Coal mines to be consolidated in China

22 February 2010 - SinoCoking Coal and Coke Chemical Industries, Inc. announced its plans to consolidate local area coal mines as a part of the government-directed consolidation of the coal mining industry in the Pindingshan region of Henan Province, China.

According to government sources, Henan province in central China is in the process of consolidating coal mines with a production capacity below 300,000 tons per year, and will only approve new mines with an output capacity of at least 450,000 tons per year. The Henan plan is a part of a general policy in China to consolidate its coal industry in order to improve production efficiency and reduce coal mine accidents. The plan is modeled after a pilot consolidation program in Shanxi province that was conducted last year. In 2009, Shanxi province, one of the nation’s key coal-producing regions, reduced the total number of its coal mines to 1,053 from 2,600 after consolidating all coal mines with a production capacity below 300,000 tons per year. The consolidation also caused coal output in Shanxi to decline by 6% in 2009. Smaller coal mines reportedly make up approximately one-third of China’s total coal output.

SinoCoking is a supplier of the vital commodities of thermal and metallurgical coal and coke to industrial users such as power plants, steel mills, plant and factory operators and manufacturers in China. The Company is a vertically-integrated processor that uses coal from both its own mines and that of third-party mines to provide basic and value-added coal products to its customer base. Excluding any of its planned acquisitions, SinoCoking currently holds mining rights to extract 300,000 tons of coal per year from mines located in the Henan Province in central China. SinoCoking began producing metallurgical coke in 2002, and since then has expanded its production to become an important supplier to regional steel producers in central China.

“The coking coal produced in the Pingdingshan region has particularly high agglutinating value combined with low levels of ash, sulfur and phosphor, which sets our region’s coal resources apart from other coal-producing provinces in China,” said Jianhua Lv, the Chief Executive Officer of SinoCoking. “In order to increase our annual coke production and ensure a steady supply of raw material for our coke chemical projects, SinoCoking intends to make acquisitions of local mining operations that will increase the total reserves directly available to the company. While we have engaged in preliminary dialogues with acquisition targets over the past couple of years, we believe the government’s imperative for consolidation of the coal mining sector this year has now come to fruition, and this creates acquisition opportunities for us that are strategically and financially compelling.”

SinoCoking has entered into discussions with ten distinct private companies in the region, and intends to acquire a majority interest in each of these companies, or their mining assets, within the next six months. The target companies are:

* Baofeng Yuxiang Coal Ltd., based in Qingliangsi Village of Daying town in Baofeng County;
* Baofeng Xingsheng Coal Ltd., based in Zhaozhuang Village of Daying town in Baofeng County;
* Pingdingshan Shilong Zhaoling Industries Coal Ltd., based in Zhaoling Village in the Shilong area of Pingdingshan;
* Pingdingshan Shilong Yuantong Coal Ltd., based in Dazhuang Village in the Shilong area of Pingdingshan;
* Pingdingshan Shilong Tianyuan Coal Ltd., based in Nanzhangzhuang Village in the Shilong area of Pingdingshan;
* Ruzhou Changsheng Coal Ltd., based in Fangwan Village of Xiaotun Town of Ruzhou;
* Baofeng Hongjiu Coal Ltd., based in Yudong Village of Zhouzhuang Town in Baofeng County;
* Baofeng Zhouzhuang Dinglou Dongfang Coal Ltd., based in Dazhuang Village in the Shilong area of Pingdingshan;
* Ruzhou Xiaotun Jialingnan Coal Ltd., based in Jialing Village of Xiaotun Town of Ruzhou; and
* Baofeng Shuangrui Coal Ltd., based in Liping Village of Daying Town in Baofeng County.

The aggregate licensed production capacity of the mines operated by these target companies is 1.5 million metric tons per year. In addition, the aggregate coal reserves of these companies is estimated to be 25 million metric tons, based on Chinese geological standards. The Company is conducting its own due diligence investigation of each prospective target.

“The opportunities presented to SinoCoking by these potential acquisitions extend beyond their licensed production capacity or reserves,” Mr. Lv added. “Assuming we can complete most if not all of the acquisitions we described in today’s announcement, SinoCoking would then directly control all of the feedstock that is necessary for both our current and planned coke manufacturing facilities. As a result, this vertical integration is expected to enable us to achieve significantly higher profit margins than previously anticipated. In the past, we relied heavily on washed coal produced by third parties for our coking feedstock.”

SinoCoking believes it can acquire each of these targets at an attractive purchase price and without the need for significant outside capital, using internally-generated cash flow and its own common stock, noting that the target companies are required to either agree to consolidate or face government-mandated closure. SinoCoking also noted that its acquisition opportunities are only one element of its expansion plan, and that SinoCoking remains focused on the financing and construction of its newly planned state-of-the-art coking plant with an expected production capacity of 900,000 metric tons per year.

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