005.

 

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $0.71 million as of June 30, 2006, representing a increase of $0.3 million as compared to a balance of $0.42 million as of December 31, 2005. The increase in cash position was mainly due to net cash generated from operating activities for $4.8 million. With the improvement in operating activities, especially the processing operations, the Company believes that it can continue to generate adequate financial resources from its operation to fund its business operations and expansion plan for the foreseeable future.

 

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Net cash generated from operating activities for the six months ended June 30, 2006 was $4,840,000 million whereas net cash from operating activities was $1,568,000 for the same period of 2005. Cash flow from operations during 2006 was enhanced by the increase in gross profit as a result of expansion of production facilities and the rising market price of refined zinc powder.

Net cash used in investing activities during the six month ended June 30 2006 was mainly reflected in: i) the acquisition of Qingshan Nonferrous Metal Development Co., Ltd and Xinjiang Buerjin County Xingzhen Mining Co., Ltd. for $2.31 million and; ii) the purchase of land, mineral rights, plant and equipment for $1.77 million by Tianzhen Mining and Xiangzhen Mining.

Net cash used in financing activities during the second quarter of 2006 mainly consists of repayment of bank borrowings during the period in order to reduce borrowing interest from short term bank loans.

ENVIRONMENTAL

The Company’s mining and exploration activities are subject to various PRC laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect the public health and environment and believes its operations are in compliance with applicable laws and regulations in all material respects. The Company’s mining operations are subject to “Natural Resource Compensation Charges”, but the charging rate varies in different cities in the PRC.  For the years ended December 31, 2006 and 2005, Natural Resource Compensation Charges of $115,810 and $30,543, respectively, were charged to operations and included in cost of sales.  For more information, please see Note 22 to the Consolidated Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS

We have never entered into any off-balance sheet financing arrangements and have not formed any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

INFLATION

The Company does not foresee any adverse effects on its earnings as a result of inflation.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.  We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates.

 

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An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimates are made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements.  We believe the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Management believes that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.

Property, Plant and Mine Development

Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives, which do not exceed the related estimated mine lives, of such facilities based on mineralized material.

Mineral exploration costs are expensed as incurred. When extraction rights are obtained from the government in accordance with mining industry practice in the PRC, costs incurred prospectively to develop the property are capitalized as incurred and are amortized using the units-of-production (“UOP”) method over the estimated life of the mineralized material based on estimated recoverable tons through the end of the period over which the Company has extraction rights. At the Company’s surface mines, these costs include costs to further delineate the mineralized material and remove overburden to initially expose the mineralized material. At the Company’s underground mines, these costs include the cost of building access ways, shaft sinking and access, lateral development, drift development, ramps and infrastructure development.

Major development costs incurred after the commencement of production are amortized using the UOP method based on estimated recoverable tons through the end of the period over which the Company has extraction rights. To the extent that these costs benefit the entire mineralized body, they are amortized over the estimated life of the mineralized body. Costs incurred to access specific ore blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific ore block or area.

Interest cost allocable to the cost of developing mining properties and to constructing new facilities, if any, is capitalized until assets are ready for their intended use.

Asset Impairment

Long-lived Assets

The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows are estimated based on quantities of recoverable metals, corresponding expected commodity prices (considering current and historical prices, price trends and related factors), production levels and operating costs of production and capital, all based on life-of-mine plans. Existing proven and probable reserves and value beyond proven and probable reserves are included when determining the fair value of mine site reporting units at acquisition and, subsequently, in determining whether the assets are impaired. The term “recoverable metals” refers to the estimated amount of gold or other commodities that will be obtained after taking into account losses during ore processing and treatment. Estimates of recoverable metals from such exploration stage metal interests are risk adjusted based on management’s relative confidence in such materials. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. The Company’s estimates of future cash flows are based on numerous assumptions and it is possible that actual future cash flows will be significantly different than the estimates, as actual future quantities of recoverable metals, gold and other commodity prices, production levels and operating costs of production and capital are each subject to significant risks and uncertainties.

 

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Goodwill

The Company evaluates, on at least an annual basis, the carrying amount of goodwill to determine whether current events and circumstances indicate that such carrying amount may no longer be recoverable. To accomplish this, the Company compares the estimated fair value of its reporting units to their carrying amounts. If the carrying value of a reporting unit exceeds its estimated fair value, the Company compares the implied fair value of the reporting unit’s goodwill to its carrying amount, and any excess of the carrying value over the fair value is charged to earnings. The Company’s fair value estimates are based on numerous assumptions and it is possible that actual fair value will be significantly different than the estimates, as actual future quantities of recoverable minerals, gold and other commodity prices, production levels and operating costs of production and capital are each subject to significant risks and uncertainties.

Stock Based Compensation

On December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award. SFAS No. 123R was to be effective for interim or annual reporting periods beginning on or after June 15, 2005, but in April 2005 the SEC issued a rule that will permit most registrants to implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period as required by SFAS No. 123R. The pro forma disclosures previously permitted *under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company has adopted the requirements of SFAS No. 123R for the fiscal year beginning on January 1, 2006, and recorded the compensation expense for all unvested stock options existing prior to the adoption during the period.

Recent accounting pronouncements

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statements No 3.  SFAS No. 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable. Accounting Principles Boards ("APB") Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of  changing to the new accounting   principle. SFAS No. 154 requires that a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets be accounted for as a change in accounting   estimate that is affected by a change in accounting principle. APB Opinion No. 20 previously required that such a change be reported as a change in accounting principle. The Company adopted SFAS No. 154 on January 1, 2006.  The adoption of the provisions of SFAS No. 154 had no material effect on the Company's consolidated financial statements.

 

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In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets-amendment of APB Opinion No. 29. SFAS No. 153 eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance, defined as transactions that are not expected to result in significant changes in the cash flows of the reporting entity. This statement is effective for exchanges of non-monetary assets occurring after June 15, 2005.  The adoption of SFAS No. 153 had had no impact on the Company's financial position, results of operations, or cash flows.

In September, 2004, the FASB issued FSP FAS 142-2, Application of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Oil- and Gas-Producing Entities. This statement is effective for the first reporting period beginning after the issuance date and clarifies that the costs for acquiring contractual mineral rights in oil and gas properties would continue to be recorded as those for tangible assets.  It also addresses that the scope exception within SFAS 142 for the accounting as prescribed in SFAS 19 extends to the balance sheet classification and disclosures for drilling and mineral rights of oil- and gas-producing entities.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs – an amendment of ARB No. 43, Chapter 4. SFAS No. 151 requires that certain abnormal costs associated with the manufacturing, freight, and handling costs associated with inventory be charged to current operations in the period in which they are incurred. The adoption of SFAS 151 had no impact on the Company's financial position, results of operations, or cash flows

On January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment- Revised 2004,” using the modified prospective transition method.

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48). This interpretation prescribes a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation is effective for fiscal years beginning after December 15, 2006 (i.e., the beginning of our fiscal year 2007). We do not expect that the adoption of FIN 48 will have a material impact on our consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value instruments.  SFAS 157 does not require any new fair value measurements, but applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (our fiscal 2008). We believe that implementation of SFAS 157 will have little or no impact on our Consolidated Financial Statements.

 

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In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS 158). SFAS 158 requires plan sponsors of defined benefit pension and other postretirement benefit plans (collectively, “postretirement benefit plans”) to fully recognize the funded status of their postretirement benefit plans in the statement of financial position, measure the fair value of plan assets and benefit obligations as of the date of the fiscal year-end statement of financial position and provide additional disclosures.  We believe that implementation of SFAS 157 will have little or no impact on our Consolidated Financial Statements since we have no applicable plans,.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify misstatements based on their impact on each of our financial statements and related disclosures. On December 30, 2006, we adopted SAB 108. Our adoption of SAB 108 did not impact our financial statements.

CONCENTRATION OF CUSTOMERS AND SUPPLIERS

During the year 2006, Wulatehouqi Zijin was the only supplier of Qianzhen Mining’s raw minerals. Bayannaoer Zijin Nonferrous Metal Co., Ltd. (“Bayannaoer Zijin”, a related company of Wulatehouqi Zijin) was one of the major customers of Qianzhen Mining which contributed approximately $5,690,000 or 25.4% of the Company’s consolidated net turnover.  In addition to the aforementioned, our nonferrous metal product business had another significant customer which accounted for approximately $7,907,000 or 35.3% of our consolidated net turnover in 2006.

ITEM 2 DESCRIPTION OF PROPERTY

 

Introduction

 

China Shenzhou Mining & Resources Inc. (China Shenzhou) holds two mining licenses and four exploration permits at the end of 2006, the mining licenses include:

 

Table 2-1: Summary of Properties for China Shenzhou

 

Type of Licence		Name		Location
Mining		Sumochagan Aobao Fluorite Mine(Xiangzhen Mining) No 2 Mine of Qingxing Copper Mine(Qingshan Metal)		Siziwangqi, Inner Mongolia Wulatehouqi, Inner Mongolia
Exploration		Jiangejier Pb-Zn property (Tianzhen Mining) Huayuan Copper Property (Tianzhen Mining) Wuzunagen Pb-Zn Property (Tianzhen Mining) Keyinbulake Cu-polymetallic Property (Xingzhen Mining)		Wuqia County, Xingjiang Wuqia county, Xingjiang Wuqia county, Xingjiang Buerjin county, Xingjiang

Figure 2-1 shows the general location of some properties and Table 2-2 and Table 2-3 present detailed information with respect to some properties.

 

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Figure 2-1: Index Map of China Shenzhou’s Properties

Table 2-2: Mining Licenses Held by the Company

Property		Sumochagan Aobao Fluorite Mine (between exploration line 21-04)		No 2 Mine of Qingxing Copper Mine,
License Number		1526000220071 (152000630047)		1500000530858
Owner		Inner Mongolia Xiangzhen Mining Group Ltd.		Qingshan Nonferrous Metal Development Co Ltd.
Valid period		from October 2006 to May 2007		from October 2005 to October 2008
Area (km2)		0.909		0.1211
Mining method		Underground Mining		Underground Mining
Mining scale		80,000t/a		60,000t/a
Mining ore types		Fluorite		Copper, Zinc and Sulfur
Mining Level (m)		700-1060		1417-1320

 

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Table 2-3: Exploration Licenses Held by the Company

Property		Huayuan Copper Property		Jiangejier Property
License Number		6500000731651		6500000731651
Owner		Xinjiang Wuqia Tianzhen Mining Co Ltd		Xinjiang Wuqia Tianzhen Mining Co Ltd
Valid period		from 31 March 2004 to 31 March 2007		from 26 April 2007 to 26 April 2008
Area (km2)		31.71		21.07
Contractor		No.2 Geological Brigade of Bureau of Geology and Mining, Xinjiang Uygur Autonomous Region		Dadi Mining Technique and Development Company Ltd, Xinjian Uygur Autonomous Region

 

The mineral rights in China are categories into two types as exploration right and mining right, separately, where:

 

o

Exploration right is the right for exploring mineral resources within the areas authorized by the exploration license.

o

Mining right is the right for exploitation of mineral resources and produce mineral products.

According to the Chinese law, an exploration license is generally valid for 3 years and can be extended not more than 2 times with each not exceeding two years. The mining license is usually valid in China for up to 10, 20 and 30 years corresponding to small scaled, medium scaled, and large scaled deposit or mine, respectively. The mining license can be renewed with the increased area and longer validation period subject to relevant regulations. Application for renewal needs to be submitted at least 30 days before the expiration date of the existing mining license. 

Description of Properties

Sumochagan Aobao Fluorite Mine

Location, Access, Climate and Physiography

Sumochagan Aobao fluorite mine is located in Siziwang Qi of Wulanchabu City in Inner Mongolia, China which is defined by E111°15′35″~111°16′30″ and N43°07′10″~43°07′49″. Access to the area is convenient by an approximately 90km simple dirt road from the mine to Erlianhot and then about 250km freeway or national highway to Hohhot, the provincial capital city of Inner Mongolia. Climate in the area is characterized by a typical continental and windy with low precipitation and high evaporation, and large temperature difference between night and day. The topography is gently grassland with an elevation difference varying from 20 to 40m. Figure 2-2 shows the general location of Sumochagan Aobao Fluorite Mine.

 

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Figure 2-2: Index Map of Sumochagan Aobao Fluorite Mine

Mining License Description

Inner Mongolia Xiangzhen Mining Group Co Ltd. (Xiangzhen) holds the mining license of the area between prospecting line 21 and line 04 of Sumochagan Aobao Fluorite Deposit. The mining license Number is 1526000220071 with a Temporary Extension No. 1526000630047 which was issued by Wulanchabu City Bureau of Land and Resources in Inner Mongolia and had expired on May 2007.  Xiangzhen has lodged an application to Inner Mongolia Bureau of Land and Resources for renewing the mining license and the new mining license is expected to be obtained soon.

Previous Exploration and Development

In 1975, No.1 geological survey brigade of Inner Mongolia conducted a 1/200,000 geological survey in this area and found Sumochagan Aobao Fluorite deposit. The subsequent resource estimated was completed and 1.716 million tonnes fluorite ore was defined at that time.

From 1981 to 1987, the No.102 geological brigade of Inner Mongolia conducted a exploration program in more detailed level and submitted a geological report entitled “Geological Report of Sumochagan Aobao Fluorite Deposit of Siziwangqi, Inner Mongolia ” in 1987. 

The deposit was extracted by a company which was owned by the local government in 1978. The company was renamed as North Fluorite Group Corporation Ltd in 1997 and then the mining right was purchased by Xiangzhen Mining Group Ltd.

 

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Mining Operation

Before 1997, the open pit mining was used and the pit was 58m deep with an elevation of 1065-1007m.

Since 2002, the underground mining had been conducted. Shrinkage method was used for the ore of high grade and the sublevel caving method proposed for ore of low grade. The designed mining capacity of the Sumochagan Aobao Fluorite Mine is 80,000t/a. The power supply is diesel generator and water supply for production and living is obtained from ground water.

The major equipment in the mine are comprised of 4 sets of compressors (20m³), 10 sets of z-20w rock loaders, 8 sets of electric locomotives (8 tonnes), 130 sets of V-type mine cars (0.75m³), ventilation fans, power transformers and so on.

Ore Processing

The fluorite ores are transported by trucks from the mine into the processing plant with an annual treatment capacity of 60,000 tonnes. The process includes a two-stage closed crushing with primary and secondary grindings, one stage of roughing flotation, one stage of scavenging, and six stages of cleaning, and is then followed by thickening, filtrating and drying, and finally packing for delivery. The major facilities consist of ball mill workshop, flotation workshop, press and filtration workshop, concentrate pools, tailings dams, laboratory, electronic scales, water supply wells, power supply lines and offices, etc. And the major equipments are jaw-type crushers (2 sets, 250x400mm and 150x750mm), ball mills (3 sets, 1.5mx3m and 1.5mx4m), 4m³flotation machines (29 sets), Φ12m thickeners (1 set), classifiers (2 sets), 20m²filters, power transformers and power distribution panels and so on.

The concentrator is located at about 45km southeast of the mine area. The concentrate recovery is 83% and the grade of fluorite concentrate is over 95%. Since 2006, a new concentrator with the design capacity of 200,000 tonnes per year was built just next to the fluorite mine, within which new process and new equipment would be utilized.

The main component of fluorite ore is CaF₂, which is a useful and valuable in fluorine chemical, and for steel making as an impregnate, glass making and as additive, which has a wide market prospect and market demand.

Property Geology

Sumochagan Aobao fluorite deposit is located in the Suniteyou Banner Fold Zone in late-Varican, Inner Mongolia Fold Belt. The main strata in the property are comprised of late Paleozoic lower Permian System Xilimiao Formation (P₁xl) which includes three sequences of P₁xl^2-4, P₁xl³, and P1xl4^-1, Proterozoic Ailegemiao Formation and Jurassic Chagannoer group. The fluorite mineralized body and mineralized marble occurred in the lower of P₁xl³ and on the top of P₁xl^2-4.

The mineralized body strikes 40°-60°, dips to 310°-330° at an angle 21°-47°, with stable, continual bedded shape as well as it is 1100m long and 0.52-22.48m thick with the largest extension of 1540m. The economic mineral is fluorite only, which main composition is CaF₂ and the gangue minerals are comprised of quartz, chlorite and sericite. According to the level of grade, the mineralized body divided into high grade mineralized material (rich ore) which CaF₂ is more than 60%, and low grade mineralized material (lean ore) which CaF₂ is from 20-60%.

 

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Resource

In 1987, No. 102102 Geological Brigade of the Inner Mongolia Autonomous Region submitted the “Geological Report of Sumochaganaobao Fluorite Deposit of Siziwangqi, Inner Mongolia ”.  The Inner Mongolia Geology Mining Bureau examined and approved the resource in the Sumochaganaobao Fluorite Deposit in the report by issuing the document No. Nei-Di(1987)No. 115 on October 23, 1987.  The bureau of land and resource of Wulanchabu City commissioned the Land-resources Institute of Inner Mongolia to verify the resources in the Mining License area.  The Institute submitted “the Verification Report of Resources between Prospecting line 21 and 04, of Sumochaganaobao Fluorite Deposit in Siziwangqi, Inner Mongolia”.  The “Consulting Center of the China Mining Association” had reviewed and assessed the verification report and recognized the resources statement in the report where the indicated resource (332) is 2.509 million tons of fluorite with the average grade of CaF₂ at 63.24%.

The parameters used in resources/reserve estimate are set forth below:

 

o

lean ore: lowest grade(CaF2) ≥30%, minimum minable thickness 1m, and maximal band thickness >2m;

o

Rich ore: grade (CaF2) ≥65%, (S) <1%, minimum minable thickness 0.7m, and band thickness 2m;

The criterion of Barite, fluorite and Boron Exploration was implemented in the estimate of resources.

Sampling, Analytical Procedures and Quality Control

The samples were taken by splitting the core into half which one half is collected as the sample, and other half was stored in core box. Sample length was usually varying fro, 0.5m to 1.5 m and core recovery is over 85%.

 

Trenching samples were collected along 10cm wide and 5cm deep channels in fresh rock in the wall of adits and each sample was 1-2m in length.

 

Samples are crushed by three jaw crushers step-by-step to 0.9mm in size and then are split. About 500 grams of each sample is sent for pulverization and the rest would be kept as coarse rejects. To the samples of this project, 100 grams of each pulp sample is sent to the lab for assaying and the rest is stored. Items of CaF₂, CaCO₃, SiO₂, Fe₂O₃ and S are assayed in the lab.

 

Assaying of samples was completed in the laboratory of the No.102 geological brigade of Inner Mongolia and was checked by the Central Laboratory of Bureau of Geology Inner Mongolia. Internal and external check samples were assayed, 95% of samples were sent for internal check and 6.4% for external check. The eligible rate of the checking samples was above 95%. The criterion of Barite, Fluorite and Boron Exploration was also implemented in sample assaying.

 

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Potential for Further Exploration

 

In China, Categories 331 and 332 resources in the deposit may be based on for mine plan, and do not need further geological exploration. Category 333 need to be upgraded to Category 331 or 332 by the implementation of additional geological exploration which could be carried out by adits of mine tunnel. There is a low potential to find new mineralized body or extensions of existing mineralized body since the deposit is well defined and well understood by geologists.

Categorization of Mineral Resources and Ore Reserves in China

The system for the categorisation of mineral resources and ore reserves in China is in a period of transition which commenced in 1999. The traditional system uses five categories based on decreasing levels of geological confidence - Categories A, B, C, D and E. The new system promulgated by the Ministry of Land & Resources (MLR) in 1999 uses three-dimensional matrices, based on economic, feasibility assessment and geological degrees of confidence. These are categorised by a three-digit code in the form of “123”. This new system is derived from the UN Framework Classification proposed for international use. All new projects in China must comply with the new system.

The resources in this description was estimated based on old system and was checked against the new one.

In China, the methods used to estimate the resources and reserves are generally prescribed by the criterion or standard which are approved by the relevant government authority, and are based on the level of knowledge for that particular geological style of deposit. The resource classification categories are assigned largely on the basis of the spacing of sampling, trenching, underground tunnels and drill holes. The parameters and computational methods are also prescribed by the criterion and standard including cut-off grades, minimum minable thickness, maximum thickness of band, and average minimum ‘industrial’ or ‘economic’ grades required.

 

No. 2 Mine of Qingxing Copper Mine

Location, Access and Physiography

No 2 Mine of the Qingxing is located at Sandaoqi Town, Wulatehou Banner, Inner Mongolia of China and is defined by E106°45′15″~106°45′45″ and N40°57′14″~40°57′45″. It is conveniently accessible by dirt road which is 30km southeast to Shanba Town, Hangjinghou Qi connected with a highway and 70km to Linhe Railway Station of Beijing-Lanzhou Railway Line. The topography character is described by middle and low mountains with deep incision valleys. The climate of this area is continental with maximum rainfall of 420mm/a and minimum of 140mm/a. Figure 2-3 shows the index map of the property.

 

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Figure 2-3: Index Map of No 2 Mine of Qingxing Copper Mine

Mining License Description

The mining license (No. 1500000530858) of Qingxing Copper Mine, No 2 Mine is held by Wulatehouqi Qingshan Nonferrous Metal Development Co. Ltd. (Qingshan) which covers 0.1211km² and is defined by the elevations of 1417m-1320m. Its valid period is from October 2005 to October 2008. Qingshan has submitted an application for a new mining license of 0.6495 km² to extend the mining area.

Previous Exploration and Development

In 1957, the Wuyuan Langshan Geological Brigade of the Geology Ministry conducted a project of 1/500,000 geological survey and around the mine area.

In 1960, the Exploration Company of Industry Bureau, Inner Mongolia conducted prospecting and detail exploration projects and submitted a geological report including resource estimate.

In October, 1993, the No.1 brigade of the Nonferrous Geological Bureau, Inner Mongolia compiled a geological report by summarizing the previous exploration information titled “the Geological Report of Deposits & in Tanyaokou Poly-Metal field in Wulatehou Qi, Inner Mongolia.

Mining Operation

In 2004, the deposit had been extracted by underground mining method with the designed capacity of 60,000t /a with mining levels varying from 1417 to 1320m.

 

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At the end of 2006, 173,800 tonnes of ore with an average copper grade of 0.76% had been mined out and the mining loss is 43,400 tonnes of ore. As a result, the consumption of the resources is 217,200 tonnes of ore containing 1661.10 tonnes of metal copper.

The major equipment in the mine includes 3 sets of compressors (20m³/6 m³), 3 sets of z-20w rock loaders, 2 sets of diesel haulage vehicles, 40 V-type mine cars (0.75m³), ventilation fans, power transformers and so on.

There is a 10 KV power supply line for mining production and water is supplied by special water wagon.

Ore Processing Operation

The mine possesses one concentrator with the processing capacity of 50,000t/a. The output copper concentrate is at grade of 15-20% (Zinc concentrate 40-46%) with concentrate recovery rate of 80%. The process of one-stage open-circuit crushing and two-stage ore grinding is adopted in the concentrator.

The major facilities of concentrator are ball mill workshop, flotation workshop, press and filtration workshop, concentrate pools, tailings houses, lab, electronic scales, water supply wells, power supply lines and offices etc.. The major equipments are 2 ball mills (1.83mx3.6m/130kw motor and 1.2mx4.5m/75kw motor), 15 sets of flotation machines (6A, 11kw), 2 sets of power transformers (315KVA), one classifier (1.2mx10m), 20m²filter, pumps and power distribution panels.

Property Geology

Geologically, Qingxing Copper Mine is located at west part of the Langshan-Baiyunebo geotectogene, north boundary of North China Platform. The main strata in the mine area are Zhaetaishan Formation member II (Pt2zh2) and member III (Pt2zh3).  

 

The Zhaetaishan member II (Pt2zh21) bottom section: lower part consisted of carbonaceous phyllite; carbonaceous slate inter-bedded calcareous chlorite schist, chlorite quartz schist and lens of crystal carbonate; the upper part consisted of biotitic quartz schist, andalusite-mica schist and bearing-carbon mica quartz schist. (Pt2zh22) medium section: carbonaceous slate, carbonaceous phyllite, banded carbonaceous quartzite, bearing-carbon quartzite, dark quartzite and tremolite, diopsidite as well as other stone rocks. The mineralized body all occurred in this member. (Pt2zh23) top section: mica quartz shist, carbonaceous mica quartz shist, carbonaceous phyllitic quartz shist.

 

The Zhaetaishan member III (Pt2zh3) bottom section: quartz shist, sheet quartzite. (Pt2zh32) top section: middle-thick quartzite inter-bedded thin quartzite.  

 

The strata occur in monocline with the striking in southwest 220-260, dip to northwest 300-320 with the dip angle 30-89. The all faults took place after the mineralized body formed, which destroyed the bodies.  

 

The mineralized body is hidden deposit with gossans and strictly controlled by the stratum. There are two mineralization zones found, No.3 mineralization zone and No.5 mineralization zone. No.3 zone situated in north of the property, which length is 500m and width 10-30m. in there the mineralized body 1-Cu-1 and 2-Zn-1, 3- Zn -2 were defined. No.5 zone situated in middle-south of the property with length 850m, width 10-40m, and mineralized body 4- Cu-2, 5 Zn-3 as well as 6 Zn-4 were defined.     

 

The main minerals are chalcopyrite, galena, sphalerite and pyrite. The main gangue is quartz, calcite and chlorite.

 

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Resources

 

No. 511 Brigade of Nonferrous Geological Exploration Bureau estimated and verified the resources of the property, and the estimate results are: the mined Cu ore 217,200 tons, Cu metal 1661.10ton. The accumulated total mineral (Cu + Zn) resource is 2.46 million tons.

 

The parameters used in estimate are shown as follows, it is determined based on the criterion of Copper, Lead, Zinc, Silver, Nickel and Molybdenum Exploration of China (T0214-2002).

 

Cu mineralized body: cut-off grade: low Cu ≥0.4%, minimum minable ≥1m and maximum band ≥2m.

 

Useful component accompany: Pd ≥0.2%, Zn≥ 0.4% and S≥ 1%.

 

Zn mineralized body: cut-off grade: Zn ≥ 1%, minimum minable ≥1m and maximum band ≥2m.     

 

Useful component accompany: Cu ≥0.06%, Ag≥ 2g/t and S≥ 4%.

 

In general, the majority of resources with category 332 or higher can be converted into probable reserve once a proper feasibility study has been conducted. In the current case, as the economic cut-off grade of ore in the feasibility study is the same as the geological cut-off grade while not based on economic evaluation and mine design, the conversion simply can not be performed. As such, the reserve has to be treated as zero unfortunately. The company is now considering carrying out a proper feasibility study that will be in compliance with the guide 7 of AMEX.

Sampling, Analytical Procedures and Quality Control

The samples were taken by splitting the core into half which one half is collected as the sample, and other half was stored in core box. Sample length was usually 0.5m to 1.0 m and core recovery is over 75%.

 

Trenching samples were collected along 10cm wide and 5cm deep channels in fresh rock in the wall of adits and each sample was 1-2m in length.

 

Assaying of samples was completed in the laboratory of the No.511 Brigade of Nonferrous Geological Exploration Bureau and check by the Central Laboratory of Bureau of Geology Inner Mongolia. For copper and nickel assays, 9.5% of samples were sent for inner checking and 6.4% for external checking. The eligible rate of the checking samples was above 95%.

 

Potential for Further Exploration

In the mining process, two mining tunnels in 1390m and in 1350m level intercepted Cu-2 mineralized body and increased the control degree. If further exploration will conduct in the future, more mineral resources could be defined, such as drilling will upgrade part of the resources to Category 332. Underground exploration (associated mining operation) should upgrade the resource level, and disclose the extension the mineralization in depth.

Tianzhen Mining

China Shenzhou Mining & Resources, Inc has two prospecting licenses of Huayuan Copper Mine which includes three occurrences (Huayuan Copper Mine, Yangshugou Occurrence and Yangye Occurrence) and Jiangejier Pb-Zn Mine, held by Xinjiang Wuqia Tianzhen Mining Co Ltd.

 

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Location, Access and Physiography

Huyuan property is located at Wuqia County in Xinjiang Autonomous Region of China and is 4 kilometers southwest of Kangsu Town, 116 kilometers northwest of Kashi city.

 

 

Figure 2-4: Index Map of Huayuan Copper Project

The property is defined by E74º56′23″ ~ 87º9’30” and N39º41’38”~39°42′02″, as well as the area covers 1.08km² as shown in Figure 2-4. Access to the area is convenient by a simple road to Kangsu Town which connected Wuqia County through a highway way, and then a national highway to Kashi City, a major city in the region. The climate over the area is typical continent with rare precipitation and high evaporation. The topography is characterized by middle-high mountains with the elevations of 1900-2200m above the sea level.

Property Geology

The property is located in Kushiweike syncline of the Nantianshan boundary geotectogene and strata spread over the area consist of Paleocene to Pliocene strata which includes purple-red mud stone, silt stone and grey-yellow calcareous sand stone as well as grey-green granule-middle calcareous sand stone. Copper mineralization occurs in light grey granule-middle grain calcareous sand stone of which strike, dip and thickness are extremely different in different place.

The No. 2 Geological Brigade of the Bureau of Geology and Mining, Xinjiang Uygur Autonomous Region conducted a prospecting project during the period of April-June 2006. Mineralized bodyⅠ-1,Ⅰ-2 and Ⅰ-4, strike 75°-255° and dip to north at 17°-27° , were defined within a copper mineralization belt which numbered Mineralization Ⅰ in Huayuan area.

 

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Mineralized body Ⅰ, Ⅱ-1, Ⅱ-2, Ⅱ-3, Ⅱ-4, Ⅱ-5 and Ⅱ-6 within two copper mineralization belt which numbered were defined in Yangshugou area.

In Yangye area, two copper mineralization belts were discovered which numbered Mineralization Ⅰ and Mineralization Ⅱ. Mineralized bodiesⅠ-1 andⅠ-2 were defined in mineralizationⅠ and mineralized bodyⅡ-1 and Ⅱ-2 were defined in mineralization Ⅱ, respectively.

Four mineralized bodies were defined in the Jiangejier Pb-Zn property. Main minerals are galena, sphalerite, chalcopyrite, malachite, pyrite, limonite and hematite. The main gangues are quartz, feldspar, calcite and chlorite.

The metallic minerals consist of malachite, cuprite, chalcocite and little natural copper and main gangue is quartz. This deposit can be determined as sedimentary type according to the present research.

 

Parameters for Resources Estimates

 

The parameters used in estimate are based on the criterion of Copper, Lead, Zinc, Silver, Nickel and Molybdenum Exploration of China (T0214-2002) and associated with the property practical condition. Cut-off grade of Cu used for resource estimate is 0.5% and minimum minable thickness is 1m with maximum band of 2m.

Sampling, Analytical Procedures and Quality Control

The samples were taken by splitting the core into half which one half is collected as the sample, and other half was stored in core box. Sample length was usually 0.5m to 1.5 m and core recovery is over 80%.

 

Samples were crushed by three stages of crushing, and then 0.5kg of each sample was pulverized to -160mesh, then 50g of each pulp was sent for assaying.

 

The assaying of samples was completed in the laboratory of the No.2 Geological Brigade of the Geological Exploration Bureau of Xinjiang Autonomous region, and checked by the Central Laboratory of Bureau of Xinjiang Autonomous Region. 9.5% of total samples were chosen for internal checking and 6.4% for external checking. The eligible rate of results of the checking samples is more than 95%.

 

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Potential for Further Exploration

The potential to find economic copper deposits in the exploration permit is good due to the fact that mineralization belts were defined and fill-in drilling will upgrade some of the resources to Category 332 or to Category 331. If the drilling distribution is favourable, the extension of the mineralization maybe possible and there is potential to define extensions of mineralization.

 

Keyinbulake Cu-Zn Property

Location and Access

Keyinbulake Multi-Metal Property is located in Buerjin County of Aletai District, Xinjiang Autonomous Region in China. The Permit is defined by E 87º17′30″-87º9’30” and N 47º58′30” - 47º59′45” and covers 3.59 km². It is 65km northwest of Aletai city, 20 km northeast of Buerjin County and is 26 km northeast of Dulaiti town. The highway from Aletai city to Dulaiti Town crosses the property so as access is convenient. Figure 2-5 indicates the general location of the property.

 

 

Figure 2-5 Index Map of Keyinbulake Multi-Metal Property

Property Geology

According to the previous exploration, some copper, znic and silver mineralization of medium to large size had been defined in Keyinbulake property. In the adjacent area of the permit, Ashele large copper deposit, Tiemuer Fe-Cu deposit and Keketale large Pb-Zn deposit had been defined in different time.

 

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Property Geology

 

According to the previous exploration, there is a geological condition forming large or medium deposit of copper, zinc and silver in Keyinbulake property, based on the facts of ten mineralization zones prospected. Sulfured mineralized body intercepted by drilling in the deep and the chemical and physical abnormity existing. In the adjacent district, Ashele large copper deposit and Tiemuer Fe-Cu deposit as well as Keketale large Pb-Zn deposit was defined continually.    

 

Mineral Resources

 

From previous exploration work, the mineral (copper-zinc) resources are 4.1435 million tons.

 

Qianzhen Mining

 

Qianzhen Mining owns a concentrator with the annual treatment capacity 200,000 tons. The processes of concentrator include two-stage closed crushing with primary and secondary grindings, one step of roughing flotation, one step of scavenging, and three steps of cleaning, and then thickening, filtrating and drying. The major facilities of concentrator include a ball mill workshop, a flotation ore processing plant, filtration workshop, concentrate pools, dams, laboratory, electronic scales, water supply wells, power supply lines and offices, etc. The major equipments are ball mills (3 sets, 2.1mx3m and 1.5mx3m), 4m³ flotation machines (24 sets), 2m³flotation machines (12 sets),Φ12m thickeners(1 set), classifiers (2 sets, 1.5mx10m), 20m² filters, pumps, power transformers and power distribution panels and so on. In 2005, Qianzhen Mining invested approximately $750,000 for the technological modernization of the original processing production line to increase its yearly capacity to approximately 200,000 tons. The current equipment is new.

 

Qianzhen Mining conducts the operation by purchasing zinc, copper and/or lead ore from Qingshan Nonferrous Metal or other suppliers. The final products are in bulk. The transportation for the products is by means of truck. Table 2-5 shows the annual output and the concentrate average price of Qianzhen Mining in last three year.

 

Table 2-5: Annual output & concentrate average price in last three years of Qianzhen Mining

Year		Product		Ore output(t)		Concentrate(t)		Average price per year (USD $/t)
2004		Zn concentrate		56902.75		8596.19		474.23
2005		Zn concentrate		87175.17		12866.49		751.60
2006		Zn concentrate Pb concentrate		129548.00		13959.16 1219.77		2190.26 1117.10