Very Substantial Acquisition

Transcription

THIS CIRCULAR REQUIRES YOUR IMMEDIATE ATTENTION
The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation
as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or
in reliance upon the whole or any part of the contents of this circular. This circular appears for information purposes only
and does not constitute an invitation or offer to acquire purchase or subscribe for the securities of Aurora Global Investment
Holdings Limited,
If you are in doubt as to any aspect of this circular or as to the action to be taken, you should consult a stockbroker or
other registered dealer in securities, bank manager, solicitor, professional accountant or other appropriate independent
adviser.
If you have sold or transferred all your shares in Aurora Global Investment Holdings Limited, you should at once hand
this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, stockbroker or other
agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.
AURORA GLOBAL INVESTMENT HOLDINGS LIMITED
ρˀ᏷ଈҙ༅ઁٖτࠉʔ̇*
(Incorporated in the Cayman Islands with limited liability)
(Stock code: 353)
VERY SUBSTANTIAL ACQUISITION:
ACQUISITION OF INTERESTS IN A COMPANY
INVOLVING
ISSUE OF CONSIDERATION SHARES
AND
CONVERTIBLE BONDS;
REFRESHMENT OF GENERAL MANDATE
TO ALLOT AND ISSUE SHARES;
REFRESHMENT OF SCHEME MANDATE LIMIT;
AND
NOTICE OF EXTRAORDINARY GENERAL MEETING
Financial adviser to the Company
Independent financial adviser to the Independent Board Committee
and the Independent Shareholders
A notice of the extraordinary general meeting of Aurora Global Investment Holdings Limited convened to be held at
Suites 5303-5304, 53rd Floor, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong on 31 October 2007 at 10:30 a.m. is
set out on pages 340 to 343 of this circular. Whether or not you are able to attend the meeting, you are requested to
complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the
Company’s branch share registrar in Hong Kong, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road
East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the
holding of the meeting or any adjournment thereof. Completion and return of the form of proxy shall not preclude you
from attending and voting at the meeting if you so wish.
15 October 2007
*
for identification purpose only
CONTENTS
Page
Definition ...................................................................................................................................
1
Letter from the Board .............................................................................................................
7
Letter from the Independent Board Committee .................................................................
41
Letter from Veda Capital........................................................................................................
42
Appendix I
—
Financial information on the Group .............................................
47
Appendix IIA
—
Accountants’ report on the Target Group ...................................
137
Appendix IIB
—
Financial information on the Target Group ................................
167
Appendix III
—
Unaudited pro forma financial information of
the Enlarged Group ......................................................................
169
Appendix IV
—
Valuation of the Target Mine — First Portion ............................
184
Appendix V
—
Reports on forecasts underlying the valuation of
the Target Mine — First Portion ...............................................
212
Appendix VI
—
Property valuation ...........................................................................
215
Appendix VII
—
Technical report ...............................................................................
225
Appendix VIII
—
General information ........................................................................
331
Notice of EGM ..........................................................................................................................
340
–i–
DEFINITIONS
In this circular, unless the context otherwise requires, the following expressions have the following
meanings:
“AGM”
the annual general meeting of the Company held on 28 June 2007
in which the Shareholders had approved, among other things, the
Existing General Mandate
“Acquisition”
the acquisition of the Sale Interests of the Target Company by
Smooth Way from the Vendor in accordance with the terms and
conditions of the Share Transfer Agreement
“associate(s)”
has the meaning ascribed to it under the Listing Rules
“Board”
the board of Directors
“Business Day”
a day (excluding Saturday and any day on which a tropical cyclone
warning signal no. 8 or above is hoisted or remains hoisted between
9:00 a.m. and 12:00 noon and is not lowered at or before 12:00
noon or on which a “black” rainstorm warning signal is hoisted or
remains in effect between 9:00 a.m. and 12:00 noon and is not
discontinued at or before 12:00 noon) on which licensed banks in
Hong Kong are open for business
“Carve-out Mine”
such portion of the Existing LRM Mine which excludes the Target
Mine.
“CB Instrument”
the instrument to be executed on the Completion Date by the
Company by way of a deed poll constituting the Convertible Bonds
“Company”
Aurora Global Investment Holdings Limited, an exempted company
incorporated in the Cayman Islands with limited liability, the Shares
of which are listed on the Stock Exchange
“Completion”
completion of the Acquisition in accordance with the terms and
conditions of the Share Transfer Agreement
“Completion Accounts”
the profit and loss account for the period commencing from
1 January 2007 and ending on the Completion Date and the
consolidated balance sheet of the Target Group as at the Completion
Date
“Completion Date”
the date on which Completion takes place
“connected person”
–1–
DEFINITIONS
“Consideration”
the total consideration payable by Smooth Way to the Vendor for
the Acquisition, the particulars of which are set out in the paragraph
headed “Consideration” in the letter from the Board
“Consideration Shares”
270 million Shares to be issued and allotted to the Vendor at the
Issue Price for the partial settlement of the Consideration pursuant
to the term of the Share Transfer Agreement
“Conversion Price”
HK$0.6 per Share (subject to adjustment)
“Conversion Shares”
Shares to be allotted and issued upon conversion of the Convertible
Bonds
“Convertible Bonds”
the Tranche 1 Bonds and the Tranche 2 Bonds
“Director(s)”
the director(s) of the Company
“EGM”
an extraordinary general meeting of the Company convened and to
be held on 31 October 2007, for the purpose of considering, and if
thought fit, approving the Share Transfer Agreement and the
transactions contemplated thereunder, the grant of specific mandate
to issue the Consideration Shares, the issue of the Convertible
Bonds, the refreshment of the Scheme Mandate Limit by the
Shareholders; and the grant of the Refreshed Issue Mandate by the
Independent Shareholders
“Encumbrance”
any mortgage, charge, pledge, lien (otherwise than arising by statute
or operation of law), hypothecation, equities, adverse claims, or
other encumbrances, or rights of whatsoever nature or interest or
any agreement for any of the same
“Enlarged Group”
the Group and the Target Group
“Existing General Mandate”
the general mandate granted to the Directors by the Shareholders
at the AGM of the Company to, among others, exercise the power
of the Company to allot, issue or otherwise deal with 162,690,000
Shares, representing 20% of the then issued share capital of the
Company and to repurchase up to 81,345,000 Shares, representing
10% of the then issued share capital of the Company
“Existing LRM Mine”
the Xiaohongshan (Little Red Mountain) iron-titanium-vanadium
mine located in Inner Mongolia at approximately 180 km north of
the city of Jiayugan, central-western PRC, and such mine is
constituted by the Target Mine and the Carve-out Mine
“Exploration Licence(s)”
the current exploration licence held by Qinghai Senyuan and the
right to conduct exploration work for Mineral Resources over the
Existing LRM Mine or, as the case may be, the Target Mine pursuant
to the Mineral Laws
–2–
DEFINITIONS
“Extension Mandate”
a general and unconditional mandate to the Directors to the effect
that the nominal value of any Shares repurchased (up to a maximum
of 10 percent of the aggregate nominal amount of the share capital
of the Company in issue on the date of the AGM) will be added to
the nominal value of the Shares which may be allotted and issued
under the Refreshed Issue Mandate
“Group”
collectively, the Company and its subsidiaries from time to time
“Hong Kong FSMI”
Hong Kong Forest Source Mining Industry Holding Company
Limited, a company incorporated in Hong Kong
“HK$”
Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong”
the Hong Kong Special Administrative Region of the PRC
“Independent Board
Committee”
the independent board committee of the Board comprising all
independent non-executive Directors, established for the purpose
of advising the Independent Shareholders in relation to the proposed
grant of the Refreshed Issue Mandate and the Extension Mandate
“Independent Shareholder(s)”
Shareholders other than Directors (excluding the independent nonexecutive Directors) and the chief executive and their respective
associates
“Issue Price”
HK$0.5 per Share, being the issue price of the Consideration Shares
“LCH”
LCH (Asia-Pacific) Surveyors Limited, an independent valuer
appointed by the Company to appraise the market value of the
Target Mine — First Portion and property interest of the Group
“Latest Practicable Date”
12 October 2007, being the latest practicable date prior to the
printing of this circular for inclusion of certain information in this
circular
“Listing Rules”
the Rules Governing the Listing of Securities on the Stock
Exchange
“Loan Capitalisation”
capitalisation by the issue of shares in the relevant companies in
the Target Group for the purpose of capitalisation of the entirety of
the Shareholder Loans such that immediately after such
capitalisation, there will not be any Shareholder Loans
“Long Stop Date”
5:00 p.m. on 8 November 2007 (being the date falling of expiry of
four months after the date of signing of the Share Transfer
Agreement) or such later time and date as Smooth Way and the
Vendor may agree in writing
“Maturity Date”
the date falling five years from the date of issue of the Convertible
Bonds
–3–
DEFINITIONS
“Mineral Laws”
the Mineral Resources Law (ᘊଐ༅฻ؒ) of the PRC, as amended,
modified or replaced from time to time, and such other rules,
regulations, measures and policies formulated and promulgated by
the governmental agencies or public bodies of the PRC (including
without limitation national, provincial and other local authorities)
“Mineral Resources”
mineral resources containing iron, vanadium and titanium in the
Target Mine or, as the case may be, the Existing LRM Mine
“Mining Licence(s)”
the mining licence(s) held or to be held by the Target Group and
the right to conduct mining and exploitation work for the Mineral
Resources over the Existing LRM Mine (or, as the case may be,
the Target Mine) exclusively pursuant to the Mineral Laws
“PRC”
the People’s Republic of China which, for the purposes of this
circular, excludes Hong Kong, the Macau Special Administrative
Region of the PRC and Taiwan
“PRC Entities”
Qinghai Senyuan and such other companies to be set up in the
PRC before Completion for the exploitation of Mineral Resources
and/or mineral processing in respect of the Target Mine
“Qinghai Senyuan”
the holder of the Exploration Licence in respect of the Existing
LRM Mine, ‫ࣵڇ‬౲฻ᘊพ඀ೕτࠉʔ̇ (Qinghai Forest Source
Mining Industry Developing Company Limited), a wholly foreign
owned enterprise established in the PRC and wholly owned by Hong
Kong FSMI
“Refreshed Issue Mandate”
a general and unconditional mandate to the Directors to exercise
the power of the Company to allot, issue or otherwise deal with
shares up to a maximum of 20% of the aggregate nominal amount
of the share capital of the Company in issue as the date of at the
EGM
“Reorganisation”
the reorganisation involving the members of the Target Group as
set out in the paragraph headed “Reorganisation” in the letter from
the Board
“RMB”
renminbi yuan, the lawful currency of the PRC
“Sale Interests”
such number of shares of US$1 each of the Target Company as
shall represent 51% of its issued share capital and held by the
Vendor immediately before Completion
“SFO”
Securities and Futures Ordinance, Chapter 571 of the Laws of Hong
Kong
–4–
DEFINITIONS
“Scheme Mandate Limit”
10% of the issued share capital of the Company as at the date of
the extraordinary general meeting of the Company held on 10
March 2006 which may be issued upon exercise of the options to
be granted under the Share Option Scheme
“Share Option Scheme”
the share option scheme adopted by the Company on 6 June 2002
“Share Transfer Agreement”
the conditional agreement entered into on 8 July 2007 between,
among other persons, Smooth Way and the Vendor in relation to,
among others, the Acquisition
“Share(s)”
ordinary shares of HK$0.01 each in the share capital of the
Company
“Shareholders”
holders of Shares
“Shareholders’ Agreement”
the shareholders’ agreement to be entered into between Smooth
Way (or such nominee which will become the owner of the Sale
Interests), the Company, the Vendor and the Target Company upon
Completion
“Shareholder Loans”
the interest-free loans owing from time to time by members of the
Target Group to the Vendor and its associates
“Smooth Way”
Smooth Way International Limited, a wholly-owned subsidiary of
the Company
“Stock Exchange”
The Stock Exchange of Hong Kong Limited
“substantial shareholder”
“Target Company”
Kanson Development Limited, a company incorporated in the
British Virgin Islands and the entire issued share capital of which
is currently held by the Vendor and will be so held by the Vendor
before the Completion
“Target Group”
the group of companies consisting of the Target Company, Hong
Kong FSMI and the PRC Entities and, where the context so requires,
the businesses carried on by them or (as the case may be) their
predecessors
“Target Mine”
the mine in a 2km by 1km rectangular area which is or to be held
by Qinghai Senyuan, which forms part of the Existing LRM Mine
“Target Mine — First Portion”
such portion of the Target Mine having a site area of approximately
0.7 square km
–5–
DEFINITIONS
“Tranche 1 Bonds”
the HK$365 million zero coupon convertible bonds due on the fifth
anniversary of the date of issue, falling on the Completion Date, in
registered form to be created (for the purpose of settlement of part
of the Consideration) by the CB Instrument and for the time being
outstanding (as defined therein) or, as the context may require,
any number of them
“Tranche 2 Bonds”
the HK$400 million zero coupon convertible bonds due on the fifth
anniversary of the date of issue, falling on the fifth Business Days
following the date of issue of the Mining Licence to a subsidiary
wholly owned (directly or indirectly) by the Company in registered
form to be created (for the purpose of settlement of part of the
Consideration) by the CB Instrument and for the time being
outstanding (as defined therein) or, as the context may require,
any number of them
“US$”
United States dollar(s), the lawful currency of the United States of
America
“Veda Capital”
Veda Capital Limited, a licensed corporation to carry out business
in type 6 regulated activity (advising on corporate finance) under
the SFO, being the independent financial adviser to the Independent
Board Committee and the Independent Shareholders in relation to
the proposed grant of the Refreshed Issue Mandate
“Vendor”
Ms Leung Lai Ching, Margaret
“km”
kilometer(s)
“%”
per cent.
In this circular, for purpose of illustration only, amounts quoted in RMB have been converted into
Hong Kong dollars at the rate of RMB1 to HK$1.00 and vice versa. Such exchange rate has been
used, where applicable, for purposes of illustration only and does not constitute a representation that
any amounts were or may have been exchanged at this or any other rates or at all.
–6–
LETTER FROM THE BOARD
(Stock code: 353)
Executive Directors:
Mr Owen Tam
Mr Tsao Ke Wen Calvin
Mr Law Fei Shing
Mr So Chi Keung
Mr Fok Po Tin
Mr Leung Kai Hung
Mr Delon Yeung
Registered Office:
Cricket Squares
Hutchins Drive, P. O. Box 2681
Grand Cayman KY1-1111
Cayman Islands
Principal place of business
in Hong Kong:
Suites 5303-4, 53rd Floor
Central Plaza
18 Harbour Road,
Wanchai
Hong Kong
Non-executive Director:
Dr Ma Chung Wo, Cameron
Independent non-executive Directors:
Mr Lum Pak Sum
Mr Wan Hon Keung
Mr Sun Tak Keung
To the Shareholders and the Independent Shareholders
15 October 2007
Dear Sir or Madam
VERY SUBSTANTIAL ACQUISITION:
ACQUISITION OF INTERESTS IN A COMPANY
INVOLVING
ISSUE OF CONSIDERATION SHARES
AND
CONVERTIBLE BONDS;
TO ALLOT AND ISSUE SHARES;
REFRESHMENT OF SCHEME MANDATE LIMIT;
AND
INTRODUCTION
On 20 July 2007, the Board announces that on 8 July 2007, Smooth Way, which is a wholly-owned
subsidiary of the Company, entered into the conditional Share Transfer Agreement with, among others,
the Vendor. Under the Share Transfer Agreement, Smooth Way has agreed to acquire 51% of the
* for identification purpose only
–7–
entire issued share capital of the Target Company at Completion from the Vendor at the Consideration
totaling HK$1,000 million in value.
The Acquisition is the acquisition of 51% of the issued share capital of the Target Company, which
shall hold 100% interest in Hong Kong FSMI immediately after the completion of the Reorganisation
and at Completion. At present and at Completion, Hong Kong FSMI is and will be the sole shareholder
of Qinghai Senyuan.
Qinghai Senyuan is a wholly foreign owned enterprise established in the PRC and is the holder of the
Exploration Licence of the Existing LRM Mine (i.e. which covers both the Carve-out Mine and the
Target Mine), which confers to Qinghai Senyuan the right to, among other things, (1) carry out
exploration (such as diamond drilling) of the Mineral Resources of the Target Mine; (2) facilitate the
construction of wiring at the Target Mine and neighboring areas for communication purpose and
facilitate the supply of water and electricity to the Target Mine; (3) access to the Target Mine and
neighboring areas; (4) use the land on a temporary basis in accordance with the exploration work
being carried out at the Target Mine; (5) be entitled to priority in exploring new type(s) of mineral
resources (if any) discovered at the Target Mine; and (6) be entitled to priority in obtaining the mining
right of the Target Mine.
At Completion, the Mining Licence in respect of the Target Mine may not have been issued.
Accordingly, if the Mining Licence in respect of the Target Mine has been issued at Completion, the
Target Group will have both the exploration and the mining rights on the Target Mine. On the other
hand, if the Mining Licence in respect of the Target Mine has not been issued at Completion, the
Target Group will only have the exploration rights on the Target Mine.
Given that preparation work for application for the Mining Licence of the Target Mine is being made
and application for the Mining Licence will be made in the fourth quarter of 2007, the Directors
consider that, provided that the application documents are in order and barring unforeseen
circumstances, there is no legal obstacle for obtaining the Mining Licence of the Target Mine. When
the Mining Licence in respect of the Target Mine is issued, the Target Group will have both the
exploration and the mining rights on the Target Mine.
It is provided in the Share Transfer Agreement that all such rights and interests to and in the exploration
in respect of the Carve-out Mine held by Qinghai Senyuan will, at nil consideration, be transferred
and/or exclusively licensed to the Vendor or such entity controlled by the Vendor. Therefore, the
exploration rights of the Target Mine will be transferred to the Group pursuant to the Acquisition
while the exploration right in respect of the Carve-out Mine is not the subject matter of the Acquisition.
The purpose of this circular is to give you information regarding (i) further details of the Acquisition,
the Consideration Shares and the Convertible Bonds; (ii) the proposed grant of the Refreshed Issue
Mandate; (iii) the proposed refreshment of the Scheme Mandate Limit; (iv) the recommendation
from the Independent Board Committee to the Independent Shareholders on the proposed grant of
the Refreshed Issue Mandate; (v) the recommendation from Veda Capital to the Independent Board
Committee and the Independent Shareholders on the proposed grant of the Refreshed Issue Mandate;
and (vi) a notice of the EGM, at which the necessary resolutions will be proposed to the Shareholders
to consider and, if thought fit, to approve the Share Transfer Agreement and the refreshment of the
Scheme Mandate Limit, and to the Independent Shareholders to consider and, if thought fit, to approve
the grant of the Refreshed Issue Mandate and the Extension Mandate by way of poll.
–8–
SHARE TRANSFER AGREEMENT
Date
8 July 2007
Parties
(1)
Ms Leung Lai Ching, Margaret, as vendor
(2)
Smooth Way, as purchaser
(3)
The Company, as warrantor giving representations, warranties and undertakings jointly and
severally with Smooth Way in favour of the Vendor
To the best of the Directors’ knowledge, information and belief having made all reasonable enquiry,
the Vendor is a third party who is independent of the Company and its subsidiaries and connected
persons of the Company.
Subject matter
The Sale Interests will comprise such number of shares of US$1 each of the Target Company as shall
represent 51% of its issued share capital and held by the Vendor immediately before Completion.
The Target Company is an investment holding company which is wholly owned by the Vendor as at
the date of this circular and which shall hold 100% interest in Hong Kong FSMI immediately after
the completion of the Reorganisation (details of which are set out under the paragraph “Reorganisation”
below, which is expected to be completed before Completion).
Consideration
The Consideration of HK$1,000 million is to be satisfied:
(a)
as to HK$100 million in cash payable by Smooth Way to the Vendor or its nominee;
(b)
as to HK$135 million by the issue of the Consideration Shares by the Company to the Vendor; and
(c)
as to HK$765 million by the issue of the Convertible Bonds by the Company to the Vendor (or
such person(s) as nominated by the Vendor).
–9–
The cash portion in the sum of HK$60 million (“Deposit”) has been paid by Smooth Way to the
Vendor upon the signing of the Share Transfer Agreement as a refundable deposit. On the 30th calendar
day from 8 July 2007 (or such later date as the Vendor may agree), a further refundable deposit
(“Further Deposit”) of HK$40 million in cash has to be paid by Smooth Way to the Vendor or its
nominee, provided that if Smooth Way on a reasonable basis is not satisfied with the results of the
due diligence exercise on the Target Group, the Target Mine and their related business, operations
and other status which Smooth Way, its agents or professional advisers think necessary and appropriate
to conduct, the Deposit shall be refunded to Smooth Way and Smooth Way shall not be obliged to pay
the Further Deposit. In addition, if the conditions precedent to the Acquisition (details of which are
set out in the paragraph headed “Conditions precedent” below) are not fulfilled or waived on or
before the Long Stop Date, the Vendor shall within six months after the Long Stop Date repay to
Smooth Way an amount equivalent to the aggregate of the Deposit and the Further Deposit.
On 8 August 2007, the Further Deposit has been paid to the Vendor. The non-cash portion in a total
sum of HK$900 million shall be settled:
(i)
as to HK$135 million, at Completion by the Company’s issue and allotment of the Consideration
Shares to the Vendor;
(ii)
as to HK$365 million, at Completion by the Company’s issue to the Vendor (or such person(s)
as nominated by the Vendor) of the Tranche 1 Bonds; and
(iii)
as to HK$400 million, on the fifth Business Day following the date of receipt of the Mining
Licence in respect of the Target Mine, by the Company’s issue to the Vendor (or such person(s)
as nominated by the Vendor) of the Tranche 2 Bonds.
Status at Completion
At Completion, the Company will be required to pay items (i) and (ii) above (which together with the
payment of the Deposit and the Further Deposit, add up to HK$600 million out of the Consideration);
51% equity interests in the Target Company will be transferred to the Group; the Target Company
holds 100% interest in Hong Kong FSMI, which in turn holds 100% of Qinghai Senyuan, the holder
of the Exploration Licence of the Existing LRM Mine (i.e. including the Target Mine) which confers
to Qinghai Senyuan, the exploration rights of the Target Mine.
At Completion, the Mining Licence in respect of the Target Mine may not have been issued. In the
event the Mining Licence in respect of the Target Mine cannot be obtained by the Target Group
eventually, it has not been provided in the Share Transfer Agreement that the Deposit, the Further
Deposit and the Consideration Shares (i.e. item (i) above) above shall be returned by the Vendor to
the Company. However, in such event, the Tranche 2 Bonds will not be issued to the Vendor.
Shareholders’ attention is drawn to the paragraph headed “Risk Factors” below.
– 10 –
At Completion and before the Tranche 1 Bonds are converted by the Vendor (or such person(s) as
nominated by the Vendor), the Vendor will be interested in 22.08% of the issued share capital of the
Company. Assuming the Tranche 1 Bonds are converted by the Vendor (or such person(s) as nominated
by the Vendor) in full and taking into account the 25% restriction on the shareholding of the Vendor
in the Company upon conversion of the Convertible Bonds (details are set out in the paragraph headed
“Convertible Bonds” below), the Vendor will be interested in 25% of the issued share capital of the
Company.
Status when the Mining Licence is obtained
The Company will issue the Tranche 2 Bonds (i.e. item (iii) above) only if the Mining Licence in
respect of the Target Mine has been received by the Group. At this stage and with the Mining Licence
of the Target Mine, the Group will get the mining rights of the Target Mine through its indirect
shareholding in Hong Kong FSMI and Qinghai Senyuan.
Given that preparation work for application for the Mining Licence of the Target Mine is being made
and application for the Mining Licence of the Target Mine will be made in the fourth quarter of 2007,
the Directors consider that, provided that the application documents are in order and barring unforeseen
circumstances, there is no legal obstacle for obtaining the Mining Licence of the Target Mine. For an
introduction to the possible unforeseen circumstances which might affect the grant of the Mining
Licence to the Group, please refer to the paragraph headed “Risk Factors” below.
The parties agree that the Convertible Bonds could be issued to such person(s) as nominated by the
Vendor to permit the Vendor to hold the Convertible Bonds through companies owned/controlled or
to be owned/controlled by her.
Particulars of the Consideration Shares and the Convertible Bonds are set out in the paragraph headed
“Non-cash portion of the Consideration” below.
Source of financing of the Consideration
As set out in the announcement issued by the Company dated 20 July 2007 regarding the placing
agreement entered into by the Company and the placing agent, Guotai Junan Securities (Hong Kong)
Limited on 18 July 2007 to place 135,000,000 new Shares at HK$0.69 per Share, net proceeds of
approximately HK$90,700,000 have been raised, which were used to settle the cash portion of the
Consideration.
With regard to the capital investment to bring the Target Mine to commercial production, the Company
intends to finance the same by the Company’s internal resources, bank borrowings, and if considered
appropriate, proceeds from any future fund raising activity of the Company. The Company has
appointed Macquarie (Hong Kong) Limited as its financial advisor to advise the Company on the
fund raising, which is intended to be finalised subsequent to the completion of the feasibility study
on the Target Mine. The capital investment shall be significantly contingent on the results of those
fund raising activities, after the completion of the feasibility study on the Target Mine.
– 11 –
The estimated funds required of the Group for the two years following the issue of this circular is
RMB1,080,000,000, in order to bring the Mineral Resources of the Target Mine into commercial
production, which includes the funds required to obtain the Mining Licence and to conduct a drilling
program to further exploit the proven reserves of the Target Mine. As it will typically take 12 months to
18 months to establish the mining operation upon obtaining of the Mining Licence, the Target Mine is
not expected to generate any revenue for at least the next 12 months from the date of this circular.
If the Group cannot in the two years following the issue of this circular raise sufficient proceeds from
any future fund raising activities of the Company or bank borrowings mentioned above, the Group
may consider establishing the mining operation by stages and it may take relatively longer time to
bring the Mineral Resources of the Target Mine into commercial production.
Adjustment to the Consideration
The Consideration shall be adjusted if, as at the Completion Date:
(1)
the audited consolidated net tangible assets of the Target Group (before any adjustment in
relation to any valuation of the Mining Licence(s) in respect of the Target Mine or the Existing
LRM Mine) as shown in the Completion Accounts is less than HK$50 million, the Consideration
shall be reduced by an amount equal to 51% of the shortfall; and/or
(2)
there are other borrowings, obligations or liabilities (whether actual or contingent) of the Target
Group owing to any other party (whether the Vendor or its associates or otherwise) and reflected
in the Completion Accounts, the Consideration shall be reduced by an amount equal to 51% of
the aggregate amount of such additional liabilities; and/or
(3)
there are guarantees given by any members of the Target Group whatsoever and howsoever, the
Consideration shall be reduced by an amount equal to 51% of the aggregate amount of such
additional liabilities,
provided that if the shortfall in the audited consolidated net tangible assets of the Target Group as set
out in paragraph (1) above is caused by the same liabilities as set out in paragraph (2), the above
adjustment to the Consideration shall be made once and shall not be double-counted.
The parties to the Share Transfer Agreement shall procure that audit of the Completion Accounts be
completed within 90 days of the Completion Date, unless a longer period is required for such audit.
In the event there is a reduction of the Consideration pursuant to the above, Smooth Way shall, issue
and deliver to the Vendor, against the delivery up for cancellation of the then Convertible Bonds held
by it new Convertible Bonds for the balance of the Consideration payable on the basis of the
Consideration as adjusted and the Consideration would be adjusted only in this manner.
Basis of determination of the Consideration
The Consideration was determined after taking into consideration factors including the present prices
of titanium, iron and vanadium products and the estimated amount of the Mineral Resources of the
Target Mine — First Portion.
– 12 –
To the best knowledge of the Directors, the present market price of titanium, iron and vanadium
products are in the range of about RMB1,100 to RMB1,200 per tonne (for titanium concentrate),
about RMB2,150 to RMB2,200 per tonne (for direct reduced iron) and about RMB108,000 to
RMB110,000 per tonne (for direct reduced vanadium) respectively depending on factors such as the
grade of the products and the demand and supply. According to information provided by the Vendor,
the indicated Mineral Resources of the Target Mine — First Portion amounted to 16.2 million tonnes
at 19.5% total iron, 3.86% titanium (in the form of titanium oxide) and 0.03% vanadium (in the form
of vanadium oxide), and the valuation of the Target Mine — First Portion is estimated to be not less
than HK$2.0 billion. As set out in the paragraph headed “Conditions precedent’ below, one of the
conditions precedent to Completion of the Acquisition includes Smooth Way having obtained a
technical report issued by a qualified technical adviser that indicates the Target Mine — First Portion
has an indicated Mineral Resources of not less than 16 million tonnes.
The Consideration was reached after arm’s length commercial negotiations between the parties to the
Share Transfer Agreement. Based on the factors mentioned above, the Directors (including independent
non-executive Directors) consider that the terms of the Acquisition and the Consideration are normal
commercial terms and fair and reasonable.
A valuation report on the Target Mine — First Portion prepared by LCH is set out in Appendix IV to
this circular. As set out in the valuation report, the value of the Target Mine — First Portion as at 31
August 2007 was about RMB2,255,000,000. Based on such valuation, the Directors considered that
the Consideration was fair and reasonable.
Details of the estimated amount of the Mineral Resources of the Target Mine are set out in the paragraph
headed “Information on the Target Mine” below.
Consideration payable at Completion
As mentioned in the sub-paragraph headed “Status at Completion” under the paragraph headed “Share
Transfer Agreement” above, at Completion, the Company will be required to pay (i) HK$135 million
by way of allotment and issue of the Consideration Shares and (ii) HK$365 million by way of issue
of the Tranche 1 Bonds, which together with the payment of the Deposit and the Further Deposit, add
up to HK$600 million.
In arriving at the amount of HK$600 million payable at Completion, the Directors have taken into
account the following factors:
(a)
The Vendor has been taking the position that any amount to be paid at Completion must not be
less than 60% of the Consideration, which she considers to be normal commercial terms for
any transaction on arm’s length basis. If such term had not been agreed upon, the Vendor
would not have entered into the Share Transfer Agreement.
(b)
The Target Mine — First Portion occupies a site area of approximately 0.7 sq.km. The valuation
of the Target Mine — First Portion is estimated to be not less than HK$2 billion. The Target
Mine has a total site area of approximately 2 sq.km.. As set out in the technical report of the
Target Mine prepared by WGM contained in Appendix VII to this circular, with continued ongoing exploration by diamond drilling, the potential for increasing resources and reserves in
– 13 –
the proposed pit area and in the remaining portion of the Target Mine (i.e. the portion other
than the Target Mine — First Portion) is considered to be good. In such respect, the Directors
believe there is a fair chance for the valuation of the entire Target Mine to be greater than
HK$2 billion.
(c)
So far as the Directors are aware, it is more common in the PRC for the holder of a mineexploration licence to be granted mine-exploitation licence than it is not. There has not been
any finding of any material breach of any condition under the Exploration Licence granted to
Qinghai Senyuan. The Directors also note that Qinghai Senyuan and other members of the
Target Group have been conducting exploration activities in accordance with the Exploration
Licence and taking all other preliminary steps for obtaining the Mining Licence. There is no
evidence to show that the Target Group cannot obtain the Mining Licence.
(d)
If the Share Transfer Agreement were not entered into in accordance with the existing terms
and conditions, the Company would lose the opportunity of pursuing the investment in the
Target Mine. Alternatively when the share transfer agreement were to be entered into upon (1)
further exploration of the Target Mine, which proves up a high quantity of indicated Mineral
Resources, and/or (2) the obtaining of the Mining Licence by the Target Group, the consideration
of the Target Mine would increase due to the inherent de-risking.
On balance, the Directors consider that it is in the interest of the Company to secure the Share Transfer
Agreement now in order to avoid a possible higher Consideration. Taking into account of the above
and in order to safeguard the interest of the Company and its shareholders, the Directors convinced
the Vendor to agree to receiving the balance of the Consideration in the sum of HK$400 million only
upon the obtaining of the Mining Licence, while the Company accepting the term of paying HK$600
million upon Completion.
Conditions precedent
Completion of the Acquisition is subject to the following conditions precedent:
(a)
Smooth Way having obtained a PRC legal opinion (in such form and substance to its satisfaction),
covering matters relating to the PRC Entities and the Target Mine;
(b)
Smooth Way having obtained a technical report issued by a qualified technical adviser that
indicates the Target Mine — First Portion has an indicated Mineral Resources of not less than
16 million tonnes;
(c)
the Listing Committee of the Stock Exchange having granted or having agreed to grant the
listing of, and permission to deal in, the Consideration Shares and the Conversion Shares;
(d)
the approval by the Shareholders (or, as the case may be, the independent Shareholders) at the
EGM of the Share Transfer Agreement and the transactions contemplated thereby (including
but not limited to the allotment and issue of the Consideration Shares or the Conversion Share)
and all other consents and acts required under the Listing Rules having been obtained and
completed or, as the case may be, the relevant waiver from compliance with any of such rules
having been obtained from the Stock Exchange;
– 14 –
(e)
(if required) all requisite waivers, consents and approvals from any relevant governments or
regulatory authorities of Hong Kong in connection with the transactions contemplated by the
Share Transfer Agreement having been obtained;
(f)
evidence to the reasonable satisfaction of Smooth Way that a sum of HK$50 million shall after
the date of the Share Transfer Agreement but before the Completion Date have been injected as
equity capital into Hong Kong FSMI;
(g)
Smooth Way being satisfied, from the date of the Share Transfer Agreement and at any time
before the Completion, that the representations, warranties and undertakings given under the
Share Transfer Agreement remain true, accurate, not misleading or in breach in any material
respect and that no events have suggested that there were any breach in any material respect of
any warranties, representations and undertakings given by the Vendor or other provisions of
the Share Transfer Agreement by the Vendor;
(h)
Smooth Way being satisfied that, from the date of the Share Transfer Agreement to Completion,
there has not been any material adverse change (being any change which has a material and
adverse effect on the financial position, business or operations of the Target Group as a whole)
in respect of any member of the Target Group; and
(i)
the Vendor providing Smooth Way with a confirmation or other documents, showing that all
fees required to be paid by Qinghai Senyuan to the State-owned Land and Resources Authority
of the PRC and/or other governmental authorities in respect of exploration of the Target Mine
having been fully paid and there is no outstanding fees.
The PRC legal opinion referred to in condition (a) above is required to cover the following areas:
(A)
whether the PRC Entities have been duly established and validly subsisting;
(B)
whether the PRC Entities have obtained all relevant operating permits required at the time of
their establishment and such permits remaining valid;
(C)
the PRC Entities’ legality of the operation and business;
(D)
if required, whether the PRC Entities have obtained and effected all necessary approval,
authorisation, consent, registration and filings required (where applicable) in relation to the
Share Transfer Agreement, and the transactions contemplated thereunder;
(E)
whether Qinghai Senyuan has obtained the Exploration Licence(s) in respect of the Existing
LRM Mine and whether such licence(s) are in full force and effect; and whether the registered
capital of Qinghai Senyuan has been paid up to the extent of no less than RMB20 million;
(F)
whether each of the companies of the Target Group has obtained the rights to use and occupy
all the properties leased by the Target Group; and
(G)
such other aspects of PRC law as Smooth Way may reasonably consider appropriate or relevant
to the transactions contemplated by the Share Transfer Agreement.
– 15 –
The PRC legal opinion referred to in condition (a) above would only cover the PRC Entities but not
the whole Target Group. As the principal operation of the Target Group is carried out by the PRC
Entities in the PRC, a PRC legal opinion covering the PRC Entities (and it being one of the conditions
precedent to the Share Transfer Agreement) is considered important, necessary and sufficient. The
other members of the Target Group incorporated in Hong Kong and BVI are investment holding
companies only and have not had any operation since their incorporation. Legal opinion on such
members is not considered of such significance to be a condition precedent to the Share Transfer
Agreement.
Smooth Way has the right to waive in writing the conditions (b), (f), (g), (h) and (i) mentioned above.
The technical assessment report mentioned in condition (b) above is expected to be required for
ascertaining the market value of the Target Mine — First Portion. However, if the market value of the
Target Mine — First Portion can be determined by an independent qualified valuer to the satisfaction
of Smooth Way without such technical assessment report, Smooth Way may waive such condition. If
the conditions mentioned above have not been fulfilled in full (or, where applicable, waived by Smooth
Way in writing) on or before the Long Stop Date, the Share Transfer Agreement shall lapse and be of
no further effect and none of the parties shall have any claims against or liability to the other parties
(other than in respect of any antecedent breaches) under the Share Transfer Agreement.
As at the Latest Practicable Date, except condition (b) which has been fulfilled as the Company has
been provided with the technical report set out in Appendix VII to this circular, none of the conditions
mentioned above was fulfilled or waived, the obtaining of the Mining Licence of the Target Mine is
not made as a condition precedent to the Share Transfer Agreement given that the application for the
Mining Licence is subject to regulatory procedure for which a definite timeframe is not provided.
However, it has been agreed that the Tranche 2 Bonds in the principal amount of HK$400 million
will only be issued to the Vendor (or such person(s) as nominated by the Vendor) on the fifth Business
Day following the date of receipt of the Mining Licence in respect of the Target Mine. Smooth Way
is only required to pay the balance of the Consideration in the sum of HK$400 million only after the
Mining Licence has been obtained.
It is a commercial decision that the Acquisition is not made conductible upon the obtaining of the
Mining Licence of the Target Mine at Completion. The Directors consider that in the event where (1)
further exploration of the Target Mine proves up a higher quantity of indicated Mineral Resources
and/or (2) the Mining Licence is obtained, the consideration of the Target Mine will increase due to
the inherent de-risking. Accordingly, the Directors consider that it is in the interest of the Company
to secure the Share Transfer Agreement now to avoid a possible higher Consideration for the said
reasons.
Taking into account of the above, the Directors consider that it is in the interest of the Company not
to make the Acquisition conditional upon the obtaining of the Mining Licence of the Target Mine.
The Company will issue further announcement to update the Shareholders the status of obtaining of
the Mining Licence of the Target Mine as and when appropriate.
– 16 –
Completion
Completion of the Acquisition shall take place on the fifth Business Day after the fulfillment (or
waiver) of the last of the conditions precedent referred to under the paragraph headed “Conditions
precedent” above (other than conditions (g) and (h)) or such other date as the parties to the Share
Transfer Agreement shall agree in writing.
CALL OPTION
Upon Completion, among other persons, Smooth Way, the Target Company and the Vendor will enter
into the Shareholders’ Agreement, pursuant to which, the Vendor, in consideration of HK$1, will
irrevocably grant to Smooth Way a call option (“Call Option”) to require the Vendor to sell to Smooth
Way all those issued shares held by the Vendor in (and, where applicable, the shareholder’s loans
advanced by the Vendor (or its associates) to) the Target Company as at the date of the exercise of the
Call Option (“Call Option Shares”) at the Call Option Price (as defined below), subject to the terms
and conditions of the Shareholders’ Agreement.
The exercise of the Call Option is at the sole discretion of Smooth Way.
The price of all the Call Option Shares (“Call Option Price”) shall be HK$960.78 million or if the
Call Option is exercised in respect of only part of the Call Option Shares, the Call Option Price for
such part shall be adjusted on a pro-rata basis.
The Call Option may be exercised by Smooth Way in whole or in part from time to time during the
period commencing on the Completion Date and expiring on the second year of the Completion Date
(both dates inclusive), provided that the exercise of the Call Option and/or the completion of the
purchase of the Call Option Shares shall be subject to the approval by the independent shareholders
of the Company and in compliance with the relevant Listing Rules (or such listing rules to which the
Company is subject) at the material time.
The Company will issue a separate announcement and fully comply with the applicable requirements
under the Listing Rules as and when appropriate if Smooth Way exercises the Call Option.
FIRST RIGHT OF REFUSAL
It will also be provided in that Shareholders’ Agreement that in the event that the Vendor wishes to
transfer to an independent third party any or all of its right, benefit, title and/or interest to of and/or in
the Carve-out Mine, the Vendor shall first offer the interest in the Carve-out Mine to Smooth Way at
the same price and terms. Within a period of one month from the date of Smooth Way’s receipt of the
offer notice of the Vendor, Smooth Way shall be entitled (but not obliged) to accept the offer made by
the Vendor. If, at the end of the said one-month period, Smooth Way shall not have accepted the offer,
all pre-emptive rights interest in the Carve-out Mine offered for sale shall lapse. In such event, the
Vendor may transfer any or all of the interest in the Carve-out Mine to such third party purchaser in
one or more transactions on terms no more favourable than as set forth in the offer notice.
– 17 –
REORGANISATION
Pursuant to the Reorganisation which has been or will be carried out for the purpose of the transactions
contemplated under the Share Transfer Agreement:
(i)
the entirety of the Shareholder Loans (which was in the sum of about HK$31,434,000 as at
30 June 2007) will be waived, capitalised by way of the Loan Capitalisation such that
immediately before the Completion, the number of shares of Hong Kong FSMI in issue will be
70 million;
(ii)
all the issued Shares in Hong Kong FSMI will be held by the Target Company by way of
allotment and issue of new shares in Hong Kong FSMI to the Target Company or (as the case
may be) transferred by the Vendor to the Target Company;
(iii)
the Target Group will make application or take preliminary steps to make application for the
Mining Licence in respect of the Target Mine for Mineral Resources of no less than 16 million
tonnes;
and all the above steps under the Reorganisation shall be consummated on or before the Completion.
The corporate structure before and after the Reorganisation and at Completion are set out below:
At the time of signing the Share Transfer Agreement and before the Reorganisation
The Vendor
100%
100%
Target Company
Hong Kong FSMI
100%
Qinghai Senyuan
Target Mine (Note)
Carve-out Mine
– 18 –
After completion of the Reorganisation
The Vendor
100%
Target Company
100%
Hong Kong FSMI
100%
Qinghai Senyuan
Target Mine (Note)
Carve-out Mine
At Completion
The Vendor
Smooth Way
49%
51%
Target Company
100%
Hong Kong FSMI
100%
PRC Entities
other than Qinghai
Senyuan
Qinghai Senyuan
Target Mine (Note)
Note: It refers to the exploration rights of the Target Mine.
– 19 –
As at the Latest Practicable Date, the geological exploration required for obtaining the Mining Licence
of the Target Mine has been substantially completed and the associated exploration report (which is
prepared for application for the Mining Licence of the Target Mine) has also been completed. A project
feasibility study and an integrated mine utilization plan required for the application for the Mining
License of the Target Mine are underway. Application for the Mining License of the Target Mine is
expected to be made in the fourth quarter of 2007. A technical report by an independent qualified party
has also been prepared.
INFORMATION ON THE GROUP
The Group is principally engaged in the design, manufacture and sale of a wide range of carpets
under its own brand name and the trading of carpets of various brand names. The Group has a principal
subsidiary in Huizhou, the PRC. The Board does not have any present intention to change its principal
business to mining and intends to continue conducting its carpet business.
Under the Share Transfer Agreement, upon Completion, the Company is required to appoint two
persons nominated by the Vendor as Directors (subject to such persons not being disqualified under
any laws or the Listing Rules from assuming the office of Director). There are currently eleven Directors
in the Company. The Company plans to recruit an expert in the mining industry and/or an individual
with relevant qualifications and experience in mining to oversee the Group’s investment in the Target
Group.
INFORMATION ON THE VENDOR
The Vendor is a seasoned entrepreneur with broad experience in investment and business management,
such as investment in natural resources and forestry projects in China. Between 1985 and 1992, she
invested in the Dong Hu Hotel in Haikou, Hainan and participated actively in its operation and
management. During the same period, the Vendor was also involved in investments in golf courses
and resorts.
Since 2001, the Vendor has been a shareholder of Crystal Health Club Company Limited in Hong
Kong, which established Qinghai Senyuan, a wholly foreign owned enterprise in the PRC, in 2004.
Qinghai Senyuan holds the exploration rights of the Existing LRM Mine (as constituted by the Target
Mine and the Carve-out Mine). In 2005, the Vendor set up Hong Kong FSMI, which is an investment
holding company incorporated in Hong Kong on 26 September 2005 whose entire issued share capital
is ultimately beneficially owned by the Vendor before Completion. Hong Kong FSMI became the
sole investor of Qinghai Senyuan in early 2007, when Crystal Health Club Company Limited transferred
the entire registered capital of Qinghai Senyuan to Hong Kong FSMI. Qinghai Senyuan obtained the
first Exploration Licence of the Existing LRM Mine (as constituted by the Target Mine and the
Carve-out Mine) on 25 November 2004. It obtained the current Exploration Licence of the Existing
LRM Mine on 31 December 2006 and such licence will expire on 25 November 2008. Pursuant to the
current Exploration Licence of the Existing LRM Mine, Qinghai Senyuan is the holder of the
exploration rights of the Existing LRM Mine.
– 20 –
Based on the above, the Vendor, via her 100% interest in Hong Kong FSMI, which holds 100%
interest in Qinghai Senyuan, is the ultimate holder of the exploration rights of the Target Mine as
conferred by the current Exploration Licence of the Existing LRM Mine.
In 2006, the Vendor established Champion Forest Source Holdings Company Limited in Hong Kong,
engaging in technologies relating to environmental and ecological system development. The Vendor
is the Chairman of Champion Forest Source Holdings Company Limited, Hong Kong FSMI and
Qinghai Senyuan.
Due diligence work performed by the Company
In order to ascertain the ultimate beneficial ownership of the Exploration Licence of the Target Mine,
the Company has performed and arranged for the performance of the following due diligence work:
(a)
review of the copy corporate documents of the PRC Entities and the Existing LRM Mine (as
constituted by the Target Mine and the Carve-out Mine) and the Exploration Licence held by
Qinghai Senyuan in respect of the Existing LRM Mine, as provided by the Vendor;
(b)
conducting company search with the Hong Kong Companies Registry in respect of Hong Kong
FSMI (being the registered holder of the entire registered capital in Qinghai Senyuan); and
(c)
reviewing a preliminary legal opinion from a PRC legal adviser on 27 June 2007, who mentioned
that they reviewed the Exploration Licence held by Qinghai Senyuan in respect of the Existing
LRM Mine, and that according to their telephone enquiry with an officer of the Ministry of
Land and Resources, Qinghai Senyuan obtained the exploration right of the Existing LRM
Mine.
In addition, the Company has engaged Jingtian & Gongcheng as the Company’s PRC legal advisers
to perform the due diligence over the PRC Entities and the Target Mine, and to issue the legal opinion
as mentioned in condition precedent (a) set out in the paragraph headed “Conditions precedent”
above.
INFORMATION ON THE PRC ENTITIES
Qinghai Senyuan is a wholly foreign owned enterprise established in the PRC on 8 April 2004 and is
wholly owned by Hong Kong FSMI. As set out in the paragraph headed “Reorganisation” above,
following the completion of the Reorganisation, the Target Company will hold 100% in Hong Kong
FSMI which wholly owns Qinghai Senyuan. The current and on-going operation of Qinghai Senyuan
principally includes the exploration of the Existing LRM Mine including surveying and diamond
drilling; chemical assaying of the samples obtained from the Target Mine; metallurgical testing of the
samples obtained from the Target Mine; feasibility study for the development of the Target Mine; and
preparatory work for the application of the Mining Licence. At present and as set out above, Qinghai
Senyuan is the holder of the Exploration Licence of the Existing LRM Mine (i.e. which covers both
the Carve-out Mine and the Target Mine). The Exploration Licence confers Qinghai Senyuan the
rights to, among other things, (1) carry out exploration (such as diamond drilling) of the Mineral
Resources of the Target Mine; (2) facilitate the construction of wiring at the Target Mine and
neighboring areas for communication purpose and facilitate the supply of water and electricity to the
– 21 –
Target Mine; (3) access to the Target Mine and neighboring areas; (4) use the land on a temporary
basis in accordance with the exploration work being carried out at the Target Mine; (5) be entitled to
priority in exploring new type(s) of mineral resources (if any) discovered at the Target Mine; and (6)
be entitled to priority in obtaining the mining right at the Target Mine. Whilst the Exploration Licence
confers such rights to Qinghai Senyuan, under the relevant PRC laws, the ownership as to the Target
Mine still vests with the PRC government but not Qinghai Senyuan, but this would not affect the
rights of exploration as conferred to Qinghai Senyuan under the Exploration Licence.
It is provided in the Share Transfer Agreement that all such rights and interests to and in the exploration
in respect of the Carve-out Mine held by Qinghai Senyuan will, at nil consideration, be transferred
and/or exclusively licensed to the Vendor or such entity controlled by the Vendor.
According to the PRC legal opinion issued by Jingtian & Gongcheng, Qinghai Senyuan has obtained
full legal and beneficial title in respect of the exploration of the Target Mine, and is the legally
interested party in the exploration of the Target Mine. Thus, Qinghai Senyuan, after complying with
the rules and regulations in China and having registered in the relevant governmental authorities, has
the right to transfer and assign part of its exploration rights in the Target Mine.
The PRC Entity to be set up will be owned by Hong Kong FSMI in Inner Mongolia for the mining of
the Mineral Resources from the Target Mine and for the mineral dressing operation, and in Yumen
(Gansu) for the processing of the mineral concentrates obtained from the mineral dressing processes.
As at the Latest Practicable Date, an application for establishment of PRC Entity is being made. Such
PRC Entity, after establishment, will make application for the Mining Licence of the Target Mine.
The Mining Licence of the Target Mine, if granted, will confer such PRC Entity the right to (1) carry
out mining activities in the Target Mine for the duration as stipulated in the Mining Licence; (2) sell
the Mineral Resources extracted from the Target Mine; and (3) construct the necessary facilities and
to apply in accordance with the PRC land administration laws and regulations for the land use right at
the Target Mine for the purpose of such mining activities.
FINANCIAL INFORMATION ON MEMBERS OF THE TARGET GROUP
Immediately upon Completion of the Acquisition, the Target Company will be owned as to 51% by
Smooth Way and as to 49% by the Vendor, Hong Kong FSMI and Qinghai Senyuan will become
wholly-owned subsidiaries of the Target Company pursuant to the Reorganisation.
According to the accountants’ report on the Target Group as set out in Appendix IIA to this Circular,
the Target Group had no turnover for the period from 8 April 2004 (being the date of incorporation of
one of its subsidiaries Qinghai Senyuan) to 31 December 2004 and for the years ended 31 December
2005 and 2006 and for the six months period ended 30 June 2007. No turnover was recorded by the
Target Group as the Target Group did not commence commercial production during the periods.
– 22 –
The Target Group recorded net loss before taxation and after taxation of approximately HK$1,149,000
for the period from 8 April 2004 to 31 December 2004 and HK$1,702,000 for the year ended
31 December 2005 and HK$9,780,000 for the year ended 31 December 2006 and HK$5,991,000 for
the six months period ended 30 June 2007. The combined losses for the periods were mainly due to
the general and administrative expenses.
As at 31 December 2004 and 2005, the Target Group had combined net assets of HK$348,000 and
HK$518,000 respectively. As at 31 December 2006 and 30 June 2007, the Target Group had combined
net liabilities of HK$9,077,000 and HK$18,750,000 respectively. As at 30 June 2007, the Target
Group had capital commitments of HK$3,065,000.
As set out in the paragraph headed “Emphasis of matter” in the accountants’ report on the Target
Group contained in Appendix IIA to this circular (i.e. page 139 of this circular), as at 30 June 2007,
the Target Group had deficit in equity of approximately HK$18,750,000 and the Target Group also
incurred a loss attributable to equity holder of the Company of approximately HK$5,991,000 for the
period then ended.
In addition, in preparing the financial information (“Relevant Financial Information”) in the
accountants’ report on the Target Group contained in Appendix IIA to this circular, the director of
Target Company has given consideration to the future liquidity of the Target Group in light of its
deficit in equity as at 30 June 2007 and loss attributable to the equity holder of Target Company for
the period ended 30 June 2007 mentioned above. The Relevant Financial Information has been prepared
on a going concern basis on the assumption that the Target Group and Target Company will continue
to operate as a going concern. The going concern basis has been adopted on the basis that the
shareholder of Target Company has agreed to provide additional share capital of HK$50,000,000 and
the shareholder’s loan of HK$31,464,000 will be capitalised and transferred to equity of Target
Company before Completion. The above matters indicate the existence of a material uncertainty
which may cast significant doubt about the Target Group’s ability to continue as a going concern.
Given that it is common that companies engaged in exploration and exploitation of natural resources
incur loss and have deficit in equity at exploration stage and the Target Group was engaged in the
exploration of the Existing LRM Mine during the relevant financial period, the Directors are of the
view that the risks of going concern and substantial capital requirement are generic risks relating to
companies in the exploration and mining industry, instead of risks facing only the Target Group. The
Board has considered the generic risks relating to companies in the exploration and mining industry
when the Board proposed to diversify the Group’s business into exploration and mining business; the
Board is of the view that the matters highlighted by the Company’s auditors in the accountants’
report on the Target Group contained in Appendix IIA to this circular as mentioned above do not have
a material adverse impact on the Board’s evaluation of the Acquisition.
– 23 –
Set out below are the financial information of the individual companies comprising the Target Group
(excluding the PRC Entities (other than Qinghai Senyuan) and intra group balances):
From
8 April 2004
(date of
incorporation
of Qinghai
Senyuan) to
31 December
2004
HK$’000
For the year ended
31 December
31 December
2005
2006
HK$’000
HK$’000
For the six
months ended
30 June
2007
HK$’000
Target Company
Revenue
Net loss before taxation
Net loss after taxation
Net liabilities
—
—
—
—
—
5
5
(5)
—
4
4
(9)
—
—
—
(9)
Hong Kong FSMI
Revenue
Net liabilities
—
—
—
—
—
227
227
(227)
—
7,105
7,105
(7,331)
—
4,563
4,563
(11,893)
Qinghai Senyuen
Revenue
Net assets/(liabilities)
—
1,149
1,149
348
—
2,670
2,670
(1,737)
—
1,428
1,428
(6,848)
—
1,471
1,471
750
Upon Completion, the Target Company will become a non wholly-owned subsidiary of the Company
and its combined financial results will be consolidated with those of the Group.
INFORMATION ON THE TARGET MINE
The Target Mine is located in Inner Mongolia, the PRC. A technical report in respect of the Target
Mine is set out in Appendix VII to this Circular. As set out in the technical report, the indicated
Mineral Resources of the Target Mine — First Portion (an area of approximately 0.7 square km and
within the Target Mine) amounted to 16.2 million tonnes at 19.5% total iron (TFe), 3.86% titanium
(TiO2) and 0.03% vanadium (V2O5). At present, the Exploration Licence in respect of the Existing
LRM Mine (which confers the right to conduct exploration work for the Mineral Resources in the
areas of the Target Mine and the Carve-out Mine) has already been obtained and is held by Qinghai
Senyuan. The rights conferred by the Exploration Licence are set out in the paragraphs headed
“Introduction” and “Information on the PRC Entities” above. As at the Latest Practicable Date, the
Mining Licence of the Target Mine has yet to be obtained.
The Target Mine and the Carve-out Mine form the Existing LRM Mine. The location and boundaries
of the Carve-out Mine and the Target Mine are determined by reference to the co-ordinates of such
mines.
– 24 –
Appendix IV to this circular is the valuation report of the Target Mine — First Portion prepared by
LCH, in which it is set out, among other things, that the value the Target Mine — First Portion as at
31 August 2007 would be approximately RMB2,255 million. The Target Mine is evaluated on the
basis of continued use and as part of a going concern business of Qinghai Senyuan. The continued
use premise assumes that the Target Mine will be used for the purpose for which it was conceived or
is currently carried out. Please refer to pages 187 to 188 for the assumptions adopted in the valuation
of the Target Mine — First Portion, and page 209 for the conclusion made by LCH.
Appendix VII to this circular is the technical report of the Target Mine prepared by WGM, in which
it is set out, among other things, the Target Mine — First Portion (an area of approximately 0.7
square km and within the Target Mine) has an estimated indicated Mineral Resources of not less than
16.2 million tonnes at 19.5% TFe and 3.86% TiO2 and 0.03% V2O5 respectively. The technical report
also concludes that with continued on-going exploration by diamond drilling, the potential for
increasing resources and reserves in the proposed pit area and in the remaining portion of the Target
Mine (i.e. the portion other than the Target Mine — First Portion) is considered to be good.
The technical report has been prepared by WGM to comply with the guidelines of Canadian Securities
Administrators National Instrument 43-101 that governs all public disclosure of scientific and technical
information concerning mineral projects based on information prepared by a qualified person. Please
refer to pages 288 to 289 for the design assumptions and pages 309 to 311 for the conclusions and
recommendations made by WGM.
Both the valuation report prepared by LCH and the technical report prepared by WGM cover the
Target Mine only and the Carve-out Mine is excluded.
Based on the valuation of the Target Mine — First Portion prepared by LCH, the Directors consider
that the Consideration for the Acquisition (totalling HK$1,000 million), representing 51% interest of
the whole Target Mine is fair and reasonable. Further, given the current amount of mineral resources
and the potential for increasing resources and reserves (as per the technical report on the Target Mine
prepared by WGM), the Directors consider that the Acquisition would be beneficial to the Group.
.
REASONS FOR THE ACQUISITION
As set out in the Company’s annual report for the year ended 31 December 2006, the Group continued
to focus on the carpet manufacturing and trading business and to take productive steps to improve
profitability and market share. On the other hand, the Group has been looking into the opportunity of
other business and exploring more investment to offer sustainable growth to its business.
In March 2007, the Group acquired a carpet trading subsidiary to strengthen the base of its core
business, details of which were set out to the Company’s announcement and circular dated 14 December
2006 and 2 January 2007 respectively. In addition, in the extraordinary general meeting of the Company
held on 15 June 2007, the Shareholders had approved the investment in Hebei Da Sheng Warranty
Company Limited, a company incorporated in Zhangjiakou, Hebei Province, PRC which engages in
logistic, investment and project guarantee business, to diversify the Group’s business. Please refer to
the Company’s announcement and circular dated 29 March 2007 and 28 May 2007 respectively for
further details in this regard.
– 25 –
The Directors consider that the Group may broaden its source of income by diversifying into the
exploration and mining of natural resources. The purpose of the Acquisition is to explore the
opportunities for deriving from the sales of the Mineral Resources to be extracted from the Target
Mine when the Mining Licence is obtained. It is currently expected that the Target Group will generate
revenue in 2009, if the Mining Licence is obtained.
The prices of metals such as iron, titanium and vanadium have been rising over the past years. The
Directors believe that the demand for metals such as iron, titanium and vanadium will be considerable
given the fact that the economy of the PRC will grow rapidly, and therefore the national consumption
of such metals will rise in the near future. The Directors therefore believe that the Acquisition enables
the Group to diversify into the iron, titanium and vanadium mining business which has good future
prospect.
Based on the technical report prepared by WGM and contained in Appendix VII to this circular, the
indicated Mineral Resources of the Target Mine—First Portion amounted to 16.2 million tonnes at
19.5% TFe, 3.86% TiO 2 and 0.03% V 2O 5 respectively, which represents an estimate of proven
exploitable reserves at the Target Mine—First Portion. The technical report also concludes that with
continued on-going exploration by diamond drilling, the potential for increasing resources and reserves
in the proposed pit area and in the remaining portion of the Target Mine (i.e. the portion other than
the Target Mine - First Portion) is considered to be good. Given the current amount of mineral resources
and the potential for increasing the mineral resources and reserves estimates, the Directors consider
that the Acquisition would be beneficial to the Group.
As per the valuation of the Target Mine — First Portion prepared by LCH and contained in Appendix
IV to this circular, the value of the Target Mine — First Portion as at 31 August 2007 was approximately
RMB2,255 million. As such, the Directors consider that the Consideration for the Acquisition (totalling
HK$1,000 million), representing 51% interest of the whole Target Mine is fair and reasonable.
Shareholders’ attention is drawn to the fact that discounted cash flow method has been used in the
valuation of the Target Mine — First Portion as set out in Appendix IV to this circular and is accordingly
a deemed profit forecast under Rule 14.61 of the Listing Rules. The Directors consider that they have
made due and careful enquiry in determining the value of the Target Mine — First Portion as at 31
August 2007 as set out in Appendix IV to this circular. Please also refer to Part A of Appendix V to
this circular in which Macquarie (Hong Kong) Limited, the financial adviser appointed by the Company,
has opined that the forecasts upon which the valuation of the Target Mine — First Portion set out in
Appendix IV to this circular has been made, have been made after due and careful enquiry by the
Directors.
The Enlarged Group’s total assets and total liabilities will increase significantly after the Acquisition.
In addition, it is expected that the Acquisition will increase the Group’s profits in the future due to the
earnings of the Enlarged Group will be improved in long run when the Target Mine is under the
production stage, however, the possible risk factors may be considered in the paragraph headed “Risk
factors” below.
For the reasons set out in the sub-paragraph headed “Consideration payable upon Completion” under
the paragraph headed “Share Transfer Agreement” above, the Acquisition is structured into two stages
that Completion will take place before the Mining Licence of the Target Mine is obtained.
The Directors, including the independent non-executive Directors, consider that the terms of the
Acquisition (including the Consideration and the payment methods thereof) are fair and reasonable
and in the interest of the Company and the Shareholders as a whole.
– 26 –
FINANCIAL EFFECTS OF THE ACQUISITION
Upon completion, the Target Company will become a non-wholly owned subsidiary of the Company
and its consolidated financial results will be consolidated with those of the Group.
Set out below is a summary of the unaudited pro forma financial information of the Group (1) before
Completion, (2) at Completion but the Mining Licence has yet to obtain and, (3) at Completion and
upon obtaining the Mining Licence, prepared on the bases set out on pages 170 to 172 of this circular
and details of which are set out in Appendix III to this circular:
The Group
as at 30 June 2007
(Before Completion)
(Unaudited)
(HK$’000)
Pro forma of
the Enlarged Group
(At Completion but
the Mining Licence
has yet to obtain)
(Unaudited)
(HK$’000)
Pro forma of
the Enlarged Group
(At Completion
and upon obtaining
the Mining Licence)
(Unaudited)
(HK$’000)
Total assets
Total liabilities
Total net assets
Net current assets
Gearing ratio (total liabilities/total assets)
211,164
60,524
150,640
61,952
0.29
996,237
292,538
703,699
101,200
0.29
2,751,111
538,325
2,212,786
101,200
0.20
Loss for the year ended 31 December 2006
(46,157)
(55,937)
(55,937)
There is no variation to the remuneration payable to and benefits in kind receivable by the directors
of Smooth Way as a consequence of the Acquisition.
NON-CASH PORTION OF THE CONSIDERATION
CONSIDERATION SHARES
The Issue Price of the Consideration Shares of HK$0.5 per Consideration Share was determined after
arm’s length negotiations between the parties with reference to the recent market price of the Shares
and the net asset value per Share as at 31 December 2006 of HK$0.11, which represents (i) a premium
of approximately 354.55% to the net asset value per share as at 31 December 2006 of HK$0.11; (ii)
a discount of approximately 41.18% to the closing price of HK$0.85 per Share as quoted on the
Stock Exchange on 6 July 2007, the last trading day immediately prior to the date of the Share
Transfer Agreement; (iii) a discount of approximately 41.18% to the average of the closing prices of
HK$0.85 per Share as quoted on the Stock Exchange for the last five trading days immediately prior
to the date of the Share Transfer Agreement; (iv) a discount of approximately 40.19% to the average
of the closing prices of HK$0.836 per Share as quoted on the Stock Exchange for the last ten trading
days immediately prior to the date of the Share Transfer Agreement; and (v) a discount of approximately
21.88% to the closing price of HK$0.64 per Share as quoted on the Stock Exchange as at the Latest
Practicable Date.
– 27 –
As set out above, the Board has considered the net asset value per Share as at 31 December 2006 of
HK$0.11 in determining the Issue Price of the Consideration Shares. The Issue Price of the
Consideration Shares of HK$0.5 per Consideration Share represents a premium of about 354.55%
over the net asset value per Share as at 31 December 2006. Taking into account the fact that the
Group made losses for the previous two financial years ended 31 December 2006, the parties to the
Share Transfer Agreement consider that it is more appropriate to use the net asset value per Share of
the Company as at 31 December 2006 as the pricing benchmark for the Issue Price of the Consideration
Shares.
Based on the above, the Board considers the Issue Price of the Consideration Shares is fair and
reasonable and in the interests of the Shareholders. Given the aforesaid massive premium of the Issue
Price over the net asset value per Share as at 31 December 2006 and from the arm’s length commercial
negotiations between the parties to the Share Transfer Agreement, the Board considers a discount of
around 40% of the Issue Price from the market price of the Shares are fair and reasonable and in the
interest of the Shareholders.
The Consideration Shares represents approximately 28.34% of the existing issued share capital of
the Company and approximately 22.08% of the issued share capital of the Company as enlarged by
the issue of the Consideration Shares. Based on the market value per Share as of 6 July 2007 (i.e. the
closing price of HK$0.85 per Share), the aggregate value of the Consideration Shares is
HK$229,500,000. The Consideration Shares will be issued under a specific mandate proposed to be
obtained at the EGM. An application has been made to the Stock Exchange for the listing of, and
permission to deal in, the Consideration Shares.
Please refer to page 31 of this circular for, inter alia, the shareholding structure, of the Company
immediately after the issue of the Consideration Shares.
CONVERTIBLE BONDS
The principal terms of the Convertible Bonds are as follows:
Principal amount
HK$765 million in aggregate, as to the Tranche 1 Bonds of HK$365 million and as to the Tranche 2
Bonds of HK$400 million.
Form and denomination
The Convertible Bonds will be issued in registered form and in the denomination of HK$600,000
each.
Maturity Date
The respective Business Day falling on the fifth anniversary from the issue date of each of the Tranche
1 Bonds and Tranche 2 Bonds.
– 28 –
Interest
The Bonds shall accrue no interest.
Transferability
The Convertible Bonds will be transferable provided that (1) any transfer of the Convertible Bonds
shall be in the principal amount of HK$600,000 (or such lesser amount as may represent the entire
principal amount thereof); and (2) if the transfer is made to a connected person of the Company
(other than the associates (with the same meaning as defined under the Listing Rules) of the holder of
the Convertible Bonds (including the Vendor)), such transfer shall comply with the requirements
under the Listing Rules and/or the requirements imposed by the Stock Exchange (if any).
Conversion
The Tranche 1 Bonds are convertible in whole or in part into new Shares at any time from the period
commencing from the Completion and expiring on the fifth anniversary of such date of commencement
up to 4:00 p.m.; while Tranche 2 Bonds are convertible in whole or in part into new Shares at any
time from the period commencing from the fifth Business Day following the date of receipt of the
Mining Licence in respect of the Target Mine and expiring on the fifth anniversary of such date of
commencement up to 4:00 p.m., provided that no Conversion Bonds may be converted, to the extent
that following such exercise, a holder of the Conversion Bonds and parties acting in concert with it,
taken together, will directly or indirectly, control or be interested in 25% or more of the entire issued
Shares. The Convertible Bonds are convertible at the Conversion Price, subject to adjustment for,
among other matters, subdivision or consolidation of Shares, bonus issues, and rights issue. Any
conversion shall be made in amounts of not less than a whole multiple of HK$600,000 (save that if at
any time the outstanding principal amount of the Convertible Bond held by a holder of the Convertible
Bond is less than HK$600,000, or if a holder of the Convertible Bond intends to exercise the conversion
rights attached to the entire principal amount of all the Convertible Bonds held by him) and no fraction
of a Share shall be issued on conversion.
Save for the redemption of the Convertible Bonds upon the reduction of the Consideration set out in
the paragraph headed “Adjustment to the Consideration” above, any Convertible Bond which remains
outstanding by 4:00 p.m. (Hong Kong time) on the Maturity Date shall be converted automatically
into the Conversion Shares. However, there will not be any automatic conversion of the Convertible
Bonds at Maturity if such conversion will result in a holder of the Convertible Bonds and parties
acting in concert with it, taken together, will directly or indirectly, control or be interested in 25% or
more of the entire issued Shares. If at Maturity, a holder of the Convertible Bonds and parties acting
in concert with it, directly or indirectly, control or are interested in 25% or more of the entire issued
Shares, which result in no automatic conversion of the Convertible Bonds at Maturity as mentioned
above, the Company may consider liaising with the holders of the outstanding Convertible Bonds to
extend the maturity date of the Convertible Bonds, or the Company (or its subsidiaries) may consider
purchasing the Convertible Bonds. Should the maturity date of the Convertible Bonds be extended, it
will constitute a change in material terms of the Convertible Bonds and the Company will seek
Shareholders’ approval (or as the case may be, independent Shareholders’ approval) of such alteration
at general meeting in accordance with the requirements under the Listing Rules and comply with the
applicable requirements of the Listing Rules (including but not limited to Chapters 14 and 14A of the
Listing Rules).
– 29 –
Conversion Price
The Convertible Bonds shall be converted at the Conversion Price of HK$0.6 per Conversion Share.
The Conversion Price of HK$0.6 represents (i) a premium of approximately 445.45% to the net asset
value per Share as at 31 December 2006 of HK$0.11; (ii) a discount of approximately 29.41% to the
closing price of HK$0.85 per Share as quoted on the Stock Exchange on 6 July 2007, the last trading
day immediately prior to the date of the Share Transfer Agreement; (iii) a discount of approximately
29.41% to the average of the closing prices of HK$0.85 per Share as quoted on the Stock Exchange
for the last five trading days immediately prior to the date of the Share Transfer Agreement; and (iv)
a discount of approximately 28.23% to the average of the closing prices of HK$0.836 per Share as
quoted on the Stock Exchange for the last ten trading days immediately prior to the date of the Share
Transfer Agreement.
Conversion Price is generally at discount to the market price and the Board does not consider discount
of 28% to 29% as high discount, taking into account the net asset value per Share as at 31 December
2006 of HK$0.11.
Moratorium on Conversion Shares
The Convertible Shares may not be assigned or transferred in whole or in part to a connected person
of the Company (other than the associates (with the same meaning as defined under the Listing
Rules) of the holder of the Convertible Bonds (including the Vendor)) unless such transfer complies
with the requirements under the Listing Rules and/or the requirements imposed by the Stock Exchange
(if any).
Purchase
The Company or any of its subsidiaries may at any time and from time to time purchase the Convertible
Bonds that remain outstanding from the holders of such Convertible Bonds at any price as to be
agreed between the Company or such subsidiary and the relevant holder of the Convertible Bonds.
There is no minimum for each purchase. If the Company purchases the Convertible Bonds (which
may be an exercise of a right, but not obligation, of the Company to purchase the Convertible Bonds),
the Company will comply with the applicable requirements under the Listing Rules (including but
not limited to Rule 13.09, Chapters 14 and 14A of the Listing Rules).
Cancellation
Immediately upon redemption by the Company or purchase by the Company or any of its subsidiaries,
the Convertible Bonds so redeemed or purchased shall forthwith be cancelled. Any Convertible Bond
so cancelled shall not be re-issued or re-sold.
Adjustment to Conversion Price
The Conversion Price is subject to adjustments upon the occurrence of, among other matters,
subdivision or consolidation of Shares, capitalisation issues and rights issues.
– 30 –
Ranking
The Conversion Shares shall rank in all respects pari passu with all Shares in issue as at the date of
allotment.
Listing
The Convertible Bonds will not be listed on the Stock Exchange or any other stock exchange. An
application has been made to the Stock Exchange for the listing of, and permission to deal in, the
Conversion Shares.
Due to the significant dilutive nature of the Conversion Shares, the Company would adopt the following
additional disclosure measures if the transaction contemplated under the Share Transfer Agreement
is approved by the Shareholders:
(i)
the Company will make a monthly announcement (“Monthly Announcement”) on the website
of the Stock Exchange. Such announcement will be made on or before the fifth business day
following the end of each calendar month and will include the following details in a table form;
(a)
whether there is any conversion of the Convertible Bonds during the relevant month and
if so, details of the conversion(s), including the conversion date, number of new Shares
issued and conversion price for each conversion. If there is no conversion during the
relevant month, a negative statement to that effect;
(b)
the number of outstanding Convertible Bonds after the conversion, if any;
(c)
the total number of Shares issued pursuant to other transactions including Shares issued
pursuant to exercise of options under any share option scheme(s) of the Company; and
(d)
the total issued share capital of the Company as at the commencement and the last day of
the relevant months.
(ii)
in addition to the Monthly Announcement, if the cumulative amount of the new Shares converted
from the Convertible Bonds reaches 5% of the issued share capital of the Company as disclosed
in the last Monthly Announcement or any subsequent announcement made by the Company in
respect of the Convertible Bonds (as the case may be) (and thereafter in a multiple of such 5%
threshold), the Company will make an announcement on the website of the Stock Exchange
including details as stated in (i) (a)-(d) above for the period commencing from the date of the
last Monthly Announcement or any subsequent announcement made by the Company in respect
of the Convertible Bonds (as the case may be) up to the date on which the total amount of
Shares issued pursuant to the conversion amounted to 5% of the issued share capital of the
Company as disclosed in the last Monthly Announcement or any subsequent announcement
made by the Company in respect of the Convertible Bonds (as the case may be); and
(iii)
in respect of conversion of the Convertible Bonds, the Company will make an announcement
in the event any such conversion will result in an increase of its shareholding in the Company
by 5%.
Shareholding chart of the Company
The following chart sets out the percentage shareholding in the Company, (i) as at the date of signing
of the Share Transfer Agreement, (ii) as at the Latest Practicable Date; (iii) after issue of the
Consideration Shares but before the issue of the Conversion Shares under the Convertible Bonds; (iv)
after issue of the Consideration Shares and the Conversion Shares under the Tranche 1 Bonds (assuming
– 31 –
the Tranche 1 Bonds are converted in full) but before issue of the Conversion Shares under the Tranche
2 Bonds; and (v) after issue of the Consideration Shares and the Conversion Shares under the Tranche
1 Bonds and the Tranche 2 Bonds (assuming all the Convertible Bonds are converted in full), assuming
that there is no other change in the share capital of the Company from the date of signing of the Share
Transfer Agreement to the Completion Date:
After issue of
the Consideration
Shares and
the Conversion
Shares under
After issue of
the Tranche 1 the Consideration
Bonds
Shares and
After issue of
(assuming the
the Conversion
the Consideration Tranche 1 Bonds
Shares under
Shares but
are converted
the Tranche 1
As at
before
in full) but
Bonds and
the date of
the issue of before the issue of
the Tranche 2
signing of
As at
the Conversion
the Conversion Bonds (assuming
the Share
the Latest
Shares under
Shares under all the Convertible
Transfer
Practicable
the Convertible
the Tranche 2
Bonds are
Agreement
Date
Bonds
Bonds converted in full)
L & L Holdings Limited
(Note 1)
120,000,000
Shares
(14.67%)
120,000,000
Shares
(12.60%)
120,000,000
Shares
(9.81%)
120,000,000
Shares
(6.55%)
120,000,000
Shares
(4.80%)
The Vendor
(and/or its nominees)
0 Share
(0%)
0 Share
(0%)
270,000,000
Shares
(22.08%)
878,333,333
Shares
(47.97%)
(Note 2)
1,545,000,000
Shares
(61.86%)
(Note 2)
Public
697,720,000
Shares
(85.33%)
832,720,000
Shares
(87.40%)
832,720,000
Shares
(68.11%)
832,720,000
Shares
(45.48%)
832,720,000
Shares
(33.34%)
Total:
817,720,000
Shares
952,720,000
Shares
1,222,720,000
Shares
1,831,053,333
Shares
2,497,720,000
Shares
Notes:
1.
L & L Holdings Limited is an investment holding company incorporated in the Republic of the Marshall Islands,
the entire issued share capital of which is wholly and beneficially owned by Mr. Tsao Ke Wen Calvin, the chief
executive officer and executive Director.
2.
The CB Instrument provides that no Conversion Bonds may be converted, to the extent that following such exercise,
a holder of the Conversion Bonds (including the Vendor) and parties acting in concert with it, taken together, will
directly or indirectly, control or be interested in 25% or more of the entire issued Shares.
As set out in the above table, the maximum number of the Conversion Shares (assuming the conversion
rights attached to the Convertible Bonds are exercised in full) is 1,275,000,000 Conversion Shares,
which represents (1) approximately 133.83% of the existing issued share capital of the Company; (2)
approximately 104.28% of the issued share capital of the Company as enlarged by the issue of the
Consideration Shares; and (3) approximately 51.05% of the issued share capital of the Company as
enlarged by the issue of the Consideration Shares and the Conversion Shares.
– 32 –
Taking into account the restriction set out in note 2 to the above table, the Acquisition, which involves
the issue of the Consideration Shares and the Conversion Shares, will not result in change of control
(as defined in the Code on Takeovers and Mergers) of the Company.
RISK FACTORS
Possible risk factors which are faced by the Group are as follows:
Significant and continuous capital investment
The Target Mine requires significant and continuous capital investment; the Target Mine exploration
and production may not be completed as planned; may exceed the original budgets and may not
achieve the intended economic results or commercial viability. Actual capital expenditures for the
Target Mine may significantly exceed the Group’s working capital or budgets because of various
factors beyond the Group’s control, which in turn may affect the Group’s financial condition.
Mining Licence of the Target Mine
Qinghai Senyuan, a member of the Target Group, is the holder of the Exploration Licence of the
Existing LRM Mine, which confers to Qinghai Senyuan the right to, inter alia, carry out exploration
of the Mineral Resources of the Target Mine. The Target Group is conducting feasibility studies and
other preparation work for obtaining the Mining Licence of the Target Mine for the purpose of carrying
out mining of the Mineral Resources at the Target Mine. The obtaining of the Mining Licence of the
Target Mine is not a condition precedent to which the Acquisition is subject. At Completion, the
Mining Licence of the Target Mine may not have been obtained. There is no guarantee that the
Mining Licence of the Target Mine will be granted. If the Target Group fails to obtain the Mining
Licence of the Target Mine as planned, the Company may not recover fully the funds and resources it
has spent, and the future development of the Group may be adversely affected.
As the steps (if any) to be taken in the case that the Mining Licence of the Target Mine cannot be
obtained largely depend on the surrounding circumstances then prevailing, the Company does not
have any detailed plan at this stage, but would assure that all steps taken will be in the best interest of
the Company and the Shareholders as a whole, and in compliance with the applicable laws, regulations
and the Listing Rules.
Policies and regulations
Exploration and mining of the mineral resources in the PRC are subject to extensive governmental
regulations, policies and controls. Whilst the exploitation and beneficiation of iron ore is one of the
items listed in the Catalogue of “Encouraged Foreign Investment Industries” as promulgated by Decree
No. 24 of the National Development and Reform Commission and the Ministry of Commerce of the
PRC, there can be no assurance that the relevant government will not change the relevant laws and
regulations or impose additional or more stringent laws or regulations in future. Failure to comply
with the relevant laws and regulations in the exploration and mining projects may adversely affect the
future development of the Group.
– 33 –
Environmental protection policies
The mining and exploration business is subject to environmental protection law and regulations in
the PRC. If the Group fails to comply with existing or future environmental laws and regulations, the
Group may be required to take remedial measures, which could have a material adverse effect on our
business, operations, financial condition and results of operations.
LISTING RULES REQUIREMENTS
The Acquisition constitutes a very substantial acquisition for the Company under Chapter 14 of the
Listing Rules and is therefore subject to the reporting, announcement and Shareholders’ approval
requirements under Chapter 14 of the Listing Rules.
The Company has appointed Macquarie (Hong Kong) Limited as its financial adviser to advise the
Company on the Acquisition.
FINANCIAL ASSISTANCE FOR FUNDING THE EXPLOITATION OF THE TARGET MINE
Pursuant to the Shareholders’ Agreement (to be entered into upon Completion), if the Target Company
requires additional funding and, subject always to the applicable Listing Rules being complied with,
the Company shall raise funds required by the Target Company (or, as the case may be, Hong Kong
FSMI) and provide such funds to the Target Company (or, as the case may be, Hong Kong FSMI) in
the form of shareholder’s loans.
The above constitutes financial assistance under Rule 14A.13(2)(a) of the Listing Rules and accordingly
is a continuing connected transaction of the Company. However, as at the Latest Practicable Date, the
Group cannot quantify the possible amount of capital funding on the Target Mine required to be
provided by the Company, given that the feasibility study on the Target Mine is still ongoing and the
total amount of investment required may vary from what is currently estimated. Please refer to the
paragraph headed “Risk Factor(s)” above.
The Company will comply with the relevant requirements under the Listing Rules when the above
financial assistance arises.
PROPOSED GRANT OF GENERAL MANDATE TO ALLOT AND ISSUE SHARES
Pursuant to an ordinary resolution passed by the Shareholders at the AGM, the Directors were granted
a general mandate to allot, issue and deal with up to a maximum of 162,690,000 Shares, representing
20% of the aggregate nominal amount of 813,450,000 issued as at the date of the AGM. As at the
Latest Practicable Date, such mandate has been largely utilised in relation to the placing of 135,000,000
Shares as announced on 20 July 2007 by the Company. The Board will seek the approval of the
Independent Shareholders for the grant of the Refreshed Issue Mandate at the EGM. Assuming no
Shares are issued or repurchased prior to the EGM, the Company had an aggregate of 952,720,000
Shares in issue as at the Latest Practicable Date, upon the grant of the Refreshed Issue Mandate, the
Directors shall be granted a general mandate to allot, issue and deal with up to 190,544,000 Shares.
– 34 –
The Refreshed Issue Mandate will expire at the earliest of (a) the conclusion of the next annual
general meeting of the Company; (b) the expiration of the period within which the next annual general
meeting of the Company is required by its articles of association, the Companies Law, Cap.22 (Law
3 of 1961, as consolidated and revised of the Cayman Islands) or any other applicable law of the
Cayman Islands to be held; and (c) the passing of an ordinary resolution by the Shareholders in
general meeting revoking or varying the authority given to the Directors.
The refreshment is conditional upon the approval by the Independent Shareholders by way of ordinary
resolutions at the EGM. The votes will be taken by way of poll. Pursuant to Rule 13.36(4)(a) of the
Listing Rules, any controlling Shareholders and their associates or, where there are no controlling
Shareholders, directors (excluding independent non-executive Directors) and the chief executive of
the Company and their respective associates shall abstain from voting in favour of the Refreshed
Issue Mandate. As at the Latest Practicable Date, there was no controlling Shareholder and aside
from (1) Mr. Tsao Ke Wen Calvin, an executive Director and the chief executive officer of the Company
who wholly and beneficially owns L & L Holdings Limited which holds 120,000,000 Shares
(representing approximately 12.60% of the existing issued share capital of the Company), (2) Mr.
Law Fei Shing, an executive Director, who holds 3,000,000 Shares (representing 0.31% of the existing
issued share capital of the Company), and (3) Dr. Ma Chung Wo Cameron, a non-executive Director,
who holds 500,000 Shares (representing 0.05% of the existing issued share capital of the Company),
none of the Directors, chief executives and/or their respective associates was interested in any Shares.
Accordingly, L & L Holdings Limited, Mr. Tsao Ke Wen Calvin, Mr. Law Fei Shing, Dr. Ma Chung
Wo Cameron, and any Director (excluding independent non-executive Directors) and the chief executive
of the Company who shall hold Shares as at the date of the EGM and their respective associates are
required to abstain from voting in favour of the relevant resolutions proposed in connection with the
Refreshed Issue Mandate at the EGM. L & L Holdings Limited, Mr. Tsao Ke Wen Calvin, Mr. Law
Fei Shing, Dr. Ma Chung Wo Cameron and their respective associates had no intention to vote against
the resolutions to approve the grant of the Refreshed Issue Mandate and the Extension Mandate as at
the Latest Practicable Date.
In compliance with Rules 13.39(6) and 13.39(7) of the Listing Rules, an Independent Board Committee
has been established to make recommendations to the Shareholders and Veda Capital has been
appointed as the independent financial adviser to advise the Independent Board Committee and the
Independent Shareholders in respect of the proposed grant of the Refreshed Issue Mandate.
EXTENSION MANDATE
In addition, an ordinary resolution regarding the Extension Mandate will be proposed at the EGM
providing that the nominal value of any shares of the Company repurchased by the Company pursuant
to or in accordance with the authority granted and approved by the shareholders of the Company at
the AGM will be added to the total nominal value of shares of the Company which may be allotted
and issued under the Issue Mandate.
Since the extension mandate granted at the AGM extends the power of the Directors to issue shares of
the Company under the mandate to allot and issue shares granted at the AGM only, a fresh Extension
Mandate is necessary to allow the Directors to issue further shares under the Issue Mandate upon
repurchase of shares of the Company.
– 35 –
REASONS FOR THE REFRESHED ISSUE MANDATE
On 8 July 2007, the Company entered into the conditional Share Transfer Agreement in relation to
the Acquisition, which offers sustainable growth to the Group’s business and broaden its source of
income by diversifying into the exploration and mining of natural resources. On 18 July 2007, the
Company entered into a placing agreement in respect of the issue of 135,000,000 Shares under the
Existing General Mandate approved by the Shareholders at the AGM, to raise approximately HK$90.7
million for part of the payment of the Consideration (“Placing”). Since the AGM, no fund raising
activity has been carried out by the Company aside from the Placing. Thus, the Board proposes to
seek the approval from the Independent Shareholders at the EGM for the grant of the Refreshed Issue
Mandate and the Extension Mandate such that the Company will have greater financial flexibility in
raising additional capital for the development of the newly acquired business.
The Board believes that fund raising exercise pursuant to a general mandate provides the Company
with a simpler and less lead time process than other types of fund raising exercises and to avoid the
uncertainties in such circumstances that specific mandate may not be obtained in a timely manner. In
appropriate circumstances, the Board will also consider other financing methods such as debt financing
or internal cash resources to fund its future business development.
The Directors therefore consider the grant of the Refreshed Issue Mandate and the Extension Mandate
is beneficial to the Company and the Independent Shareholders as a whole.
FUND RAISING ACTIVITIES
The Group has conducted the following fund raising activities in the past 12 months from the Latest
Practicable Date:
Intended use of
Net amount
proceeds as
Description
Announcement
raised
announced
Actual use of proceeds
Placing of new shares
under general
mandate granted
on 8 June 2006
5 March 2007
Approximately
Approximately
HK$1 million for remaining
HK$26.0 million
HK$18 million
balance of acquisition of the
for new investment
Logistic and Financial
opportunity, as
Management System from
to approximately
CMST.
HK$3.2 million
to repay accrued
HK$9.3 million has been paid
expenses and as to
as partial consideration of
approximately
Acquisition
approximately
HK$4.8 million
Approximately HK$8 million
for operation
for repayment of accrued
expenses of
expenses and operation
the Group
expenses (as to (1) payment
of Directors’ fees and
salary of HK$4,100,000;
(2) settlement of professional
fees of HK$3,900,000;
As at the Latest Practicable
Date, the remaining balance
of the proceeds of HK$7.7
million has been maintained
into the bank
– 36 –
Description
Announcement
Net amount
raised
Intended use of
proceeds as
announced
Actual use of proceeds
Placing of new shares 11 June 2007
under refreshment of
general mandate
granted on 14 May
2007
Approximately
Approximately HK$51 HK$10 million has been paid as
HK$66.8 million
million for major
partial payment of capital
transaction of
injection in Hebei Da Sheng
investment into joint Warranty Company Limited
venture company
in Hebei Da Sheng HK$4.2 million has been
Warranty Company used as general working
Limited details of
capital of the Group
which are set out
in Company’s
As at the Latest Practicable
announcement and
Date, the remaining balance
circular dated
of the proceeds of HK$52.6
29 March 2007 and million has been maintained
28 May 2007
into the bank in which
respectively) and
HK$41 million of the
as to approximately balance of capital injection in
HK$15.8 million for Hebei Da Sheng Warranty
general working
Company Limited
capital of the Group will be paid.
Placing of new shares
under the mandate
granted at the AGM
Approximately
All of the net
HK$90.7 million
proceeds for the
part payment
of the
Consideration
20 July 2007
– 37 –
The entire amount of net
proceeds have been used to
settle the cash portion of the
Consideration.
REFRESHMENT OF THE SCHEME MANDATE LIMIT
The Board also proposes to seek the approval of the Shareholders to refresh the Scheme Mandate
Limit at the EGM.
The Scheme Mandate Limit approved to be reset at the extraordinary general meeting of the Company
held on 10 March 2006 enables the Directors to grant options to eligible person(s) under the Share
Option Scheme to subscribe for up to 52,520,000 Shares, representing 10% of the then issued share
capital of the Company as at the date of the extraordinary general meeting of the Company held on
10 March 2006. Up to the Latest Practicable Date, all the options entitling the holders to subscribe
for 52,520,000 Shares have been granted and exercised under the Share Option Scheme. These options
were granted on 7 March 2006, 2 May 2006 and 27 November 2006 and are in accordance with the
terms and restrictions of the Share Option Scheme. All these options were granted to eligible
participants under the Share Option Scheme. The Directors confirm that the grant of the above options
was in line with the rules of the Share Option Scheme and the relevant requirements of the Listing
Rules.
As at the Latest Practicable Date, apart from the Share Option Scheme, the Company has no other
share option scheme.
In order to provide the Company with greater flexibility in granting options to eligible person(s)
under the Share Option Scheme, the Board decides to seek the approval of the Shareholder to refresh
the Scheme Mandate Limit so that the total number of Shares which may be issued upon exercise of
all options to be granted under the Share Option Scheme and any other share option schemes of the
Company shall be re-set at 10% of the Shares in issue as at the date of passing the relevant resolution
at the EGM.
As at the Latest Practicable Date, the Company had 952,720,000 Shares in issue and assuming no
Shares are issued or repurchased prior to the EGM, the Board will be allowed to grant options to
subscribe for up to 95,272,000 Shares (“Available Limit”) if the proposed refreshment of the Scheme
Mandate Limit is approved at the EGM.
Pursuant to the Listing Rules, the maximum number of Shares which may be issued upon exercise of
all outstanding options granted and yet to be exercised under the Share Option Scheme and any other
share option schemes of the Company must not in aggregate exceed 30% of the Shares in issue from
time to time (“30% Overall Limit”). On the basis of 952,720,000 Shares in issue as at the Latest
Practicable Date, the 30% Overall Limit represents a total of 285,816,000 Shares. There was no
outstanding options granted and yet to be exercised as at the Latest Practicable Date, accordingly, the
Available Limit does not exceed the 30% Overall Limit as at the Latest Practicable Date.
The refreshment of the Scheme Mandate Limit is conditional upon:
(a)
the Shareholders approving the proposed refreshment at the EGM; and
(b)
the Listing Committee of the Stock Exchange granting the listing of and permission to deal in
the Shares which may be allotted and issued upon the exercise of options to be granted under
the Share Option Scheme or any other schemes.
– 38 –
An ordinary resolution will be proposed at the EGM for the approval of refreshing the Scheme Mandate
Limit. No Shareholder is required to abstain from voting for this ordinary resolution. Application has
been made to the Listing Committee of the Stock Exchange for the granting of the listing of, and
permission to deal in, the Shares to be issued pursuant to the exercise of options to be granted under
the Share Option Scheme.
EGM
The EGM will be held at Suites 5303-5304, 53rd Floor, Central Plaza, 18 Harbour Road, Wanchai,
Hong Kong on 31 October 2007 at 10:30 a.m. to consider and, if thought fit, approve, among other
matters, the Acquisition, the Share Transfer Agreement and the transactions contemplated thereunder,
the proposed grant of the Refreshed Issue Mandate and the Extension Mandate and the proposed
refreshment of the Scheme Mandate Limit.
A notice convening the EGM is set out on pages 340 to 343 of this circular. Whether or not you are
able to attend the EGM, you are requested to complete the accompanying form of proxy in accordance
with the instructions printed thereon and return the same to the Company’s share registrar in Hong
Kong, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong
Kong as soon as possible and in any event not less than 48 hours before the time appointed for the
holding of the EGM or any adjournment thereof. Completion and return of the form of proxy shall
not preclude you from attending and voting at the EGM if you so wish.
To the best knowledge of the Directors, none of the Vendor and her associates holds any Shares as at
the Latest Practicable Date. On such basis, no Shareholder is required to abstain from voting on the
Acquisition, the Share Transfer Agreement and the transactions contemplated thereunder. No
Shareholder is required to abstain from voting on the proposed refreshment of the Scheme Mandate
Limit. Pursuant to Rule 13.36(4) of the Listing Rules, all Directors (excluding the independent nonexecutive Directors) and the chief executive and their respective associates are required to abstain
from voting in favour of the proposed grant of the Refreshed Issue Mandate and the Extension Mandate.
PROCEDURE TO DEMAND A POLL AT GENERAL MEETING
Pursuant to articles 72 and 73 of the articles of association of the Company, a resolution put to vote of
the meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the
result of the show of hands or on the withdrawal of any demand for a poll) demanded:
(i)
by the chairman of the meeting; or
(ii)
by at least three Shareholders present in person (or, in the case of a Shareholder being a
corporation, by its duly authorized representative) or by proxy for the time being entitled to
vote at the general meeting; or
(iii)
by a Shareholder or Shareholders present in person (or, in the case of a Shareholder being a
corporation, by its duly authorized representative) or by proxy and representing not less than
one-tenth of the total voting rights of all the Shareholders having the right to vote at the meeting;
or
– 39 –
(iv)
by a Shareholder or Shareholders present in person (or, in the case of a Shareholder being a
corporation, by its duly authorized representative) or by proxy and holding Shares conferring a
right to vote at the meeting being Shares on which an aggregate sum has been paid up equal to
not less than one-tenth of the total sum paid up on all the Shares conferring that right; or
(v)
if required by the Designated Stock Exchange (defined as “a stock exchange in respect of
which Shares are listed or quoted and where such stock exchange deems such listing or quotation
to be the primary listing or quotation of the Shares” under the articles of association of the
Company), by any Director or Directors who, individually or collectively, hold proxies in respect
of Shares representing 5% or more of the total voting rights at such meeting.
Unless a poll be so demanded and not withdrawn, a declaration by the chairman of the meeting that a
resolution has on a show of hands been carried or carried unanimously, or by a particular majority, or
lost, and an entry to that effect made in the book containing the minutes of the proceedings of the
Company shall be conclusive evidence of the fact without proof of the number or proportion of the
votes recorded in favour or against such resolution.
RECOMMENDATION
The Directors consider that the terms of the Share Transfer Agreement, the proposed grant of the
Refreshed Issue Mandate and the Extension Mandate and the proposed refreshment of the Scheme
Mandate Limit are fair and reasonable to the Company and in the interests of the Shareholders as a
whole. Accordingly, the Directors recommend the Shareholders and the Independent Shareholders
(as the case may be) to vote in favour of the relevant resolutions at the EGM.
Your attention is drawn to the letter of recommendation from the Independent Board Committee set
out on page 41 of this circular and the letter of advice from Veda Capital set out on pages 42 to 46 of
this circular, which contains, among other matters, its advice to the Independent Board Committee in
relation to the proposed grant of the Refreshed Issue Mandate and the principal factors considered by
it in arriving at its recommendation.
ADDITIONAL INFORMATION
Your attention is drawn to the information set out in the appendices to this circular.
Yours faithfully,
For and on behalf of the Board
Aurora Global Investment Holdings Limited
Law Fei Shing
Executive Director
– 40 –
LETTER FROM THE INDEPENDENT BOARD COMMITTEE
(Stock code: 353)
15 October 2007
To the Independent Shareholders
Dear Sir or Madam,
REFRESHMENT OF GENERAL MANDATE TO ALLOT AND ISSUE SHARES
We have been appointed as members of the Independent Board Committee to advise the Independent
Shareholders in connection with the granting of the Refreshed Issue Mandate and the Extension
Mandate, details of which are set out in the circular of the Company dated 15 October 2007 (“Circular”),
of which this letter forms part. Terms defined in the Circular shall have the same meanings when used
herein unless the context otherwise requires.
Having considered the advice of Veda Capital in relation thereto as set out in the Circular, we are of
the view that the granting of the Refreshed Issue Mandate and the Extension Mandate is in the interests
of the Company and the Independent Shareholders as a whole and the terms of the grant of the
Refreshed Issue Mandate and the Extension Mandate are fair and reasonable so far as the Independent
Shareholders are concerned.
Accordingly, we recommend the Independent Shareholders to vote in favour of the resolutions to be
proposed at the EGM to approve the grant of the Refreshed Issue Mandate and the Extension Mandate.
Yours faithfully
Lum Pak Sum
Independent
non-executive Director
Wan Hon Keung
Independent
– 41 –
Sun Tak Keung
Independent
LETTER FROM VEDA CAPITAL
The following is the full text of the letter from Veda Capital setting out the advice to the Independent
Board Committee and the Independent Shareholders for inclusion in this circular.
Veda Capital Limited
Suite 809, 8th Floor, Shui On Centre,
8 Harbour Road, Wanchai, Hong Kong
15 October 2007
To the Independent Board Committee and the Independent Shareholders
of Aurora Global Investment Holdings Limited
Dear Sirs and Madams,
TO ALLOT AND ISSUE SHARES
INTRODUCTION
We refer to the circular dated 15 October 2007 issued by the Company to the Shareholders of which
this letter forms part (the “Circular”) and our appointment as the independent financial adviser to
advise the Independent Board Committee and the Independent Shareholders in respect of the proposed
grant of the Refreshed Issue Mandate, details of which are set out in the letter from the Board contained
in the Circular (the “Board Letter”). Capitalised terms used in this letter, unless the context otherwise
requires, shall have the same meanings ascribed to them in the Circular.
Pursuant to Rule 13.36(4)(a) of the Listing Rules, the grant of the Refreshed Issue Mandate is subject
to the approval of the Independent Shareholders by way of poll at the EGM. The controlling
Shareholders and their associates or, where there are no controlling Shareholders, Directors (excluding
the independent non-executive Directors) and the chief executive of the Company and their respective
associates shall abstain from voting in favour of the relevant resolutions at the EGM. As at the Latest
Practicable Date, there was no controlling Shareholder and aside from Mr. Tsao Ke Wen Calvin,
being the executive Director and the chief executive officer of the Company who wholly and
beneficially owns L & L Holdings Limited which holds 120,000,000 Shares (representing
approximately 12.60% of the existing issued share capital of the Company), Mr. Law Fei Shing,
being the executive Director, who holds 3,000,000 Shares (representing 0.31% of the existing issued
share capital of the Company), and Dr. Ma Chung Wo Cameron, the non-executive Director, who
holds 500,000 Shares (representing 0.05% of the existing issued share capital of the Company), none
of the Directors, chief executive of the Company and/or their respective associates was interested in
any Shares. Accordingly, L & L Holdings Limited, Mr. Tsao Ke Wen Calvin, Mr. Law Fei Shing, Dr.
Ma Chung Wo, Cameron and any Director (excluding the Independent non-executive Directors) and
the chief executive of the Company who shall hold Shares as at the date of the EGM and their respective
associates are required to abstain from voting in favour of the relevant resolutions proposed in
connection with the grant of Refreshed Issue Mandate at the EGM. As at the Latest Practicable Date,
– 42 –
L & L Holdings Limited, Mr. Tsao Ke Wen Calvin, Mr. Law Fei Shing, Dr. Ma Chung Wo, Cameron
and their respective associates had no intention to vote against the resolution to approve the grant of
the Refreshed Issue Mandate.
The Independent Board Committee, comprising all the independent non-executive Directors, namely
Mr. Lum Pak Sum, Mr. Wan Hon Keung and Mr. Sun Tak Keung, has been established to advise
whether the proposed grant of the Refreshed Issue Mandate is in the interests of the Company and the
Independent Shareholders as a whole.
BASIS OF OUR ADVICE
In formulating our opinion, we have relied on the information, facts and representations contained or
referred to in the Circular and the information, facts and representations provided by, and the opinions
expressed by the Directors, the Company and its management. We have assumed that all statements,
information, facts, opinions and representations made to us or referred to in the Circular were true,
accurate and complete at the time they were made and continued to be true, accurate and complete as
at the date of the Circular. We have relied on such information and opinions and have not, however,
conducted any independent investigation into the business, financial conditions and affairs or the
future prospects of the Group. We have no reason to doubt the truth, accuracy and completeness of
the statements, information, facts, opinions and representations provided to us by the Directors, the
Company and its management. The Directors have confirmed to us that no material facts have been
omitted from the information supplied and opinions expressed. We consider that we have been provided
with sufficient information to reach an informed view to provide a reasonable basis for our opinion.
All the Directors jointly and severally accept full responsibility for the accuracy of the information
contained in the Circular and confirm, having made all reasonable enquiries, that, to the best of their
knowledge, opinions expressed in the Circular have been arrived at after due and careful consideration
and that there are no other facts not contained in the Circular the omission of which would make any
statement in the Circular misleading.
PRINCIPAL FACTORS AND REASONS CONSIDERED
In arriving at our opinion in respect of the proposed grant of the Refreshed Issue Mandate, we have
taken the following principal factors and reasons into consideration:
Background
The Group is principally engaged in the design, manufacture and sale of a wide range of carpets
under its own brand name and the trading of carpets of various brand names.
At the AGM, the Directors were granted the Existing General Mandate to allot, issue and deal with
up to 162,690,000 new Shares, representing 20% of the aggregate nominal amount of the issued
share capital of the Company then in issue. Subsequent to the AGM, and as at the Latest Practicable
Date, the Existing General Mandate has been largely utilized in relation to the placing of 135,000,000
Shares, details of which were disclosed in the announcement of the Company dated 20 July 2007 as
being part of the Consideration in relation to the Acquisition.
– 43 –
To maintain the financial flexibility necessary for the Group’s future business development, the
Directors therefore propose to seek the approval of the Independent Shareholders at the EGM for the
grant of the Refreshed Issue Mandate. The Company had an aggregate of 952,720,000 Shares in issue
as at the Latest Practicable Date. Subject to the passing of the ordinary resolutions for the approval of
the Refreshed Issue Mandate and assuming that no Shares are issued and/or repurchased by the
Company between the Latest Practicable Date and the date of the EGM, the Company would be
allowed under the Refreshed Issue Mandate to allot and issue up to 190,544,000 Shares.
Reasons for the Refreshed Issue Mandate
With reference to the announcement of the Company dated 20 July 2007, the Company has entered
into a Share Transfer Agreement in relation to the acquisition of the Target Company which engaged
in the exploration and mining of natural resources. As disclosed in the Company’s annual report for
the year ended 31 December 2006, the Group continued to focus on the carpet manufacturing and
trading business and to take productive steps to improve profitability and market share. On the other
hand, the Group has been looking into the opportunity of other business and exploring more investment
to offer sustainable growth to its business. Thus, the Directors consider the Acquisition will enable
the Group to diversify into the mining business.
In view of the newly acquired business opportunity, the Refreshed Issue Mandate would offer the
Group greater flexibility to enhance its business development as well as being able to capture investment
opportunities which may arise at any time and require prompt investment decision by the Group.
Given that the Existing General Mandate which was approved in the AGM has been largely utilized,
the Directors consider that the Refreshed Issue Mandate could give the Company the flexibility and
ability to capture any capital raising or investment or business opportunity as and when it arises.
Such ability is crucial in a competitive and rapidly changing capital market and investment environment.
In light of the above, we are of the opinion that the Refreshed Issue Mandate would provide the
Company with the necessary flexibility essential for fulfilling any possible funding needs for future
business development and/or investment decisions in a timely manner. As such, we are of the view
that the granting of the Refreshed Issue Mandate will be in the interest of the Company and the
Independent Shareholders as a whole.
Fund Raising Activities
As stated in the letter from the Board in this circular, in the past 12 months from the Latest Practicable
Date, the Company has raised an aggregate of approximately HK$183.5 million by placing of new
Shares under the general mandates granted on 8 June 2006, 14 May 2007 and at the AGM respectively,
details of which are set out in the announcements of the Company dated 5 March 2007, 11 June 2007
and 20 July 2007 respectively.
In view of the net proceeds of the placing of new Shares have been and will be utilized on their
intended use as announced, we consider that it is reasonable for the Directors to propose the granting
of the Refreshed Issue Mandate in the EGM in order to give the Company greater flexibility to finance
its newly acquired mining business development and other investments as and when such opportunities
arise.
– 44 –
Other financing alternative
As debt financing may incur interest burden to the Group, equity financing such as issuance of new
Shares for cash or equity swaps may be an appropriate mean to fund such investments and/or
acquisitions and provide additional working capital for the future development and expansion of the
Group, given the Group’s financial position, capital structure, cost of funding and the then financial
market condition. Other financing methods such as debt financing or internal cash resources to fund
future business development of the Company shall be taken into consideration in appropriate
circumstances.
We consider that the grant of the Refreshed Issue Mandate will provide the Company with an additional
alternative and it is reasonable for the Company to have the flexibility in deciding the financing
methods for its future development, including equity issuance. As such, we are of the view that the
grant of the Refreshed Issue Mandate will be in the interests of the Company and the Independent
Shareholders as a whole.
Potential dilution to shareholdings of the Independent Shareholders
Set out below is a table showing the shareholdings of the Company as at the Latest Practicable Date
and; for illustrative purpose, the potential dilution effect on the shareholdings upon full utilization of
the Refreshed Issue Mandate, assuming no Shares are issued or repurchased during the period between
the Latest Practicable Date and the date of the EGM:
As at the Latest
Practicable Date
No. of Shares
%
Upon full utilization
of the Refreshed
Issue Mandate
No. of Shares
%
L & L Holdings Limited (Note 1)
Mr. Law Fei Shing (Note 2)
Dr. Ma Chung Wo, Cameron (Note 3)
Independent Shareholders
Shares to be issued under
the Refreshed Issue Mandate
120,000,000
3,000,000
500,000
829,220,000
12.60
0.31
0.05
87.04
120,000,000
3,000,000
500,000
829,220,000
10.50
0.26
0.04
72.53
—
—
190,544,000
16.67
Total:
952,720,000
100.00
1,143,264,000
100.00
Notes:
1.
L & L Holdings Limited is an investment holding company incorporated in the Republic of the Marshall Islands,
the entire issued share capital of which is wholly and beneficially owned by Mr. Tsao Ke Wen Calvin, the chief
executive officer of the Company and executive Director.
2.
Mr. Law Fei Shing is an executive Director.
3.
Dr. Ma Chung Wo, Cameron is a non-executive Director.
– 45 –
As illustrated in the table above, the existing aggregate shareholding of the Independent Shareholders
will decrease from approximately 87.04% as at the Latest Practicable Date to approximately 72.53%
upon full utilisation of the Refreshed Issue Mandate. Taking into account the benefits of the Refreshed
Issue Mandate as discussed above and the fact that the shareholdings of all Shareholders will be
diluted proportionately, we consider such dilution or potential dilution of shareholding to be acceptable.
RECOMMENDATION
Having considered the factors and reasons as stated above, we are of the view that the grant of the
Refreshed Issue Mandate is in the interests of the Company and Independent Shareholders as a whole,
and is fair and reasonable. Accordingly, we recommend the Independent Shareholders and advise the
Independent Board Committee to recommend the Independent Shareholders to vote in favour of the
ordinary resolutions in relation to the grant of the Refreshed Issue Mandate to be proposed at the
EGM. Independent Shareholders are however advised to take note of the possible dilution effect on
their shareholding interests in the Company when and if the Refreshed Issue Mandate is utilised.
Yours faithfully,
For and on behalf of
Veda Capital Limited
Hans Wong
Julisa Fong
Managing Director
Executive Director
– 46 –
APPENDIX I
1.
FINANCIAL INFORMATION ON THE GROUP
SUMMARY OF FINANCIAL INFORMATION
A summary of the published results and the assets and liabilities of the Group for the last three
financial years, as extracted from the audited financial statements, is set out below.
RESULTS
Year ended 31 December
2006
2005
2004
HK’000
HK’000
HK’000
Revenue
Cost of sales
26,523
(29,240)
40,982
(34,715)
19,560
(23,100)
Gross profit/(loss)
Other operating income
Selling and distribution expenses
Administrative expenses
Other operating expenses
(2,717)
7,476
(1,865)
(38,299)
(10,603)
6,267
765
(3,190)
(24,466)
(68,820)
(3,540)
177
(800)
(21,156)
(49,184)
Operating loss
Finance costs
(46,008)
(149)
(89,444)
(1,686)
(74,503)
(3,290)
Loss before income tax
Taxation Credit
(46,157)
—
(91,130)
—
(77,793)
84
Loss for the year
(46,157)
(91,130)
(77,709)
Attributable to:
Equity holders of the Company
Minority interest
(46,167)
10
(91,136)
6
(77,486)
(223)
(46,157)
(91,130)
(77,709)
ASSETS AND LIABILITIES
2006
HK$’000
As at 31 December
2005
HK$’000
2004
HK$’000
100,517
37,716
110,602
24,710
175,495
95,426
Net Assets
Add: minority interests
62,801
217
85,892
227
80,069
233
Shareholder’s funds
63,018
86,119
80,302
Total Assets
Total Liabilities
– 47 –
APPENDIX I
2.
REPORT OF THE AUDITORS FOR THE FINANCIAL STATEMENTS OF THE GROUP
FOR THE YEAR ENDED 31 DECEMBER 2006
The following are the financial statements of the Group for the year ended 31 December 2006
as extracted from the annual report of the Company for the year ended 31 December 2006
(“2006 Annual Report”). The page references in this report are the same as those in the 2006
Annual Report.
INDEPENDENT AUDITORS’ REPORT
To the members of Aurora Global Investment Holdings Limited
(incorporated in the Cayman Islands with limited liability)
We have audited the consolidated financial statements of Aurora Global Investment Holdings
Limited (the “Company”) set out on pages 31 to 86, which comprise the consolidated and
Company balance sheets as at 31 December 2006, and the consolidated income statement, the
consolidated statement of changes in equity and the consolidated cash flow statement for the
year then ended, and a summary of significant accounting policies and other explanatory notes.
Directors’ responsibility for the financial statements
The directors of the Company are responsible for the preparation and the true and fair
presentation of these financial statements in accordance with Hong Kong Financial Reporting
Standards issued by the Hong Kong Institute of Certified Public Accountants and the disclosure
requirements of the Hong Kong Companies Ordinance. This responsibility includes designing,
implementing and maintaining internal control relevant to the preparation and the true and fair
presentation of financial statements that are free from material misstatement, whether due to
fraud or error; selecting and applying appropriate accounting policies; and making accounting
estimates that are reasonable in the circumstances.
Auditors’ responsibility
Our responsibility is to express an opinion on these financial statements based on our audit and
to report our opinion solely to you, as a body, and for no other purpose. We do not assume
responsibility towards or accept liability to any other person for the contents of this report.
We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the
Hong Kong Institute of Certified Public Accountants. Those standards require that we comply
with ethical requirements and plan and perform the audit to obtain reasonable assurance as to
whether the financial statements are free from material misstatement.
– 48 –
APPENDIX I
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditors’
judgement, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditors consider
internal control relevant to the entity’s preparation and true and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by the directors, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the state of
affairs of the Company and of the Group as at 31 December 2006 and of the Group’s loss and
cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards
and have been properly prepared in accordance with the disclosure requirements of the Hong
Kong Companies Ordinance.
Grant Thornton
Certified Public Accountants
13th Floor, Gloucester Tower
The Landmark
15 Queen’s Road Central
Hong Kong
27 April 2007
– 49 –
APPENDIX I
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2006
Notes
Revenue
Cost of sales
5
Gross (loss)/profit
Other revenue and income
5
2006
HK$’000
2005
HK$’000
26,523
(29,240)
40,982
(34,715)
(2,717)
7,476
(1,865)
(38,299)
(10,603)
6,267
765
(3,190)
(24,466)
(68,820)
(89,444)
(1,686)
Operating loss
Finance costs
7
(46,008)
(149)
Income tax expense
8
9
(46,157)
—
(91,130)
—
(46,157)
(91,130)
(46,167)
10
(91,136)
6
(46,157)
(91,130)
— Basic
(8.7)
(30.0)
— Diluted
N/A
N/A
Loss for the year
Attributable to:
Minority interests
11
Loss for the year
Loss per share (HK cents)
12
– 50 –
APPENDIX I
CONSOLIDATED BALANCE SHEET
As at 31 December 2006
Notes
2006
HK$’000
2005
HK$’000
15(a)
16
34
18
73,952
4,912
3,750
—
74,497
4,831
4,075
—
82,614
83,403
4,033
4,504
8,590
—
776
5,683
5,712
6,704
2,031
7,069
17,903
27,199
9,723
25,611
1,143
76
5
9,032
10,547
—
76
2,395
36,558
22,050
(18,655)
5,149
63,959
88,552
234
924
304
2,356
1,158
2,660
62,801
85,892
Non-current assets
Property, plant and equipment
Prepaid lease payments
Deposits
Goodwill
Current assets
Inventories
Trade and bills receivables
Prepayments, deposits and other receivables
Pledged time deposits
Cash at banks and in hand
Current liabilities
Trade payables
Deposits received, other payables and accruals
Amounts due to directors
Finance lease payable
Bank borrowings
19
20
26
21(a)
22
23
24
25
26
Net current (liabilities)/assets
Total assets less current liabilities
Non-current liabilities
Amounts due to minority shareholders
25
27
Net assets
– 51 –
APPENDIX I
CONSOLIDATED BALANCE SHEET (Continued)
Notes
2006
HK$’000
2005
HK$’000
28
29(a)
5,519
57,499
5,252
80,867
Minority interests
63,018
(217)
86,119
(227)
Total equity
62,801
85,892
EQUITY
Equity attributable to equity holders
of the Company
Share capital
Reserves
– 52 –
APPENDIX I
BALANCE SHEET
Notes
2006
HK$’000
2005
HK$’000
15(b)
17
34
261
61,186
3,750
339
76,432
1,000
65,197
77,771
48
9
36
6,313
57
6,349
2,167
100
1,288
—
2,267
1,288
Net current (liabilities)/assets
(2,210)
5,061
Net assets
62,987
82,832
5,519
57,468
5,252
77,580
62,987
82,832
Non-current assets
Interests in subsidiaries
Deposits
Current assets
Cash and cash equivalents
Current liabilities
Other payables and accruals
Amount due to a director
21(b)
23
24
EQUITY
Share capital
Reserves
28
29(b)
Total equity
– 53 –
APPENDIX I
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Equity attributable to equity holders of the Company
At 1 January 2005
Disposal of subsidiaries
Currency translation
Net income/(expense) recognised
directly in equity
Net loss for the year
Total recognised income
and expense for the year
Issue of convertible note
(note 28(d))
Conversion of convertible note
(note 28(d))
Issue of shares
Capital reorganisation
(note 28(b))
At 31 December 2005
and 1 January 2006
Disposal of property, plant
and equipment
Net income/(expense) recognised
directly in equity
Total recognised income
and expense for the year
Share options granted (note 30)
Share options cancelled (note 30)
Exercise of share options
and issue of shares (note 28(f))
At 31 December 2006
Statutory
Assets
Capital
reserve revaluation Exchange
reserves
fund
reserve
reserve
HK$’000 HK$’000 HK$’000 HK$’000
Share
capital
HK$’000
Share
premium
HK$’000
134,000
—
—
—
—
—
—
—
—
35
(35 )
—
9,735
—
—
—
—
—
—
—
—
(35 )
—
—
—
—
—
—
2,750
6,112
Convertible
note
equity
reserve
HK$’000
Share
option Accumulated
reserve
losses
Total
HK$’000 HK$’000 HK$’000
Minority
interests
HK$’000
Total
equity
HK$’000
(2,045 )
4
2,141
—
—
—
—
—
—
(61,423 )
—
—
80,302
(31 )
2,141
(233 )
—
—
80,069
(31 )
2,141
—
—
2,145
—
—
—
—
—
—
(91,136 )
2,110
(91,136 )
—
6
2,110
(91,130 )
(35 )
—
2,145
—
—
(91,136 )
(89,026 )
6
(89,020 )
—
—
—
—
4,708
—
—
4,708
—
4,708
30,250
55,731
—
—
—
—
—
—
—
—
(4,708 )
—
—
—
—
—
28,292
61,843
—
—
28,292
61,843
—
137,610
—
—
—
—
—
—
—
—
—
5,252
—
85,981
—
137,610
—
—
—
9,735
—
100
2,833
—
—
—
—
—
—
—
—
(9 )
—
—
—
—
—
—
—
—
—
—
—
(9 )
—
2,833
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(9 )
—
—
2,833
—
—
—
—
—
—
11,190
(413 )
267
14,065
—
—
—
—
—
(4,867 )
5,519
100,046
137,610
—
9,726
2,933
—
5,910
(137,610 )
– 54 –
(152,559 )
—
—
86,119
2,833
(227 )
—
85,892
2,833
(9 )
—
(9 )
—
(46,167 )
2,824
(46,167 )
—
10
2,824
(46,157 )
(46,167 )
—
—
(43,343 )
11,190
(413 )
10
—
—
(43,333 )
11,190
(413 )
9,465
—
9,465
63,018
(217 )
62,801
—
(198,726 )
APPENDIX I
CONSOLIDATED CASH FLOW STATEMENT
Notes
Cash flows from operating activities
Adjustments for :
Depreciation
Amortisation of prepaid lease payments
Bad debts written off
Impairment of goodwill
Provision for impairment of trade receivable
Provision for salary provision written back
Write back of other payable
Gain on disposal of subsidiaries
Gain on deemed disposal of a subsidiary
Loss on disposals of property,
plant and equipment
Interest income
Interest expenses
Share-based compensation
30(a) & (b)
2006
HK$’000
2005
HK$’000
(46,157)
(91,130)
7,447
112
65
—
314
—
—
—
—
6,380
107
48,022
35,750
—
(62)
(2,230)
(10,634)
(2,067)
2
(85)
149
10,777
22
(87)
1,686
—
Operating loss before working capital changes
Decrease/(Increase) in inventories
Decrease/(Increase) in trade and
bills receivables
Increase in prepayments, deposits
and other receivables
Increase/(Decrease) in trade payables
Increase/(Decrease) in deposits received,
other payables and accruals
Increase in amounts due to directors
(27,376)
1,680
(14,243)
(4,136)
843
(2,058)
(1,870)
516
(8,128)
(562)
14,911
1,143
(1,767)
—
Cash used in operations
Interest paid
Hong Kong profits tax paid
(10,153)
(149)
—
(30,894)
(1,686)
(74)
Net cash used in operating activities
(10,302)
(32,654)
– 55 –
APPENDIX I
CONSOLIDATED CASH FLOW STATEMENT (Continued)
Notes
Cash flow from investing activities
Deposits paid
Purchases of property, plant and equipment
Proceeds from disposals of
property, plant and equipment
Disposal of subsidiaries (net of cash
and cash equivalents)
Deemed disposal of subsidiaries
(net of cash and cash equivalents)
Interest received
34
15(a)
Net cash used in investing activities
2006
HK$’000
(2,750)
(943)
153
—
(44)
—
85
(4)
87
—
—
—
—
28(f)
Net cash generated from financing activities
Net (decrease)/increase in cash
and cash equivalents
Cash and cash equivalents at 1 January
Effect on foreign exchange rate changes
Cash and cash equivalents at 31 December
– 56 –
21(a)
(4,075)
(1,003)
5
(3,603)
Cash flow from financing activities
Addition of new other loans
Addition of new finance lease
Proceeds from issue of convertible note
Proceeds from issuance of share capital
Proceeds from issue of shares
upon exercise of share options
(Decrease)/Increase in trust receipt loans
Repayment of bank loans
Repayment of other loans
Capital element of finance lease payments
Decrease/(Increase) in pledged time deposits
(Decrease)/Increase in amount
due to minority shareholders
2005
HK$’000
(4,886)
18,010
380
33,000
46,843
9,465
(2,257)
—
—
(70)
2,031
—
101
(3,900)
(48,097)
(139)
(1,031)
(1,432)
1,923
7,737
47,090
(6,168)
9,550
6,931
8
(2,653)
34
771
6,931
APPENDIX I
NOTES TO THE FINANCIAL STATEMENTS
1.
GENERAL INFORMATION
The Company was incorporated in the Cayman Islands as an exempted company with limited liability
under the Companies Law (Revised) of the Cayman Islands. The address of its registered office is Century
Yard, Cricket Squares, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands, Bristish
West Indies and its principal place of business is Suites 5303-4, 53rd floor, Central Plaza, 18 Harbour
Road, Wanchai, Hong Kong. The Company’s shares are listed on The Stock Exchange of Hong Kong
Limited (the “Stock Exchange”).
Pursuant to a special resolution passed on 10 March 2006 at an extraordinary general meeting, the Company’s
name was changed from Orient Industries Holdings Limited to Aurora Global Investment Holdings Limited.
The principal activity of the Company is investment holding. Details of principal activities of its principal
subsidiaries (together with the Company referred to as the “Group”) are set out in note 17(a) to the financial
statements.
The financial statements on pages 31 to 86 have been prepared in accordance with Hong Kong Financial
Reporting Standards (“HKFRSs”) which collective term includes all applicable individual Hong Kong
Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations issued by the Hong
Kong Institute of Certified Public Accountants (“HKICPA”). The financial statements also include the
applicable disclosure requirements of the Hong Kong Companies Ordinance and the Rules Governing the
Listing of Securities on the Stock Exchange.
The financial statements for the year ended 31 December 2006 were approved for issue by the board of
directors on 27 April 2007.
2.
ADOPTION OF NEW OR AMENDED HKFRSS
(a)
New or amended HKFRSs effective on 1 January 2006
From 1 January 2006, the Group has adopted the new or amended HKFRSs which are first effective
on 1 January 2006 and relevant to the Group. The adoption of these new and amended HKFRSs did
not result in any significant changes in the Group’s and the Company’s accounting policies.
– 57 –
APPENDIX I
NOTES TO THE FINANCIAL STATEMENTS (Continued)
(b)
New or amended HKFRSs that have been issued but are not yet effective
The Group has not early adopted the following HKFRSs that have been issued but are not yet
effective. The directors of the Company anticipate that the adoption of such HKFRSs will not result
in material financial impact on the Group’s financial statements.
Amendment to HKAS 1
HKFRS 7
HKFRS 8
HK(IFRIC) Interpretation 7
1
2
3
4
5
6
7
8
3.
“Presentation of Financial Statements” - Capital Disclosures 1
“Financial Instruments: Disclosures” 1
“Operating Segments” 8
“Applying the Restatement Approach under HKAS 29 Financial
Reporting in Hyperinflationary Economies” 2
“Scope of HKFRS 2” 3
“Reassessment of Embedded Derivatives” 4
“Interim Financial Reporting and Impairment” 5
“Group and Treasury Share Transactions” 6
“Service Concession Arrangements” 7
Effective for annual periods beginning on or after 1 January 2007
Effective for annual periods beginning on or after 1 March 2006
Effective for annual periods beginning on or after 1 May 2006
Effective for annual periods beginning on or after 1 June 2006
Effective for annual periods beginning on or after 1 November 2006
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of preparation
The significant accounting policies that have been used in the preparation of these financial statements
are summarised below. These policies have been consistently applied to all the years presented
unless otherwise stated.
The financial statements have been prepared on the historical cost convention except for the
revaluation of property, plant and equipment which are stated at fair values. The measurement
bases are fully described in the accounting policies below.
The financial statements have been prepared on a going concern basis notwithstanding that the
Group had net current liabilities of approximately HK$18,655,000 at 31 December 2006 and had
made operating losses in each of the last 3 years. In order to turn around the Group’s loss-making
situation, improve its financial position and ensure it has sufficient funds to meet its current
commitments, the directors intend to take and/or have carried out the following :
i)
the directors will take action to tighten cost controls over the staff costs, overheads and
various general and administrative expenses;
– 58 –
APPENDIX I
ii)
on 5 March 2007, the Company entered into a placement agreement (“the Placement
Agreement”) with Enlighten Securities Limited (the “Placing Agent”) pursuant to which an
aggregate of 87,000,000 new ordinary shares (the “Placing Share”) of HK$0.01 each were
to be placed by the Placing Agent on behalf of the Company, on a fully underwritten basis,
at the price of HK$0.308 per Placing Share with six independent investors. The gross proceeds
from the placement of approximately HK$26,796,000 have been received on 16 March 2007;
iii)
subsequent to 31 December 2006, the exercise of 19,820,000 share options of the Company
resulted in an increase in cash of approximately HK$7,547,000. Details are set out in note
30 to the financial statements; and
iv)
on 16 April 2007, the Group entered into a loan agreement with a registered money lender
in Hong Kong for a loan of approximately HK$30,000,000 for the investment in a PRC
company as set out in note 37(c). The loan will be repayable at the end of twelve months
from the date of drawdown.
In the opinion of the directors, in light of the measures taken to-date, the Group will have sufficient
working capital to meet its current and future requirements. Accordingly, the directors are satisfied
that the Group will be able to continue as a going concern and that it is appropriate to prepare the
financial statements on a going concern basis, notwithstanding the Group’s tight financial and cash
position as at 31 December 2006.
Should the Group be unable to continue in business as a going concern, adjustments would have to
be made to reduce the value of assets to their recoverable amounts, to provide for any further
liabilities which might arise, and to reclassify non-current assets and liabilities as current assets
and liabilities.
It should be noted that accounting estimates and assumptions are used in preparation of the financial
statements. Although these estimates are based on management’s best knowledge and judgement of
current events and actions, actual results may ultimately differ from those estimates. The areas
involving a higher degree of judgement or complexity, or areas where assumptions and estimates
are significant to the financial statements, are disclosed in note 4.
(b)
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Group made up to
31 December each year.
(c)
Subsidiaries
Subsidiaries are entities (including special purpose entities) over which the Group has the power to
control the financial and operating policies so as to obtain benefits from their activities. The existence
and effect of potential voting rights that are currently exercisable or convertible are considered
when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from
the date on which control is transferred to the Group. They are excluded from consolidation from
the date that control ceases.
– 59 –
APPENDIX I
Inter-group transactions, balances and unrealised gains on transactions between group companies
are eliminated in preparing the consolidated financial statements. Unrealised losses are also
eliminated unless the transaction provides evidence of an impairment of the asset transferred.
In the Company’s balance sheet, subsidiaries are carried at cost less impairment loss. The results of
the subsidiaries are accounted for by the Company on the basis of dividends received and receivable
at the balance sheet date.
Minority interest represents the portion of the profit or loss and net assets of a subsidiary attributable
to equity interests that are not owned by the Group and are not the Group’s financial liabilities.
Minority interests are presented in the consolidated balance sheet within equity, separately from
the equity attributable to the equity holders of the Company. Profit or loss attributable to the minority
interests are presented separately in the consolidated income statement as an allocation of the Group’s
results. Where losses applicable to the minority exceeds the minority interests in the subsidiary’s
equity, the excess and further losses applicable to the minority are allocated against the minority
interest to the extent that the minority has a binding obligation and is able to make an additional
investment to cover the losses. Otherwise, the losses are charged against the Group’s interests. If
the subsidiary subsequently reports profits, such profits are allocated to the minority interest only
after the minority’s share of losses previously absorbed by the Group has been recovered.
(d)
Foreign currency translation
The financial statements are presented in Hong Kong Dollars (HK$), which is also the functional
currency of the Company.
In the individual financial statements of the consolidated entities, foreign currency transactions are
translated into the functional currency of the individual entity using the exchange rates prevailing
at the dates of the transactions. At balance sheet date, monetary assets and liabilities denominated
in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the
balance sheet date retranslation of monetary assets and liabilities are recognised in the consolidated
income statement.
Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated
at the rates prevailing on the date when the fair value was determined and are reported as part of the
fair value gain or loss. Non-monetary items that are measured in terms of historical cost in a foreign
currency are not retranslated.
In the consolidated financial statements, all individual financial statements of foreign operations,
originally presented in a currency different from the Group’s presentation currency, have been
converted into Hong Kong dollars. Assets and liabilities have been translated into Hong Kong dollars
at the closing rates at the balance sheet date. Income and expenses have been converted into the
Group’s presentation currency at the average rates over the reporting period. Any differences arising
from this procedure have been dealt with separately in the exchange reserve in equity.
– 60 –
APPENDIX I
Other exchange differences arising from the translation of the net investment in foreign entities and
of borrowings are taken to shareholders’ equity. When a foreign operation is sold, such exchange
differences are recognised in the consolidated income statement as part of the gain or loss on sale.
(e)
Revenue recognition
Revenue is recognised when it is probable that the economic benefits will flow to the Group and
when the revenue can be measured reliably, on the following bases:
(i)
sale of goods are recognised upon transfer of the significant risks and rewards of ownership
to the buyers, provided that the Group maintains neither managerial involvement to the
degree usually associated with ownership, nor effective control over the goods sold;
(ii)
interest income is recognised on a time proportion basis using the effective interest rate
method; and
(iii)
rental and sub-leasing rental income are recognised on a time proportion basis in accordance
with the terms and conditions of the tenancy agreement.
(f)
Borrowing costs
All borrowing costs are expensed as incurred.
(g)
Goodwill
Goodwill arising on acquisition of subsidiaries for which the acquisition date represents the excess
of the cost of an acquisition over the Group’s interest in the fair value of identifiable assets and
liabilities of the acquired subsidiary at the date of acquisition. The Group has discontinued
amortisation from 1 January 2005 onwards and goodwill is tested annually for impairment and
carried at cost less accumulated impairment losses. Gains and losses on the disposal of subsidiaries
include the carrying amount of goodwill relating to the subsidiaries sold.
(h)
Property, plant and equipment are recognised at revalued amount, based on their fair value at the
date of valuation less any subsequent accumulated depreciation and impairment losses. Fair value
is determined based on directors’ estimates and in appraisals by external professional valuers at
least once every three years, unless market-based factors indicate a risk of impairment. Any
accumulated depreciation at the date of revaluation is restated proportionately with the change in
the gross carrying amount of the asset so that the carrying amount of the asset revaluation equals it
revalued amount.
– 61 –
APPENDIX I
Any revaluation surplus arising on revaluation of property, plant and equipment is credited to the
“assets revaluation reserve” in equity, unless the carrying amount of that asset has previously suffered
a revaluation decrease or impairment loss as described in note 3(i). To the extent that any decrease
has previously been recognised in consolidated income statement, a revaluation increase is credited
to consolidated income statement with the remaining part of the increase dealt with in the asset
revaluation reserve. A decrease in net carrying amount of property, plant and equipment arising
from revaluations or impairment testing is charged against any revaluation surplus in the asset
revaluation reserve relating to the asset and any remaining decrease recognised in consolidated
income statement.
Depreciation is calculated using the straight-line method to allocate the revalued amounts of the
property, plant and equipment to their residual values over their estimated useful lives, as follows :
Buildings
The shorter of the lease terms and/or 50 years
Plant and machinery
15 years
Leasehold improvements, furniture,
office equipment and motor vehicles
4 to 10 years
The assets’ useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
The gain or loss arising on retirement or disposal is determined as the difference between the sales
proceeds and the carrying amount of the asset and is recognised in consolidated income statement.
Any revaluation surplus remaining in equity is transferred to retained earnings on the disposal of
revalued assets.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as
appropriate, only when it is probable that future economic benefits associated with the item will
flow to the Group and the cost of the item can be measured reliably. All other costs, such as repairs
and maintenance are charged to the consolidated income statement during the financial period in
which they are incurred.
(i)
Impairment testing of assets
Goodwill, property, plant and equipment, prepaid lease payments, and interests in subsidiaries are
subject to impairment testing.
Goodwill is tested for impairment at least annually, irrespective of whether there is any indication
that they are impaired. All other assets are tested for impairment whenever there are indications
that the asset’s carrying amount may not be recoverable.
– 62 –
APPENDIX I
An impairment loss is recognised as an expense immediately for the amount by which the asset’s carrying
amount exceeds its recoverable amount unless the relevant asset is carried at a revalued amount under
the Group’s accounting policy, in which case the impairment loss is treated as a revaluation decrease
according to that policy (refer to Note 3(h) for details). The recoverable amount is the higher of fair
value, reflecting market conditions less costs to sell, and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessment of time value of money and the risk specific to the asset.
For the purposes of assessing impairment, where an asset does not generate cash inflows largely
independent from those from other assets, the recoverable amount is determined from the smallest
group of assets that generate cash inflows independently (i.e. a cash-generating unit). As a result,
some assets are tested individually for impairment and some are tested at cash-generating unit
level. Goodwill in particular is allocated to those cash-generating units that are expected to benefit
from synergies of the related business combination and represent the lowest level within the Group
at which the goodwill is monitored for internal management purpose.
An impairment loss recognised for cash-generating units, to which goodwill has been allocated, are
credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged
pro rata to the other assets in the cash generating unit, except that the carrying value of an asset will
not be reduced below its individual fair value less cost to sell, or value in use, if determinable.
An impairment loss on goodwill is not reversed in subsequent periods. In respect of other assets, an
impairment loss is reversed if there has been a favourable change in the estimates used to determine
the asset’s recoverable amount and only to the extent that the asset’s carrying amount does not
exceed the carrying amount that would have been determined, net of depreciation or amortisation,
if no impairment loss had been recognised.
(j)
Leases
An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the
Group determines that the arrangement conveys a right to use a specific asset or assets for an
agreed period of time in return for a payment or a series of payments. Such a determination is made
based on an evaluation of the substance of the arrangement and is regardless of whether the
arrangement takes the legal form of a lease.
(a)
Assets acquired under a finance lease
Where the Group acquires the use of assets under finance leases, the amounts representing
the fair value of the leased asset, or, if lower, the present value of the minimum lease
payments, of such assets is included in property, plant and equipment and the corresponding
liabilities, net of finance charges, are recorded as obligation under finance leases.
Subsequent accounting for assets held under finance lease agreement corresponds to those
applied to comparable acquired assets. The corresponding finance lease liability is reduced
by lease payments less finance charges, which are expensed to finance costs.
– 63 –
APPENDIX I
Finance charges implicit in the lease payments are charged to profit or loss over the period
of the leases so as to produce an approximately constant periodic rate of charge on the
remaining balance of the obligations for each accounting period. Contingent rentals are
charged to profit or loss in the accounting period in which they are incurred.
(b)
Operating leases charges as the lessee
(i)
Where the Group has the use of assets held under operating leases, payments made
under the leases are charged to the consolidated income statement on a straight line
basis over the lease terms except where an alternative basis is more representative of
the pattern of benefits to be derived from the leased assets. Lease incentives received
are recognised in the consolidated income statement as an integral part of the
aggregate net lease payments made. Contingent rentals are charged to the consolidated
income statement in the accounting period in which they are incurred.
(ii)
Prepaid lease payments are up-front payments to acquire the land use rights/leasehold
land. The payments are stated at cost less accumulated amortisation and accumulated
impairment losses. Amortisation is calculated on a straight line basis over the lease
term.
(c)
Assets leased out under operating leases as the lessor
Assets leased out under operating leases are measured and presented according to the nature
of the assets. Initial direct costs incurred in negotiating and arranging an operating lease are
added to the carrying amount of the leased asset and recognised as an expense over the
lease term on the same basis as the rental income.
Rental income receivable from operating leases is recognised in profit or loss on a straightline basis over the periods covered by the lease term, except where an alternative basis is
more representative of the pattern of benefits to be derived from the use of the leased asset.
Lease incentives granted are recognised in profit or loss as an integral part of the aggregate
net lease payments receivable. Contingent rentals are recognised as income in the accounting
period in which they are earned.
(k)
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the
first-in, first-out method, and in the case of work in progress and finished goods, comprises direct
materials, direct labour and an appropriate proportion of overheads based on a normal level of
operating activities. Net realisable value is based on the estimated selling prices in the ordinary
course of business less any applicable selling expenses.
– 64 –
APPENDIX I
(l)
Financial assets
All financial assets are recognised when, and only when, the Group becomes a party to the contractual
provisions of the instrument. When financial assets are recognised initially, they are measured at
fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable
transaction costs.
Derecognition of financial assets occurs when the rights to receive cash flows from the investments
expire or are transferred and substantially all of the risks and rewards of ownership have been
transferred. At each balance sheet date, financial assets are reviewed to assess whether there is
objective evidence of impairment. If any such evidence exists, impairment loss is determined and
recognised based on the classification of the financial asset.
Account and other receivables, and cash and cash equivalents are non-derivative financial assets
with fixed or determinable payments that are not quoted in an active market. They are recognised
initially at fair value and subsequently measured at amortised cost using the effective interest rate
method, less any provision for impairment losses. Amortised cost is calculated taking into account
any discount or premium on acquisition and includes fees that are an integral part of the effective
interest rate and transaction cost.
A provision for impairment of receivables is established when there is objective evidence that the
Group will not be able to collect all amounts due according to the original terms of the receivables.
The amount of the write-down is determined as the difference between the asset’s carrying amount
and the present value of expected cash flows, discounted at the original effective rate of interest.
The amount of loss is recognised in profit or loss of the period in which the impairment occurs.
If, in subsequent period, the amount of the impairment loss decreases and the decrease can be
related objectively to an event occurring after the impairment was recognised, the previously
recognised impairment loss is reversed to the extent that it does not result in the carrying amount of
the financial asset exceeding what the amortised cost would have been had the impairment not been
recognised at the date the impairment is reversed. The amount of the reversal is recognised in profit
or loss of the period in which the reversal occurs.
(m)
Accounting for income taxes
Income tax comprises current tax and deferred tax
Current income tax assets and/or liabilities comprise those obligations to, or claims from, tax
authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date.
They are calculated according to the tax rates and tax laws applicable to the periods to which they
relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are
recognised as a component of tax expense in the consolidated income statement.
– 65 –
APPENDIX I
Deferred tax is calculated using the liability method on temporary differences at the balance sheet
date between the carrying amounts of assets and liabilities in the financial statements and their
respective tax bases. Deferred tax liabilities are generally recognised for all taxable temporary
differences. Deferred tax assets are recognised for all deductible temporary differences, tax losses
available to be carried forward as well as other unused tax credits, to the extent that it is probable
that taxable profit will be available against which the deductible temporary differences, unused tax
losses and unused tax credits can be utilised.
Deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill
or from initial recognition (other than in a business combination) of assets and liabilities in a
transaction that affects neither taxable nor accounting profit or loss.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in
subsidiaries, except where the Group is able to control the reversal of the temporary differences
and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax is calculated, without discounting, at tax rates that are expected to apply in the period
the liability is settled or the asset realised, provided they are enacted or substantively enacted at the
balance sheet date.
Changes in deferred tax assets or liabilities are recognised in the consolidated income statement, or
in equity if they relate to items that are charged or credited directly to equity.
(n)
Cash and cash equivalents include cash at bank and in hand less bank overdrafts which are repayable
on demand and form an integral part of the Group’s cash management.
(o)
Share capital
Ordinary shares are classified as equity. Share capital is determined using the nominal value of
shares that have been issued.
Any transaction costs associated with the issuing of shares are deducted from the share premium
(net of any related income tax benefit) to the extent they are incremental costs directly attributable
to the equity transaction.
(p)
Financial liabilities
The Group’s financial liabilities include trade and other payables, and accruals, amounts due to
directors and minority shareholders, bank borrowings and finance lease payable. They are included
in balance sheet line items as “amounts due to minority shareholders” under non-current liabilities
or “trade payables”, “other payables and accruals”, “amounts due to directors” and “bank borrowings”
under current liabilities or “finance lease payable” under current or non-current liabilities.
– 66 –
APPENDIX I
Financial liabilities are recognised when the Group becomes a party to the contractual provisions
of the instrument. All interest related charges are recognised as an expense in finance costs in the
consolidated income statement.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled
or expires.
Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amount is recognised in the consolidated
income statement.
(a)
Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings
are subsequently stated at amortised cost; any difference between the proceeds (net of
transaction costs) and the redemption value is recognised in the consolidated income
statement over the period of the borrowings using the effective interest rate method.
Borrowings are classified as current liabilities unless the Group has an unconditional right
to defer settlement of the liability for at least 12 months after the balance sheet date.
(b)
Trade and other payables and accruals
Trade and other payables and accruals are recognised initially at their fair value and
subsequently measured at amortised cost, using the effective interest rate method.
(c)
Convertible note
Convertible note issued by the Company that contain both financial liability and equity
components are classified separately into respective liability and equity components on
initial recognition. On initial recognition, the fair value of the liability component is
determined using the prevailing market interest rate for similar non-convertible debts. The
difference between the proceeds of the issue of the convertible note and the fair value assigned
to the liability component, representing the call option for conversion of the note into equity,
is included in equity as convertible bond equity reserve.
The liability component is subsequently carried at amortised cost using the effective interest
rate method. The equity component will remain in equity until conversion or redemption of
the note.
When the note is converted, the convertible note equity reserve and the carrying value of the
liability component at the time of conversion, is transferred to share capital and share premium
as consideration for the shares issued. If the bond is redeemed, the convertible note equity
reserve is released directly to retained profits.
– 67 –
APPENDIX I
(d)
Finance lease liabilities
Finance lease liabilities are measured at initial value less the capital element of lease
repayments (see Note 3(j)).
(q)
Provisions, contingent liabilities and contingent assets
Provisions are recognised when the Group has a present obligation (legal or constructive) as a
result of a past event, and it is probable that an outflow of economic benefits will be required to
settle the obligation and a reliable estimate can be made. Where the time value of money is material,
provisions are stated at the present value of the expenditure expected to settle the obligation.
All provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate.
Where it is not probable that an outflow of economic benefits will be required, or the amount
cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability
of outflow of economic benefits is remote. Possible obligations, whose existence will only be
confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as
contingent liabilities unless the probability of outflow of economic benefits is remote.
Contingent liabilities are recognised in the course of the allocation of purchase price to the assets
and liabilities acquired in a business combination. They are initially measured at fair value at the
date of acquisition and subsequently measured at the higher of the amount that would be recognised
in a comparable provision as described above and the amount initially recognised less any
accumulated amortisation, if appropriate.
(r)
Retirement benefits costs and short term employee benefits
Retirement benefits to employees are provided through a defined contribution plans
(a)
Defined contribution plans
The Group operates a defined contribution Mandatory Provident Fund retirement benefits
scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for
all of its employees in Hong Kong. Contributions are made based on a percentage of the
employees’ basic salaries and are charged to the consolidated income statement as they
become payable in accordance with the rules of the MPF Scheme. The assets of the MPF
Scheme are held separately from those of the Group in an independently administered fund.
The Group’s employer contributions vest fully with the employees when contributed into
the MPF Scheme.
– 68 –
APPENDIX I
The employees of the Group’s subsidiaries which operate in the People’s Republic of China,
excluding Hong Kong and Macau, (the “PRC”) are required to participate in the retirement
benefits scheme (the “RB Scheme”) operated by the respective local municipal government
in the PRC. These subsidiaries are required to contribute a certain percentage of their payroll
costs to the RB Scheme to fund the benefits. The only obligation of the Group with respect
to the RB Scheme is to pay the ongoing required contributions under the RB Scheme.
Contributions under the RB Scheme are charged to the consolidated income statement as
they become payable in accordance with the rules of the RB Scheme.
(b)
Short-term employee benefits
Employee entitlements to annual leave are recognised when they are accrued to employees.
A provision is made for the estimated liability for annual leave as a result of services rendered
by employees up to the balance sheet date.
Employee entitlements to sick leave and maternity leave are not recognised until the time of
leave.
(s)
(i)
The Group operates equity-settled share-based compensation plans for remuneration of its
employees.
All employee services received in exchange for the grant of any share-based compensation
are measured at their fair values. These are indirectly determined by reference to the share
options awarded. Their value is appraised at the grant date and excludes the impact of any
non-market vesting conditions (for example, profitability and sales growth targets).
(ii)
For other goods or services received by the Group in exchange for the grant of any sharebased compensation, they are directly measured at the fair value of the goods or services
received.
All share-based compensation is ultimately recognised as an expense in consolidated income
statement/recognised as an expense in full at the grant date when the share options granted vest
immediately, with a corresponding increase in equity (share option reserve). If vesting periods or
other vesting conditions apply, the expense is recognised over the vesting period, based on the best
available estimate of the number of share options expected to vest. Non-market vesting conditions
are included in assumptions about the number of options that are expected to become exercisable.
Estimates are subsequently revised, if there is any indication that the number of share options
expected to vest differs from previous estimates. No adjustment to expense recognised in prior
periods is made if fewer share options ultimately are exercised than originally vested.
At the time when the share options are exercised, the amount previously recognised in share option
reserve will be transferred to share premium. When the share options are forfeited or are still not
exercised at the expiry date, the amount previously recognised in share option reserve will be
transferred to retained profits.
– 69 –
APPENDIX I
(t)
Segment reporting
In accordance with the Group’s internal financial reporting the Group has determined that business
segments be presented as the primary reporting format and geographical segments as the secondary
reporting format.
Segment revenue, expenses, results, assets and liabilities include items directly attributable to a
segment as well as those that can be allocated on a reasonable basis to that segment. Segment
revenue, expenses, assets and liabilities are determined before intra-group balances and intra-group
transactions are eliminated as part of the combination process, except to the extent that such intragroup balances and transactions are between group enterprises within a single segment. Inter-segment
pricing is based on similar terms as those available to other external parties.
Capital expenditure is the total cost incurred during the year to acquire segment assets that are
expected to be used for more than one year.
Unallocated item mainly comprise financial and corporate assets, interest-bearing loans, borrowings,
corporate and financing expenses and minority interests.
In respect of geographical segment reporting, revenue is based on the country in which the customer
is located and total assets and capital expenditure are where the assets are located.
(u)
Related parties
Parties are considered to be related to the Group if:
(i)
directly, or indirectly through one or more intermediaries, the Group:
—
—
—
controls, is controlled by, or is under common control with, the entity;
has an interest in the entity that gives it significant influence over the entity;
has joint control over the entity;
(ii)
the party is an associate of the Group;
(iii)
the party is a joint venture in which the Group is a venturer;
(iv)
the party is a member of the key management personnel of the Group or its parent;
(v)
the party is a close member of the family or any individual referred to in (i) or (iv);
(vi)
the party is an entity that is controlled, jointly-controlled or significantly influenced by or
for which significant voting power in such entity resides with, directly or indirectly, any
individual referred to in (iv) or (v); or
(vii)
the party is a post-employment benefit plan for the benefit of employees of the Group, or of
any entity that is a related party of the Group.
– 70 –
APPENDIX I
4.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Estimates and judgements are continually evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates
will, by definition, seldom equal the related actual results. The estimates and assumptions that have a
significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the
next financial year are discussed below:
(i)
Depreciation
The Group depreciates its property, plant and equipment on a straight-line basis over their estimated
useful lives of 4 to 50 years. The estimated useful lives reflect the directors’ estimate of the period
that the Group will derive future economic benefits from the use of the Group’s property, plant and
equipment.
(ii)
Fair value of property, plant and equipment
Property, plant and equipment are stated at fair value based on director’s estimates and valuations
performed by independent professional valuers. In determining the fair value, the directors and the
valuers have used a method of valuation which involves certain estimates. The directors have
exercised their judgement as to the estimates used, the appropriateness of method of valuation used
and that the assumptions used therein are reflective of current market conditions.
(iii)
Impairment of receivables
The Group’s management reviews receivables on a regular basis to determine if any provision for
impairment is necessary. This estimate is based on the credit history of its customers, past settlement
and industry practice and current market conditions. Management reassesses the impairment of
receivables at the balance sheet date.
(iv)
Net realisable value of inventories
Net realisable value of inventories is the estimated selling price in the ordinary course of business,
less estimated costs of completion and selling expenses. These estimates are based on the current
market condition and the historical experience of selling goods of similar nature. It could change
significantly as a result of changes in market conditions. Management reassesses the estimations at
the balance sheet date.
– 71 –
APPENDIX I
5.
REVENUE, OTHER REVENUE AND INCOME
Revenue, which is also the Group’s turnover, represents total invoiced value of goods sold after allowances
for returns and trade discounts.
An analysis of the Group’s revenue, other revenue and income is as follows:
2006
HK$’000
2005
HK$’000
26,523
40,982
85
1,312
1,079
5,000
87
544
134
—
7,476
765
Revenue
Sale of goods
Interest income
Rental and sub-leasing rental income
Sundry income
Write back of deposit received (note (a))
Note:
(a)
On 30 May 2006, the Company and GP Capital Limited entered into a subscription agreement
(“Subscription Agreement”) for the placing of the Company’s convertible notes in an aggregate
principal amount of HK$40 million (“Convertible Notes”). On 9 June 2006, the Company and GP
Capital Limited entered into an agreement to extend the date of closing of the placing of Convertible
Notes from 10 June 2006 to not later than 30 June 2006. In consideration of the Company agreeing
to extend the closing date, GP Capital Limited agreed to place a non-refundable amount of
HK$10,000,000 with the Company which upon completion of the placing of the Convertible Notes
would be used as part of the subscription monies for the Convertible Notes. However, the Group
only received an initial deposit of HK$5,000,000 prior to the expiry of the extended closing date.
On 30 June 2006, the Company was provided with two cheques by GP Capital Limited in the
amount of HK$5,000,000 and HK$30,000,000 respectively (the “Cheques”) for the purpose of
settling the remaining subscription monies pursuant to the Subscription Agreement. However, the
Cheques were not honoured by the GP Capital Limited’s bank. In view of this, on 27 September
2006, the Company notified GP Capital Limited of the termination of the Subscription Agreement.
A legal proceeding was brought by the Group and based on the court order issued on 12 February
2007, GP Capital Limited is required to honour the Cheques.
In the opinion of the directors, after consulting with their legal advisor, the Subscription Agreement
has expired and the deposit received of HK$5,000,000 is non-refundable and, accordingly, this
amount has been credited as income to the consolidated income statement for the year.
– 72 –
APPENDIX I
6.
SEGMENT INFORMATION
The Group’s operating businesses are structured and managed separately according to the nature of their
operations and the products they provide. Each of the Group’s business segments represents a strategic
business unit that offers products which are subject to risks and returns that are different from those of the
other business segments. Summary of details of the business segments are as follows:
(i)
the manufacturing of carpets segment represents the manufacturing and sale of carpets; and
(ii)
the trading of carpets segment represents the trading of carpets of other renowned brand names.
In determining the Group’s geographical segments, revenues are attributable to the segments based on the
location of customers, and assets are attributable to the segments based on the location of the assets.
There was no intersegment sale and transfer during the year (2005: Nil).
(a)
Primary reporting format - business segments
Manufacturing
of carpets
2006
2005
HK$’000 HK$’000
Segment revenue:
Sales to external
customers
Segment results
Unallocated other
operating income
Impairment
of goodwill
Gain on disposal
of subsidiaries
Gain on deemed
disposal of
a subsidiary
Other unallocated
expense
Finance costs
Trading of carpets
Consolidated
2006
2005
2006
2005
HK$’000 HK$’000 HK$’000 HK$’000
8,825
8,179
17,698
32,803
26,523
40,982
(17,618)
(54,994)
(5,506)
(9,960)
(23,124)
(64,954)
5,059
55
—
(35,750)
—
—
—
(35,750)
—
3,838
—
6,796
—
10,634
—
—
—
2,067
—
2,067
(27,943)
(149)
(1,496)
(1,686)
Loss before
income tax
Income tax
(46,157)
—
(91,130)
—
Loss for the year
(46,157)
(91,130)
– 73 –
APPENDIX I
Manufacturing
of carpets
2006
2005
HK$’000 HK$’000
Trading of carpets
Consolidated
2006
2005
2006
2005
HK$’000 HK$’000 HK$’000 HK$’000
Segment assets
Unallocated assets
79,535
—
83,740
—
7,098
—
10,123
—
86,633
13,884
93,863
16,739
Total assets
79,535
83,740
7,098
10,123
100,517
110,602
Segment liabilities
Unallocated
liabilities
18,445
8,211
14,987
12,247
33,432
20,458
—
—
—
—
4,284
4,252
Total liabilities
18,445
8,211
14,987
12,247
37,716
24,710
112
107
—
—
112
107
6,152
5,952
312
323
6,464
6,275
—
—
—
—
983
105
6,152
5,952
312
323
7,447
6,380
56
242
17
36
73
278
—
—
—
—
3,945
725
56
242
17
36
4,018
1,003
Bad debts
written off
—
47,950
65
72
65
48,022
Provision for
impairment of
trade receivables
—
—
314
—
314
—
Impairment
of goodwill
—
35,750
—
—
—
35,750
Amortisation of
prepaid lease
payments
Depreciation
Unallocated
depreciation
Capital expenditure —
addition of property,
plant and equipment
Unallocated capital
expenditure
Addition of
property, plant
and equipment
Non cash expenses
– 74 –
APPENDIX I
(b)
Secondary reporting format — geographic segments
Hong Kong
Macau
PRC
Overseas
Consolidated
2006
2005
2006
2005
2006
2005
2006
2005
2006
2005
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
7.
Segment revenue
Sales to external
customers
12,471
24,231
866
778
9,386
11,541
3,800
4,432
26,523
40,982
Segment assets
20,982
26,862
—
—
79,535
83,740
—
—
100,517
110,602
Capital
expenditure
Addition
of property,
plant and
equipment
3,962
761
—
—
56
242
—
—
4,018
1,003
FINANCE COSTS
2006
2005
HK$’000
HK$’000
111
275
Interest charged on:
Bank loans and overdrafts wholly repayable within five years
Finance lease
23
6
Other loans
15
1,405
149
1,686
– 75 –
APPENDIX I
8.
LOSS BEFORE INCOME TAX
Loss before income tax is arrived at after charging and crediting the following:
2006
2005
HK$’000
HK$’000
19,878
25,824
7,371
6,374
76
6
7,447
6,380
Charging:
Cost of inventories recognised as expense
Depreciation (note (a))
— owned assets
— leased fixed assets
112
107
3,093
2,589
534
311
2
22
Impairment of goodwill **
—
35,750
Bad debts written off (note (b)) **
65
48,022
1,020
—
9,757
—
Operating lease charges on land and buildings
Auditors’ remuneration
Loss on disposals of property, plant and equipment **
Fair value of options granted to a third party for consultancy
services rendered (note 30(a))
Fair value of options granted to directors and
employees included in staff cost (note 13)
Provision for impairment of trade receivables **
Outgoings in respect of leasing properties
314
—
1,096
60
8,938
—
Under-provision of value added tax and the corresponding penalty
arising in previous years (note 23(a)) **
Exchange difference, net
Staff cost, including directors’ emoluments (note 13)
—
239
24,243
10,262
Crediting:
Exchange difference, net
Gain on disposal of subsidiaries **
4
—
—
10,634
Gain on deemed disposal of subsidiaries **
—
2,067
Write back of other payables **
—
2,230
Write back of provision for salary provision **
—
62
Notes:
**
Included in “Other operating expenses” on the face of the consolidated income statement.
(a)
Depreciation expenses of HK$5,538,000 (2005: HK$5,384,000) has been expensed in cost of
inventories sold and HK$1,909,000 (2005: HK$996,000 ) in administrative expenses.
(b)
Included in the bad debts written off was an amount of HK$47,950,000 due from a debtor which
was overdue for over two years as at 31 December 2005.
– 76 –
APPENDIX I
9.
INCOME TAX EXPENSE
2006
HK$’000
2005
HK$’000
—
—
Current tax
— Hong Kong
No provision for Hong Kong profits tax is required since the Group did not have any assessable profit for
the year (2005: Nil).
Reconciliation between income tax expense and the accounting loss at applicable tax rates:
2006
HK$’000
(46,157)
(91,130)
Tax at the applicable rates
Tax effect of non-taxable income
Tax effect of non-deductible expenses
Tax effect of unrecognised temporary differences
Tax effect of tax losses not recognised
(10,808)
(1,406)
6,922
331
4,961
(16,117)
(1,495)
15,326
242
2,044
Income tax expense
10.
2005
HK$’000
—
—
DIVIDENDS
No dividend has been paid or declared by the Company for the year ended 31 December 2006 (2005: Nil).
11.
LOSS ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
Of the consolidated loss attributable to equity holders of the Company of HK$46,167,000 (2005:
HK$91,136,000), a loss of HK$40,087,000 (2005: HK$54,155,000) has been dealt with in the financial
statements of the Company.
12.
LOSS PER SHARE
The calculation of basic loss per share is based on the loss attributable to the equity holders of the Company
of approximately HK$46,167,000 (2005: HK$91,136,000) and on the weighted average of ordinary shares
of 528,332,055 (2005: 303,888,493) in issue.
No diluted loss per share is presented for the year ended 31 December 2006 as the outstanding share
options were anti-dilutive. No diluted loss per share for the year ended 31 December 2005 has been presented
as there was no dilutive potential shares.
– 77 –
APPENDIX I
13.
EMPLOYEE BENEFIT EXPENSE (INCLUDING DIRECTORS’ EMOLUMENTS)
Wages, salaries and allowances
Fair value of share options granted to directors and
employees (note (a))
Pension costs - defined contribution plans
2006
HK$’000
2005
HK$’000
14,186
10,035
9,757
300
—
227
24,243
10,262
Note:
(a)
14.
Fair value of share options granted to directors and employees of approximately HK$10,170,000
was charged to the income statement during the year at the date of grant (note 30(a)). An amount of
approximately HK$413,000 was credited to the income statement on cancellation of share options
when the corresponding staff left the Group (note 30 (b)).
DIRECTORS’ REMUNERATION AND SENIOR MANAGEMENT’S EMOLUMENTS
(a)
Directors’ emolument
Fees
HK$’000
Salaries,
allowances
and
benefits
in kind*
HK$’000
Contribution
to retirement
Quarter
benefit
expenses
scheme
HK$’000
HK$’000
Total
HK$’000
2006
Executive directors
Mr. Pang Man Kin, Nixon
Mr. Tsao Ke Wen, Calvin
Mr. Lam Shu Chung
Mr. Law Fei Shing
Mr. So Chi Keung
—
—
—
—
—
2,325
1,177
1,465
1,605
1,090
600
605
—
—
—
12
12
12
12
11
2,937
1,794
1,477
1,617
1,101
Non-executive director
Dr. Ma Chung Wo Cameron
—
86
—
—
86
Independent non-executive directors
Mr. Poon Chiu #
Mr. Lum Pak Sum
Mr. Li Chak Hung #
60
60
66
86
86
86
—
—
—
—
—
—
146
146
152
186
8,006
1,205
59
9,456
*
This includes the fair value of share options granted during the year attributable to the
directors.
#
Resigned on 4 April 2007.
– 78 –
APPENDIX I
Notes
Contribution
Quarter to retirement
expenses benefit scheme
HK$’000
HK$’000
Fees
HK$’000
Salaries and
allowances
HK$’000
201
183
600
480
181
325
329
—
—
—
5
5
12
12
4
531
517
612
492
185
Total
HK$’000
2005
Executive directors
Mr. Lam Shu Chung
Mr. Law Fei Shing
Mr. So Chi Keung
(ii)
—
—
—
—
—
Non-executive director
Dr. Ma Chung Wo Cameron
(iii)
—
—
—
—
—
Independent
non-executive directors
Mr. Poon Chiu
Mr. Lum Pak Sum
Mr. Li Chak Hung
Mr. Yu Tak Shing, Eric
Mr. Lee Siu Leung
Mr. Ha Chun, Michael
(iii)
(iv)
(iv)
(v)
(vi)
(vii)
30
18
19
50
52
30
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
30
18
19
50
52
30
199
1,645
654
38
2,536
Notes:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(i)
(i)
appointed on 16 August 2005
appointed on 31 March 2005
appointed on 30 June 2005
appointed on 16 September 2005
appointed on 31 March and resigned on 16 September 2005
resigned on 6 June 2005
resigned on 31 March 2005
During the year, 22,500,000 share options were granted to the directors of the Company to subscribe
for ordinary shares of the Company (2005: Nil).
During the year, no emoluments were paid by the Group to the directors of the Company as an
inducement to join or upon joining the Group, or as compensation for loss of office (2005: Nil).
There was no arrangement under which a director waived or agreed to waive any remuneration
during the year.
– 79 –
APPENDIX I
(b)
Five highest paid individuals
The five highest paid individuals during the year included five directors (2005: three), details of
whose remuneration are set out in note 14(a) above. Details of the emoluments of the remaining
two individuals in the year ended 31 December 2005, which fell within the salary band of Nil HK$1,000,000, are as follows:
2005
HK$’000
Basic salaries, housing benefits, other allowances and benefits in kind
Retirement benefits scheme contributions
1,080
24
1,104
15.
PROPERTY, PLANT AND EQUIPMENT
(a)
Group
Buildings
HK$’000
Plant and
machinery
HK$’000
Leasehold
improvements,
furniture, office
equipment and
motor vehicles
HK$’000
Total
HK$’000
At 1 January 2005
Valuation
Accumulated depreciation
21,497
(457)
61,167
(7,067)
4,127
(1,409)
86,791
(8,933)
Net book amount
21,040
54,100
2,718
77,858
Year ended 31 December 2005
Opening net book amount
Additions
Disposals
Exchange differences
Depreciation
21,040
—
—
607
(471)
54,100
—
—
1,561
(5,482)
2,718
1,003
(175)
23
(427)
77,858
1,003
(175)
2,191
(6,380)
Closing net book amount
21,176
50,179
3,142
74,497
At 31 December 2005
Valuation
22,118
(942)
62,931
(12,752)
4,976
(1,834)
90,025
(15,528)
Net book amount
21,176
50,179
3,142
74,497
– 80 –
APPENDIX I
Leasehold
improvements,
furniture, office
Plant and
equipment and
Buildings
machinery
motor vehicles
Total
HK$’000
HK$’000
HK$’000
HK$’000
21,176
50,179
3,142
74,497
—
—
4,018
4,018
Additions
Disposals
—
—
847
2,035
(490)
(5,538)
(1,419)
(7,447)
21,533
46,676
5,743
73,952
Valuation
23,002
65,141
9,073
97,216
(1,469)
(18,465)
(3,330)
(23,264)
Net book amount
21,533
46,676
5,743
73,952
Depreciation
(16)
18
(16)
2,900
At 31 December 2006
The Group’s property, plant and equipment were carried at fair value and were revalued at 31
December 2006. Valuations were made on the basis of the depreciated replacement cost method
determined by B.I. Appraisals Limited, an independent firm of chartered surveyors.
Property, plant and equipment for the Group includes an amount of HK$380,000 in respect of
assets held under a finance lease (2005: HK$380,000) and the related accumulated depreciation
amounts is approximately HK$82,000 (2005: HK$6,000).
The Group paid a deposit of HK$3,075,000 for additions of leasehold improvements, furniture and
office equipment during the year ended 31 December 2005 which was classified as ‘deposits paid’.
During the year, the consideration was fully paid by the Group and the deposit paid in last year was
transferred to property, plant and equipment.
– 81 –
APPENDIX I
(b)
Company
Leasehold improvements, furniture,
office equipment and motor vehicles
HK$’000
At 1 January 2005
Valuation
447
(18)
Net book amount
429
Additions
Disposals
Depreciation
429
9
(12)
(87)
339
At 31 December 2005
Valuation
444
(105)
Net book amount
339
Additions
Disposals
Depreciation
339
3
(8)
(73)
261
At 31 December 2006
Valuation
438
(177)
Net book amount
261
– 82 –
APPENDIX I
16.
PREPAID LEASE PAYMENTS - GROUP
The Group’s interests in leasehold land and land use rights represent prepaid operating lease payments and
their net carrying value are analysed as follows:
2006
2005
HK$’000
HK$’000
Outside Hong Kong, held on leases of between 10 to 50 years
4,912
4,831
Opening net carrying amount
4,831
4,798
Annual charges of prepaid operating lease payment
Closing net carrying amount
17.
193
140
(112)
(107)
4,912
4,831
INTERESTS IN SUBSIDIARIES - COMPANY
Notes
2006
2005
HK$’000
HK$’000
Investments
— Unlisted shares, at cost
(a)
76,432
76,432
— Arising from share-based compensation
(b)
5,754
—
82,186
76,432
Due from subsidiaries
(c)
149,183
139,059
Provision for impairment losses
– 83 –
231,369
215,491
(170,183)
(139,059)
61,186
76,432
APPENDIX I
Notes:
(a)
Particulars of the principal subsidiaries as at 31 December 2006 are as follows:
Percentage
Name
Place of
Paid-up
of equity
incorporation/
share/registered
attributable to
activities and place
Principal
establishment
capital
the Company
of operation
British Virgin
Ordinary
100%
Islands
US$100
British Virgin
Ordinary
Islands
US$1
PRC
US$4,940,000
Directly held
Jackley China Limited
Aurora International
Enterprises Limited
Investment holding
Hong Kong
100%
Investment holding
Hong Kong
Indirectly held
Hui Zhou Orient Carpet Manufacturing
100%
Co., Ltd. (“HZOCM”) #
Orient Finance (Hong Kong) Limited *
of carpets PRC
Hong Kong
Ordinary
100%
HK$10,000
Orient Carpet Manufacturing
Manufacture and sale
Hong Kong
(Hong Kong) Limited *
Ordinary
Provision of finance
Hong Kong
100%
HK$10,000
Investment holding and
trading of carpets
Hong Kong
International Carpet
Hong Kong
Co. Limited (“ICC”) *
Aurora Logistic Capital
Ordinary
51%
HK$2,000,000
Hong Kong
Ordinary HK$1
Hong Kong
100%
Assurance Limited
Aurora Logistic Software
Investment holding
Hong Kong
Hong Kong
Ordinary HK$1
100%
Management Limited
Wise Mount Management Limited
Trading of carpets
Logistic
Hong Kong
Hong Kong
Ordinary HK$1
100%
Investment holding
Hong Kong
Wellspark Holdings Limited
Hong Kong
Ordinary HK$1
100%
Investment holding
Hong Kong
*
Subsidiaries audited by Grant Thornton Hong Kong
#
Wholly foreign owned enterprise
– 84 –
APPENDIX I
The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally
affected the results for the year or formed a substantial portion of the net assets of the Group. To give
details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.
(b)
The amount represents share-based compensation expenses arising from grant of share options of
the Company to employees of subsidiaries in exchange for their services offered to these subsidiaries.
(c)
The amounts due are unsecured, interest-free and not repayable in the next twelve months from the
balance sheet date.
18.
GOODWILL — GROUP
The net carrying amount of goodwill is analysed as follows:
2006
2005
HK$’000
HK$’000
At 1 January
Gross carrying amount
Accumulated impairment
71,500
71,500
(71,500)
(35,750)
Net carrying amount
—
35,750
Net carrying amount at 1 January
—
35,750
Impairment losses
—
(35,750)
Net carrying amount at 31 December
—
—
At 31 December
Gross carrying amount
Accumulated impairment
71,500
71,500
(71,500)
(71,500)
Net carrying amount
—
—
The balance of the Group’s goodwill carried forward to 2005 of HK$35,750,000 was wholly attributable to
HZOCM, which carries out all of the Group’s carpet manufacturing operations.
Based on the comparison of the fair value less costs to sell (being the recoverable amount) and the carrying
value of the cash-generating units, the directors concluded the goodwill relating to the HZOCM carpet
manufacturing operations had been fully impaired in the year ended 31 December 2005. Accordingly, an
impairment charge of HK$35,750,000 was charged to the consolidated income statement in 2005.
– 85 –
APPENDIX I
19.
INVENTORIES — GROUP
Raw materials
Work in progress
Finished goods
20.
2006
2005
HK$’000
HK$’000
1,773
2,170
—
61
2,260
3,452
4,033
5,683
TRADE AND BILLS RECEIVABLES — GROUP
The Group normally allows credit terms ranging from 30 to 120 days to established customers. An aging
analysis of the trade and bills receivables, net of provision, as at the balance sheet date, based on the date
of recognition of the sale, is as follows:
1-90 days
2006
2005
HK$’000
HK$’000
3,567
3,340
91-120 days
153
80
121-365 days
471
2,292
2,050
1,423
6,241
7,135
(1,737)
(1,423)
4,504
5,712
Over 1 year
Less: Provision for impairment of trade receivables
Trade receivables — net
– 86 –
APPENDIX I
21.
CASH AND CASH EQUIVALENTS
(a)
Group
Cash and cash equivalents include the following components:
Bank overdrafts (note 26)
2006
2005
HK$’000
HK$’000
776
7,069
(5)
771
(138)
6,931
Included in cash at banks and in hand of the Group is HK$344,000 (2005: HK$201,000) of bank
balances denominated in Renminbi (“RMB”) placed with banks in the PRC. RMB is not a freely
convertible currency.
(b)
Company
22.
2006
2005
HK$’000
HK$’000
9
6,313
TRADE PAYABLES — GROUP
An aging analysis of the trade payables as at the balance sheet date, based on the receipt of goods purchased,
is as follows:
2006
2005
HK$’000
HK$’000
1-90 days
5,926
5,977
91-120 days
2,603
986
121-365 days
967
500
Over 1 year
227
1,569
9,723
9,032
– 87 –
APPENDIX I
23.
DEPOSITS RECEIVED, OTHER PAYABLES AND ACCRUALS
Group
Note
Deposits received
Company
2006
2005
2006
2005
HK$’000
HK$’000
HK$’000
HK$’000
5,429
2,263
—
—
20,182
8,284
2,167
1,288
25,611
10,547
2,167
1,288
Other payables
and accruals
(a)
Note:
(a)
Included in the balance was installation cost and interest payable to ૯Γജጙ‫ۺ‬உτࠉʔ̇ജ
ጙin relation to a litigation case of a wholly-owned subsidiary of the Company namely HZOCM
who had been made a defendant of a proceeding in the PRC. The proceedings were brought byജጙ
against HZOCM at the Peoples Court of the Hui Yang District, Hui Zhou City, Guangdong Province
in respect of installation cost due and interest payable. The amount claimed under this set of
proceedings was HK$1,520,000 and interest payable of HK$1,288,000. The amount and the
corresponding interest was fully provided in the Group’s financial statements as at 31 December
2006.
The balance also included value added tax and the corresponding penalty payable estimated and
billed by the local tax authority during the year of approximately HK$8,938,000 (note 8).
At 31 December 2005, an amount due to a former-director of the Company of HK$58,000 was
included in other payables and accruals of the Group and the Company. The amount due was fully
settled during the year ended 31 December 2006.
24.
AMOUNTS DUE TO DIRECTORS
The amounts due are unsecured, interest-free and repayable on demand.
– 88 –
APPENDIX I
25.
FINANCE LEASE PAYABLE — GROUP
The analysis of the total future minimum lease payments under a finance lease and their present values are
as follows:
Present value
Minimum
of minimum
lease payments
lease payments
2006
2005
2006
2005
HK$’000
HK$’000
HK$’000
HK$’000
Within one year
101
101
76
76
In the second year
101
101
76
76
208
301
158
228
410
503
310
380
on finance lease payments
(100)
(123)
Total net finance lease payable
310
380
(76)
(76)
234
304
Amounts payable:
In the third to fifth years,
inclusive
Total minimum finance
lease payments
Future finance charges
Less: Portion classified
as current liabilities
Non-current portion included under
non-current liabilities
The Group entered into a finance lease for a motor vehicle with a lease period of 5 years. The lease does
not have an option to renew or any contingent rental provisions. Under the lease term, the legal title of the
leased asset will be transferred to the Group at nil consideration on expiry of the lease period.
– 89 –
APPENDIX I
26.
BANK BORROWINGS — GROUP
An analysis of bank borrowings which were repayable within one year was as follows:
Bank overdrafts, unsecured (note 21(a))
Trust receipt loans, secured (note (a)
(a)
2006
2005
HK$’000
HK$’000
5
138
—
2,257
5
2,395
At 31 December 2005, these borrowings bore interest at variable rate of 7.405% per annum and
were secured by the followings:
27.
(i)
Pledge of time deposits of HK$2,031,000; and
(ii)
Personal guarantees executed by a related party and by the minority shareholders of ICC.
AMOUNTS DUE TO MINORITY SHAREHOLDERS
The amounts due are unsecured, interest free and would not be repayable within the next twelve months
from the balance sheet date.
– 90 –
APPENDIX I
28.
SHARE CAPITAL
2006
Authorised:
At 1 January, ordinary shares
of HK$0.01 each
(2005: HK$0.1 each)
Notes
Number
of shares
’000
(b)
HK$’000
Number
of shares
’000
HK$’000
20,000,000
—
200,000
—
2,000,000
18,000,000
200,000
—
20,000,000
200,000
20,000,000
200,000
525,200
—
—
5,252
—
—
1,340,000
50,000
(1,251,000)
134,000
5,000
(137,610)
525,200
5,252
139,000
1,390
(c)
(d)
(e)
—
—
—
—
—
—
69,500
275,000
41,700
695
2,750
417
(f)
26,700
267
—
—
551,900
5,519
525,200
5,252
At 31 December ordinary shares
of HK$0.01 each
(2005: HK$0.01 each)
Issued and fully paid:
At 1 January, ordinary shares
of HK$0.01 each
(2005: HK$0.1 each)
Shares issued on 18 January 2005
(a)
(b)
Ordinary shares of HK$0.01 each
after the capital reorganisation
Shares issued on 14 April 2005
Shares issued on 10 August 2005
Shares issued on 3 November 2005
Exercise of share options and
issue of shares
At 31 December ordinary
shares of HK$0.01 each
(2005: HK$0.01 each)
2005
Notes:
(a)
On 18 January 2005, the Company issued 50,000,000 new ordinary shares at HK$0.30 per share to
Shenzhen Hao Sheng He Industrial Company Limited to complete the balance of the consideration
of the conditional share acquisition agreement (to acquire 49% additional equity interest in a
subsidiary of the Company, HZOCM) entered into on 15 September 2003. These issued shares rank
pari passu with other shares in issue in all respects.
– 91 –
APPENDIX I
(b)
Pursuant to a special resolution passed on 31 December 2004, the capital reorganisation was approved
in the following manner (i) the nominal value of the issued shares was reduced from HK$0.10 each
to HK$0.001 each by the cancellation of HK$0.099 paid up on each issued share; (ii) every authorised
but unissued share was subdivided into 100 reduced shares; and (iii) every 10 reduced shares was
consolidated into one new shares (“New Share”). As a result, an amount of approximately
HK$137,610,000 standing to the credit of the issued share capital of the Company was cancelled
and credited to capital reserve account of the Company, from which distribution shall be at the
discretion of the Directors. The capital reorganisation was completed on 10 March 2005.
(c)
On 22 February 2005, the Company proposed to raise approximately HK$13,900,000 before
expenses, by issuing 69,500,000 offer shares at the price of HK$0.2 per offer share by way of an
open offer, payable in full on application, on the basis of one offer share for every two New Shares.
The open offer was fully allotted by the shareholders and the underwriter in April 2005. These
issued New Shares rank pari passu with other shares in issue in all respects.
(d)
In June 2005, the Company completed a subscription agreement for the issue of convertible note in
an aggregate principal of HK$33,000,000 to the subscriber. The subscriber has the right to convert
the whole integral multiple of HK$1,000,000 of the principal amount of the convertible note into
New Shares at any times before the maturity date falling on the second anniversary of the date of
issue of the convertible note at the initial conversion price of HK$0.12 per share.
On 9 August 2005, the Company received a conversion notice from L & L Holdings Limited (“L &
L”) in respect of the convertible note in an aggregate principal amount of HK$33,000,000, pursuant
to which L & L exercised the conversion rights in full attaching to the convertible note at the
conversion price of HK$0.12 per share, resulting in the issue of 275,000,000 New Shares by the
Company to L & L. These issued New Shares rank pari passu with other shares in issue in all
respects.
(e)
In October 2005, Prime Orient International Limited (“POIL”) entered into the placing and
subscription agreement pursuant to which a placing agent agreed with POIL to place up to 41,700,000
shares at the placing price of HK$0.79 per placing share on behalf of POIL to not less than six
individual investors who were third parties independent of the Company and its connected persons
on a best effort basis. Immediately after the completion of the aforesaid placing, the Company
issued 41,700,000 New Shares at HK$0.79 per share to POIL on 3 November 2005. These issued
New Shares rank pari passu with other shares in issue in all respects.
(f)
During the year, subscription rights attached to the 26,700,000 share options of the Company (note
30(c)) were exercised at subscription prices of HK$0.365 and HK$0.35 per share. As a result of the
subscription, the Company allotted, issued and fully paid 26,700,000 New Shares of HK$0.01 each.
These issued New Shares rank pari passu with other shares in issue in all respects. A share premium
of approximately HK$9,198,000 was arose from the issue and allotment of shares. In addition an
amount of approximately HK$4,867,000 was transferred from share option reserve to share premium.
– 92 –
APPENDIX I
29.
RESERVE
(a)
Group
The amounts of the Group’s reserves and the movements therein for the current and the prior years
are presented in the consolidated statement of changes in equity of the financial statements.
The share premium account of the Company includes
i)
the difference between the then combined net asset value of the subsidiaries acquired pursuant
to the Group reorganisation in 2001, over the nominal value of the share capital of the
Company issued in exchange therefore;
ii)
the premium arising from the capitalisation issue in the previous year (note 28(b));
iii)
issue of shares of the Company at a premium net of the transaction costs associated with the
issue of shares; and
iv)
amount transferred from other equity reserves upon exercise of share option and conversion
of convertible note.
The capital reserves of the Group arose from the capital reorganisation as set out in note 28(b)
above.
– 93 –
APPENDIX I
(b)
Company
Share
Capital
Convertible
Share
note equity
option Accumulated
premium
reserves
reserve
reserve
losses
Total
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
—
3,057
—
—
55,731
—
—
—
—
55,731
—
—
4,708
—
—
4,708
30,250
—
(4,708)
—
—
(25,542)
—
137,610
—
—
—
137,610
—
—
—
—
(54,155)
(54,155)
85,981
140,667
—
—
(149,068)
77,580
—
—
—
11,190
—
—
—
(413)
14,065
—
—
(4,867)
—
—
—
—
(40,087)
(40,087)
100,046
140,667
—
5,910
(189,155)
57,468
At 1 January 2005
(94,913)
(91,856)
Premium on shares issued
during the year
Issue of convertible
note (note 28(d))
Conversion of convertible
note (note 28(d))
At 31 December 2005
and 1 January 2006
Share options granted
(note 30(a))
—
11,190
Share options cancelled
(noted 30(b))
—
(413)
and issue of shares
(note 28(f))
At 31 December 2006
—
9,198
Details of the share premium account and capital reserves of the Company are set out in note 29(a)
above.
– 94 –
APPENDIX I
30.
SHARE-BASED COMPENSATION
The Company operates a share option scheme (the “Scheme”) for the purpose of providing incentives and
rewards to eligible participants who contribute to the success of the Group’s operations. Eligible participants
of the Scheme include the Company’s directors, independent non-executive directors, other employees of
the Group, suppliers of goods or services to the Group, customers of the Group, any person or entity that
provides research, development or other technological support to the Group and any minority shareholder
in the Company’s subsidiaries. The Scheme was adopted on 6 June 2002 and, unless otherwise cancelled or
amended, will remain in force for 10 years from that date.
The maximum number of unexercised share options currently permitted to be granted under the Scheme is
an amount equivalent, upon their exercise, to 10% of the shares of the Company in issue at any time.
Pursuant to the extraordinary general meeting passed on 10 March 2006, the general scheme limit of the
Company’s share option scheme has been reset to 52,520,000 shares, representing 10% of the Company’s
issued share capital on the date of meeting, with the passing of ordinary resolution, which allowing the
Company to grant further options carrying the rights to subscribe for a maximum of 52,520,000 shares.
The maximum number of shares issuable under share options to each eligible participant in the Scheme
within any 12-month period, is limited to 1%, of the shares of the Company in issue at any time. Any
further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.
Share options granted to a director, chief executive or substantial shareholder of the Company, or to any of
their associates, are subject to approval in advance by the independent non-executive directors , in addition,
any share options granted to a substantial shareholder or an independent non-executive director of the
Company, or to any of their associates, in excess of 0.1% of the shares of the Company in issue at any time
or with an aggregate value (based on the price of the Company’s shares at the date of the grant) in excess of
HK$5 million, within any 12-month period, are subject to shareholders’ approval in advance in a general
meeting.
The offer of a grant of share options may be accepted within 28 days from the date of the offer, upon
payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share
options granted is determinable by the directors, and commences after a certain vesting period and ends on
a date which is not later than 10 years from the date of the offer of the share options or the expiry date of
the Scheme, if earlier.
The exercise price of the share options is determinable by the directors, but may not be less than the higher
of:
i)
the Stock Exchange closing price of the Company’s shares on the date of the offer of the share
options;
ii)
the average Stock Exchange closing price of the Company’s shares for the five trading days
immediately preceding the date of the offer; and
iii)
the nominal value of the shares.
– 95 –
APPENDIX I
Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.
The movement of the share options granted by the Company under the Scheme are as follows:
2006
2005
Number
Number
—
—
— on 7 March 2006
32,000,000
—
— on 2 May 2006
14,200,000
—
8,720,000
—
At 1 January
Granted (note (a))
— on 27 November 2007
54,920,000
—
Cancelled (note (b))
(2,400,000)
—
Exercised (note (c))
(26,700,000)
—
25,820,000
—
At 31 December
Notes:
(a)
Share options granted vest immediately. The fair value of the 54,920,000 share options at the date
of grant was approximately HK$11,190,000 in aggregate which has been recognised as to
HK$10,170,000 as employee benefits expenses and other administrative expenses of HK$1,020,000
in the consolidated income statement for the year ended 31 December 2006. The corresponding
amount of HK$11,190,000 has been credited to share option reserve. No liabilities were recognised
due to these equity settled share-based payment transactions.
The fair values of share options granted to employees of HK$10,170,000 during the year were
determined by an independent valuer using the Black-Scholes Model (the “Model”). Details of the
inputs to the Model are as follows:
Share options
Expected volatility (%)
Risk-free interest rate (%)
Dividend yield (%)
– 96 –
Share options
Share options
granted on
granted on
granted on
7 March 2006
2 May 2006
27 November
at exercise
at exercise
2006 at exercise
price of
price of
price of
HK$0.35
HK$0.365
HK$0.54
79%
94%
108%
4.207%
4.216%
3.657%
0.00%
0.00%
0.00%
APPENDIX I
Expected volatility at the date of grant was generated from Bloomberg based on the Company’s 90
days historical share prices before the respective date of valuation.
The fair value of share options granted to a third party of HK$1,020,000 for consultancy services
rendered during the year was determined based on the invoiced amount of service provided.
(b)
During the year, 2,400,000 share options were cancelled when the employees left the Group and
the corresponding amount of approximately HK$413,000 was credited to the income statement and
debited to the share option reserve.
(c)
In respect of the share options exercised in the current financial year, the weighted average share
price of the Company at the dates of exercise ranged from HK$0.50 to HK$0.61 per share. The
share options exercised during the year resulted in the issue of 26,700,000 ordinary shares of the
Company (note 28(f)).
At the balance sheet date, the Group has the following outstanding share options and exercise prices:
2006
Number
2005
Weighted
Weighted
average
average
exercise
exercise
price
price
per share
Number
HK$
per share
HK$
Exercise period:
10 March 2006
to 9 March 2011
10,900,000
0.350
—
N/A
6,200,000
0.365
—
N/A
to 9 March 2011
8,720,000
0.540
—
N/A
At 31 December 2006
25,820,000
0.418
—
N/A
2 May 2006
to 9 March 2011
27 November 2006
The exercise in full of these remaining share options would under the present capital structure of the
Company result in the issue of 25,820,000 additional ordinary shares of the Company including share
capital of approximately HK$258,000 and share premium of approximately HK$10,529,000. Subsequent
to the balance sheet date, 19,820,000 share options were exercised resulting in a gross proceeds of
HK$7,547,000.
Subsequent to the balance sheet date and up to the date of these financial statements, no share option had
been granted.
– 97 –
APPENDIX I
31.
DEFERRED TAX
At the balance sheet date, unrecognised deferred tax assets are follows:
Group
Tax losses
Company
2006
2005
2006
2005
HK$’000
HK$’000
HK$’000
HK$’000
36,880
29,554
—
—
Deferred tax asset has not been recongnised in respect of the above tax losses carried forward because it is
not probable that future taxable profits will be available against which the Group and the Company can
utilise the benefits.
The unrecognised tax losses may be carried forward indefinitely except for the losses of HK$31,735,000
(2005: HK$20,051,000) which will expire as follows:
32.
2006
2005
HK$’000
HK$’000
2006
—
664
2007
2,397
2,397
2008
1,206
1,206
2009
9,667
9,667
2010
6,117
6,117
2011
12,348
—
31,735
20,051
OPERATING LEASE COMMITMENTS
At 31 December 2006, the Group had total future minimum lease payments under non-cancellable operating
lease falling due as follows:
Within one year
In the second to fifth years, inclusive
– 98 –
2006
2005
HK$’000
HK$’000
3,474
4,044
521
2,468
3,995
6,512
APPENDIX I
The Group leases certain leasehold land and buildings under operating leases. The leases run for an initial
period of two to three years, with an option to renew the lease and renegotiate the terms at expiry date or at
dates as mutually agreed between the Group and respective landlords/lessors. None of the leases include
contingent rentals.
The Company did not have any significant lease commitments at 31 December 2006 (2005: Nil).
33.
OPERATING SUB-LEASE ARRANGEMENTS
At 31 December 2006, the Group had total future minimum lease receipts under non-cancellable operating
sub-lease falling due as follows:
2006
2005
HK$’000
HK$’000
822
364
—
152
822
516
Within one year
The Group sub-leases its property under operating lease arrangements which run for an initial period of
one to two years, with an option to renew the lease terms at the expiry date or at dates as mutually agreed
between the Group and the respective tenants. The terms of the leases generally also require the tenants to
pay security deposits.
The Company did not have any significant lease arrangements at 31 December 2006 (2005: Nil).
34.
COMMITMENTS
(a)
On 3 December 2005, the Group entered into an acquisition agreement with China National Materials
Storage and Transportation Guangzhou Corp (the “vendor”) to purchase the Logistic and Financial
Management System at a total consideration RMB6,000,000 (equivalent to approximately
HK$5,769,000) which was satisfied (i) as to RMB3,500,000 (approximately HK$3,365,000) by
issuing of 10,516,827 shares of the Company, and (ii) as to RMB2,500,000 (approximately
HK$2,404,000) for cash. On 24 November 2006, the Group and the vendor have entered into a
revised acquisition agreement which amended the consideration from HK$6,000,000 to
HK$3,000,000. The consideration would be settled in cash based on the revised terms. A refundable
deposit of HK$1,000,000 was paid by the Group in 2005 and an additional deposit of HK$1,000,000
was paid by the Group during the year. The amounts paid were included in balance sheet as “deposits”
under non-current assets as at 31 December 2006. As at 31 December 2006, capital commitment
arising from this acquisition was approximately HK$1,000,000 in cash.
– 99 –
APPENDIX I
(b)
On 8 December 2006, the Group entered into an acquisition agreement to acquire 70% equity
interests in Win Alliance Development Limited, which carries out the businesses of manufacturing
and trading of carpets and trading of commodities such as seamless steel pipes and steel, at a total
consideration HK$14,000,000. The consideration shall be satisfied (i) as to HK$ 9,000,000 by
issuing of 18,000,000 ordinary shares of the Company, and (ii) as to HK$ 5,000,000 for cash. A
refundable deposit of HK$1,750,000 was paid by the Group on 13 December 2006 and which was
included in the consolidated balance sheet as “deposits” under non-current assets. As at 31 December
2006, capital commitment arising from this acquisition was HK$3,250,000 in cash and issue of
18,000,000 consideration shares of the Company. The transaction was completed on 2 March 2007.
35.
RELATED PARTY TRANSACTIONS
Apart from the balances and transactions with related parties disclosed elsewhere in the financial statements,
the Group had the following transactions with its related parties during the year:
(a)
A wholly-owned subsidiary entered into a sub-letting agreement with Orient Securities Limited, a
company in which a director of the Company had beneficial interest, to sublet part of office at
8/F Luk Kwok Centre, 69 Gloucester Road, Wanchai, Hong Kong at monthly rental HK$30,338,
totalling to HK$364,056 for the year (2005: HK$364,056).
(b)
Compensation of key management personnel
Included in staff costs are key management personnel compensation (including directors’
emoluments) and comprises the following categories:
Short term employee benefits
Contribution to retirement benefit scheme
Share-based payment
– 100 –
2006
2005
HK$’000
HK$’000
5,520
2,498
59
38
5,129
—
10,708
2,536
APPENDIX I
36.
RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group is exposed to a variety of financial risks which results from both its operating and investing
activities. The Group does not have written risk management policies and guidelines. However, the board
of directors meets periodically to analyse and formulate strategies to manage the Group’s exposure to
market risks, including changes in interest rates and currency exchange rates. Generally, the Group introduces
conservative strategies on its risk management. The Group’s exposure to market risk is kept to minimum.
The Group has not used any derivatives or other instruments for hedging purposes. The Group does not
issue derivative financial instruments for trading purposes.
(a)
Credit risk
All the Group’s cash and cash equivalents are deposited with major banks located in Hong Kong
and the PRC.
The carrying amounts of trade and bills receivables and other receivables represent the Group’s
maximum exposure to credit risk in relation to its financial assets. These financial assets are actively
monitored to avoid significant concentrations of credit risk. No other financial assets carry a
significant exposure to credit risk.
(b)
Foreign currency risk
The sales and purchases of the Group are predominantly in United States Dollar, RMB and Hong
Kong Dollar. The Group does not hedge its foreign currency risks, as the management does not
expect any significant movements in the exchange rate between United States Dollar, RMB and
Hong Kong Dollar.
(c)
Interest rate risk
The Group has no significant interest bearing assets. The Group’s interest rate risk arises from long
term borrowings. The interest rates and terms of repayment are disclosed in notes 25 and 26.
(d)
Fair values
The fair values of the Group’s current financial assets and liabilities are not materially different
from their carrying amount because of the immediate or short term maturity. The fair values of noncurrent liabilities were not disclosed because their carrying value is not materially different from
their fair value.
– 101 –
APPENDIX I
37.
POST BALANCE SHEET EVENTS
The Group had the following significant post balance sheet events:
(a)
On 30 January 2007, the Company entered into a non-legally binding memorandum of understanding
(“MOU”), pursuant to which the Company has agreed, subject to the entering into of a formal
subscription agreement, which is expected to be within two months from the date of signing of the
MOU, to issue to the investor the convertible notes, which are proposed to be in maximum aggregate
principal amount of US$10,000,000. No formal contract has been signed up to the date of these
financial statements.
(b)
On 5 March 2007, the Company entered into a placement agreement as set out in note 3(a)(ii) to the
(c)
On 27 March 2007, the Group entered into an agreement regarding an investment into a ChineseForeign Equity Joint Venture Company, Hebei Da Sheng Warranty Company Limited (“Da Sheng”),
where the Group would inject US$6,375,000 (equivalent to approximately HK$ 51,000,000) as
capital. The contribution by the Group to the registered capital shall be made in the following
manner:
(i)
US$3,125,000 (equivalent to approximately HK$25,000,000) within three mounts after the
date of signing the agreement that is 26 June 2007; and
(ii)
US$ 3,250,000 (equivalent to approximately HK$26,000,000) by the end of two years from
the date of issuance of business license of Da Sheng.that is 25 September 2008.
– 102 –
APPENDIX I
3.
INTERIM REPORT OF THE COMPANY FOR THE SIX MONTHS ENDED 30 JUNE
2007
The following are the unaudited consolidated results of the Group as extracted from the interim
report of the Group for the six months ended 30 June 2007.
CONDENSED CONSOLIDATED INCOME STATEMENT
For the period ended 30 June 2007
Notes
Revenue
Cost of sales
3
Six months ended 30 June
2007
2006
(Unaudited)
(Unaudited)
HK$’000
HK$’000
17,458
(23,445)
11,002
(12,520)
Gross loss
(5,987)
1,040
(1,367)
(16,674)
(930)
(1,518)
849
(1,009)
(21,854)
(8,670)
Operating loss
Finance costs
6
(23,918)
(20)
(32,202)
(89)
Income tax expense
5
7
(23,938)
—
(32,291)
—
Loss for the period
(23,938)
(32,291)
Attributable to:
Minority interests
(23,938)
—
(32,301)
10
(23,938)
(32,291)
(3.8)
(6.2)
N/A
N/A
Loss per share attributable
to equity holders of the Company
— Basic, HK cents
9
— Diluted, HK cents
– 103 –
APPENDIX I
CONDENSED CONSOLIDATED BALANCE SHEET
As at 30 June 2007
Notes
Non-current assets
Deposits
Current assets
Inventories
Cash at bank and in hand
Current liabilities
Trade payables
Deposits received, other payables and accruals
Bank borrowings
Tax payable
10
11
Net current assets/(liabilities)
Amounts due to minority shareholders
Net assets
EQUITY
Equity attributable to equity holders
of the Company
Share capital
Reserves
13
Minority interests
30 June
2007
(Unaudited)
HK$’000
31 December
2006
(Audited)
HK$’000
74,664
4,855
18,355
73,952
4,912
3,750
97,874
82,614
4,611
9,374
9,709
89,596
4,033
4,504
8,590
776
113,290
17,903
15,847
34,161
1,100
87
—
143
9,723
25,611
1,143
76
5
—
51,338
36,558
61,952
(18,655)
159,826
63,959
176
9,010
234
924
150,640
62,801
8,135
142,722
5,519
57,499
150,857
63,018
(217)
Total equity
150,640
– 104 –
(217)
62,801
APPENDIX I
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Minority
Interest
Total
equity
Total
HK$’000
HK$’000
HK$’000
Equity attributable to equity holders of the Company
Share
capital
HK$’000
Capital
reserves
HK$’000
Share
premium
HK$’000
Assets
revaluation
reserve
HK$’000
Exchange
reserve
HK$’000
5,252
137,610
85,981
9,735
100
—
(152,559)
86,119
(227)
85,892
—
—
—
—
—
—
—
—
—
—
8,016
—
—
(32,301)
8,016
(32,301)
—
10
8,016
(32,291)
At 30 June 2006
(Unaudited)
5,252
137,610
85,981
9,735
100
8,016
(184,860)
61,834
(217)
61,617
At 1 January 2007
(Audited)
5,519
137,610
100,046
9,726
2,933
5,910
(198,726)
63,018
(217)
62,801
2,400
—
100,896
—
—
—
—
103,296
—
103,296
216
—
—
—
12,824
—
—
—
—
—
(4,559)
—
—
(23,938)
8,481
(23,938)
—
—
8,481
(23,938)
8,135
137,610
213,766
9,726
2,933
1,351
(222,664)
150,857
(217)
150,640
At 1 January 2006
(Audited)
Equity-settled share
option arrangement
Net loss for the period
Issue of shares
(note 13)
and issue of shares
(note 13(d))
Net loss for the Period
At 30 June 2007
(Unaudited)
– 105 –
Share
option Accumulated
reserve
losses
HK$’000
HK$’000
APPENDIX I
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
2007
2006
(Unaudited)
(Unaudited)
HK$’000
HK$’000
Net cash outflow from operating activities
(9,461)
(942)
Net cash outflow from investing activities
(4,032)
(761)
Net cash inflow/(outflow) from financing activities
Net increase/(decrease) in cash
and cash equivalents
102,318
(612)
88,825
(2,315)
Cash and cash equivalents at 1 January
771
6,931
Cash and cash equivalents at 30 June
89,596
4,616
– 106 –
APPENDIX I
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1.
BASIS OF PREPARATION
These unaudited condensed consolidated financial statements have been prepared in accordance with the
applicable disclosure requirements of Appendix 16 to the Rules Governing the Listing of Securities on The
Stock Exchange of Hong Kong Limited (the “Listing Rules”) and the Hong Kong Accounting Standard
(“HKAS”) 34 “Interim Financial Reporting” issued by the Hong Kong Institute of Certified Public
Accountants (“HKICPA”).
The interim financial report contains the condensed financial statements and selected explanatory notes.
The notes include an explanation of events and transactions that are significant to an understanding of the
changes in financial position performance of the Group since the 2006 annual financial statement. The
condensed consolidated financial statements and notes thereon do not include all of the information required
for full set of financial statements prepared in accordance with Hong Kong Financial Report Standards
(HKFRSs), which term collectively includes HKASs and Interpretations (“INTs”).
The preparation of the interim financial report in conformity with HKAS 34 requires management to make
judgments, estimates and assumptions that affect the application of policies and reported amounts of assets
and liabilities, income and expenses on a year to date basis. Actual results may differ from these estimates.
The interim financial report is unaudited, but have been reviewed by the Audit Committee of the Company.
2.
PRINCIPAL ACCOUNTING POLICIES
The condensed financial statements have been prepared on the historical cost basis except for the revaluation
of certain property, plant and equipment and certain financial assets and liabilities, which are measured at
fair value.
The accounting and basis of preparation adopted in these condensed consolidated financial statements are
consistent with those followed in the preparation of the Group’s financial statements for the year ended 31
December 2006, except in relation to the following amendments to and interpretation of HKFRSs issued
by HKICPA that affect the Group and are adopted for the first time for the current period’s financial
statements:
Amendment to HKAS 1
“Presentation of Financial Statements” — Capital Disclosures (1)
HKFRS 7
“Financial Instruments: Disclosures” (1)
“Applying the Restatement Approach under
HKAS 29 Financial Reporting in Hyperinflationary Economies” (2)
“Scope of HKFRS 2” (3)
“Reassessment of Embedded Derivatives” (4)
“Interim Financial Reporting and Impairment” (5)
– 107 –
APPENDIX I
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (Continued)
(1)
(2)
(3)
Effective for annual periods beginning on or after 1 May 2006
(4)
Effective for annual periods beginning on or after 1 June 2006
(5)
Effective for annual periods beginning on or after 1 November 2006
The adoption of the above HKFRSs did not result in material impact on the accounting policies of the
Group’s condensed consolidated financial statements.
The Group has not early adopted certain accounting Standards or Interpretations that have been issued but
not yet effective. The adoption of such Standards and Interpretations will not result in substantial changes
to the Group’s accounting policies.
3.
REVENUE
Revenue, which is also the Group’s turnover represents the net invoiced value of goods sold, after allowances
for returns and trade discounts during the Period. All significant transactions among the companies
comprising the Group have been eliminated on consolidation.
4.
SEGMENT INFORMATION
Segment information is presented by way of two segment formats:
(i)
on a primary segment reporting basis, by business segment; and
(ii)
on a secondary segment reporting basis, by geographical segment.
The Group’s operating business are structured and managed separately, according to the nature of their
operations and the products they provide. Each of the Group’s business segments represents a strategic
business unit that offers products which are subject to risks and returns that are different from those of
other business segments. Summary details of the business segments are as follows:
(a)
the manufacture of carpets segment represents the manufacture and sale of carpets under the Group’s
own brand name; and
(b)
the trading of carpets segment represents the trading of carpets of other renowned brand names.
(c)
the trading of other goods segment represents the trading of other goods from imports and exports.
– 108 –
APPENDIX I
In determining the Group’s geographical segments, revenue and results are attributed to the segments based
on the location of the customers.
(a)
Business segments
The following table presents revenue and results for the Group’s business segments.
Manufacturing of
carpets
six months
ended 30 June
2007
2006
(Unaudited) (Unaudited)
HK$’000
HK$’000
(b)
Trading of
carpets
six months
ended 30 June
2007
2006
HK$’000
HK$’000
Trading of
other goods
six months
ended 30 June
2007
2006
HK$’000
HK$’000
Consolidated
six months
ended 30 June
2007
2006
HK$’000 HK$’000
Segment revenue:
Sales to external customers
4,904
4,501
9,482
6,501
3,072
—
17,458
11,002
Segment results
(3,281)
(11,675)
(8,429)
(5,737)
(356)
—
(12,066)
(17,412)
Unallocated other
operating income
Share-base payment
Unallocated expenses
Finance costs
215
—
(12,067)
(20)
18
(8,016)
(6,792)
(89)
Income tax
(23,938)
—
(32,291)
—
Loss for the period
(23,938)
(32,291)
Geographical segments
The following table presents revenue and results for the Group’s geographical segments.
Hong Kong
six months
ended 30 June
2007
2006
HK$’000
HK$’000
Segment revenue:
Sales to external customers
Segment results
The People’s Republic
of China (the “PRC”)
six months
ended 30 June
2007
2006
HK$’000
HK$’000
Overseas
six months
ended 30 June
2007
2006
HK$’000
HK$’000
Consolidated
six months
ended 30 June
2007
2006
HK$’000 HK$’000
8,863
4,541
5,704
4,649
2,891
1,812
17,458
11,002
(20,657)
(20,616)
(3,281)
(11,675)
—
—
(23,938)
(32,291)
– 109 –
APPENDIX I
5.
The Group’s loss before income tax is arrived at after charging:
Cost of inventories sold
Fair value of options granted
2006
(Unaudited)
(Unaudited)
HK$’000
HK$’000
20,061
10,190
—
8,016
Depreciation
4,093
3,596
Impairment loss of goodwill
1,081
—
57
55
8,348
5,407
Staff costs (including directors’ emoluments)
6.
2007
FINANCE COSTS
2007
2006
(Unaudited)
(Unaudited)
HK$’000
HK$’000
Interest charged on:
Bank loans and overdrafts wholly
repayable within five years
7.
—
63
Finance leases
20
11
Other loans
—
15
20
89
INCOME TAX EXPENSE
No provision for Hong Kong profits tax is required since the Group did not have any assessable profit for
the Period (2006: Nil).
8.
DIVIDENDS
The Directors do not recommend the payment of any interim dividend in respect of the Period (2006: Nil).
– 110 –
APPENDIX I
9.
LOSS PER SHARE
The calculation of basic loss per share is based on the loss attributable to equity holders of the Company of
HK$23,938,000 (2006: HK$32,301,000) and on the weighted average number of ordinary shares of
634,056,851 (six months ended 30 June 2006: 525,200,000) in issue during the Period.
Dilutive loss per share for the Period was not presented because the exercise of the Company’s share
options will reduce loss per share which is anti-dilutive.
10.
TRADE AND BILL RECEIVABLES
The Group normally allows credit terms ranging from 30 to 120 days to established customers.
An aging analysis of the trade receivables, net of provisions, as at the balance sheet date, based on the date
of recognition of the sales, is as follows:
30 June
31 December
2007
2006
(Unaudited)
(Audited)
HK$’000
HK$’000
1-90 days
3,804
3,567
91-120 days
2,308
153
121-365 days
2,294
471
Over 1 year
2,705
2,050
11,111
6,241
(1,737)
(1,737)
9,374
4,504
Less: Provision for impairment of trade receivables
Trade receivables — net
– 111 –
APPENDIX I
11.
TRADE PAYABLES
The Group normally obtains credit terms ranging from 30 to 120 days from its suppliers.
An aging analysis of the trade payables as at the balance sheet date, based on the receipt of goods purchased,
is as follows:
30 June
12.
31 December
2007
2006
(Unaudited)
(Audited)
HK$’000
HK$’000
1-90 days
7,973
5,926
91-120 days
3,157
2,603
121-365 days
2,042
967
Over 1 year
2,675
227
15,847
9,723
ACQUISITION OF SUBSIDIARIES
During the six months ended 30 June 2007, the Group acquired 100% interest in Go On Foundate Company
Limited (“Go On”) and 70% interest in Win Alliance Development Limited (“Win Alliance”). The acquisition
has been accounted for using business combination method of accounting.
On 8 December 2006, Wise Mount Management Limited (“Wise Mount”), a wholly owned subsidiary of
the Company, and Ms Sheng De Cruz Li entered into conditional sales and purchase agreement pursuant to
which Wise Mount agreed to acquire the equity interests of Win Alliance which represented 70% of the
registered share capital of Win Alliance. Win Alliance is principally manufacturing and trading of carpets
and trading of other commodities such as seamless steel pipes and steel. (Please also refer the Company’s
announcement and circular dated 14 December 2006 and 2 January 2007 for further details.)
– 112 –
APPENDIX I
The fair value of the identifiable assets, liabilities and contingent liabilities of subsidiaries acquired by the
Group and dealt with in the interim condensed consolidated financial statements at the dates of acquisition
are as follows:
Win Alliance
Go On
(Unaudited)
(Unaudited)
HK$’000
HK$’000
Net assets acquired:
1,892
284
18,355
—
Trade receivables
2,499
—
1,633
—
Deposits
Cash and bank balances
1
Trade payables
(2,274)
—
—
(78)
—
—
(298)
(16)
(313)
(143)
—
Due to the directors
Tax payable
Minority interests
Goodwill arising on acquisition
21,869
(327)
(8,623)
—
754
327
14,000
—
Cash
5,000
—
Shares allotment (Note 13(a))
9,000
—
14,000
—
Fair value of net assets at dates
of acquisition
Satisfied or represented by:
– 113 –
APPENDIX I
An analysis of the net outflow of cash and cash equivalents in respect of the acquisition of subsidiaries are
as follows:
Win Alliance
Go On
(Unaudited)
(Unaudited)
HK$’000
HK$’000
1
—
Cash and bank balances acquired and net inflow
of cash and cash equivalents in respect
of the consolidation of subsidiary
in the condensed consolidated balance sheet
Less: Cash consideration
(5,000)
—
(4,999)
—
Net outflow of cash and cash equivalents
in respect of the acquisition of subsidiary
in the consolidated cash flow statements
Note:
Since the date of the acquisitions, Win Alliance and Go On have recorded a loss of HK$382,000 and
HK$43,000 to the Group’s loss distributable to equity shareholders of the Company respectively and Win
Alliance has contributed a revenue of HK$2,398,000 for the four months ended 30 June 2007.
– 114 –
APPENDIX I
13.
SHARE CAPITAL
30 June 2007
31 December 2006
Number
Number
of shares
Notes
of shares
’000
HK$’000
’000
HK$’000
20,000,000
200,000
20,000,000
200,000
551,900
5,519
525,200
5,252
(a)
18,000
180
—
—
(b)
87,000
870
—
—
(c)
135,000
1,350
—
—
21,550
216
26,700
267
813,450
8,135
551,900
5,519
Authorised:
Ordinary shares of
HK$0.01 each
Issued and fully paid:
At 1 January,
ordinary shares of
HK$0.01 each
Shares issued on
16 February 2007
Shares issued on
16 March 2007
Shares issued on
25 June 2007
and issue of shares
(d)
At 30 June/31 December
ordinary shares
of HK$0.01 each
Notes:
(a)
On 16 February 2007, the Company issued 18,000,000 new ordinary shares at HK$0.50 per share
to Ms Sheng De Cruz Li to complete the balance of the consideration of the conditional sale and
purchase agreement (to acquire 70% equity interest in Win Alliance Development Limited) entered
into on 8 December 2006. These issued shares rank pari passu with other shares in issue in all
respects.
(b)
In March 2007, the Company entered into placement agreement between Enlighten Securities Limited
as placing agent, pursuant to which an aggregate of 87,000,000 new ordinary shares were placed by
the placing agent on behalf of the Company, on a fully underwritten basis at the price of HK$0.308
per placing share with six independent investors. Immediately after the completion of the aforesaid
placing, the Company issued 87,000,000 new Shares at HK$0.308 per share to six independent
investors on 16 March 2007. These issued new shares rank pari passu with other shares in issue in
all respects.
– 115 –
APPENDIX I
(c)
In June 2007, the Company entered into placement agreement between Enlighten Securities Limited
as placing agent, pursuant to which an aggregate of 135,000,000 new ordinary shares were placed
by the placing agent on behalf of the Company, on a fully underwritten basis at the price of HK$0.50
per placing share with six independent investors. Immediately after the completion of the aforesaid
placing, the Company issued 135,000,000 new Shares at HK$0.50 per share to six independent
investors on 25 June 2007. These issued new shares rank pari passu with other shares in issue in all
respects.
(d)
During the Period, subscription rights attached to the 10,900,000 share options, 6,200,000 share
options and 4,450,000 share options of the Company were exercised at subscription prices of
HK$0.35, HK$0.365 and HK$0.54 per share respectively. As a result of the subscription, the
Company allotted, issued and fully paid 21,550,000 new Shares of HK$0.01 each. These issued
new Shares rank pari passu with other shares in issue in all respects.
14.
SHARE BASED COMPENSATION
The Company operates a share option scheme (the “Scheme”) for the purpose of providing incentives and
rewards to eligible participants who contribute to the success of the Group’s operations. Eligible participants
of the Scheme include the Company’s directors, independent non-executive directors, other employees of
the Group, suppliers of goods or services to the Group, customers of the Group, any person or entity that
provides research, development or other technological support to the Group and any minority shareholder
in the Company’s subsidiaries. The Scheme was adopted on 6 June 2002 and, unless otherwise cancelled or
amended, will remain in force for 10 years from that date.
The maximum number of unexercised share options currently permitted to be granted under the Scheme is
an amount equivalent, upon their exercise, to 10% of the shares of the Company in issue at any time.
Pursuant to the extraordinary general meeting passed on 10 March 2006, the general scheme limit of the
Company’s share option scheme has been reset to 52,520,000 shares, representing 10% of the Company’s
issued share capital on the date of meeting, with the passing of ordinary resolution, which allowing the
Company to grant further options carrying the rights to subscribe for a maximum of 52,520,000 shares.
The maximum number of shares issuable under share options to each eligible participant in the Scheme
within any 12-month period, is limited to 1%, of the shares of the Company in issue at any time. Any
further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.
Share options granted to a director, chief executive or substantial shareholder of the Company, or to any of
their associates, are subject to approval in advance by the independent non-executive directors, in addition,
any share options granted to a substantial shareholder or an independent non-executive director of the
Company, or to any of their associates, in excess of 0.1% of the shares of the Company in issue at any time
or with an aggregate value (based on the price of the Company’s shares at the date of the grant) in excess of
HK$5 million, within any 12-month period, are subject to shareholders’ approval in advance in a general
meeting.
– 116 –
APPENDIX I
The offer of a grant of share options may be accepted within 28 days from the date of the offer, upon
payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share
options granted is determinable by the directors, and commences after a certain vesting period and ends on
a date which is not later than 10 years from the date of the offer of the share options or the expiry date of
the Scheme, if earlier.
The exercise price of the share options is determinable by the directors, but may not be less than the higher
of:
(i)
the Stock Exchange closing price of the Company’s shares on the date of the offer of the share
options;
(ii)
the average Stock Exchange closing price of the Company’s shares for the five trading days
immediately preceding the date of the offer; and
(iii)
the nominal value of the shares.
Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.
– 117 –
APPENDIX I
Details of the outstanding share options under the Scheme during the period for the six months ended 30
June 2007 were as follow:
Participants
Date of grant
Number of
share options
outstanding at
1 January
2007
(’000)
Directors
7 March 2006
5,000
0.350
7 March 2006
500
0.350
Mr. Law Fei Shing
7 March 2006
3,000
0.350
Dr. Ma Chung Wo,
Cameron
7 March 2006
500
0.350
Directors
of subsidiaries
In aggregate
7 March 2006
1,500
0.350
27 November 2006
8,720
0.540
7 March 2006
400
0.350
2 May 2006
3,200
0.365
2 May 2006
3,000
0.365
Other employees
In aggregate
Exercise
price
per share
HK$
Exercise period
10 March 2006
to 9 March 2011
10 March 2006
to 9 March 2011
10 March 2006
to 9 March 2011
Number of
Number of
share
share
options
options
exercised
balance
during
as at
the period 30 June 2007
(’000)
(’000)
Closing
price
immediately
before the
date on
which the
options were
granted
HK$
5,000
—
0.350
500
—
0.350
3,000
—
0.350
10 March 2006
to 9 March 2011
500
—
0.350
10 March 2006
to 9 March 2011
27 November 2006
to 9 March 2011
1,500
—
0.350
4,450
4,270
0.540
10 March 2006
to 9 March 2011
2 May 2006
to 9 March 2011
400
—
0.350
3,200
—
0.365
3,000
—
0.365
21,550
4,270
Third parties
Total
25,820
2 May 2006
to 9 March 2011
Note: All of above share options can be exercised immediately upon acceptance of the offer by the grantee
and there were no vesting conditions/period.
– 118 –
APPENDIX I
15.
At 30 June 2007, the Group had total future minimum lease payments under non-cancellable operating
lease falling due as follows:
30 June
Within one year
16.
31 December
2007
2006
(Unaudited)
(Audited)
HK$’000
HK$’000
1,833
3,474
194
521
2,027
3,995
OPERATING SUB-LEASE ARRANGEMENTS
At 30 June 2007, the Group had total future minimum lease receipts under non-cancellable operating sublease falling due as follows:
30 June
31 December
2007
2006
(Unaudited)
(Audited)
HK$’000
HK$’000
Within one year
—
822
—
—
—
822
– 119 –
APPENDIX I
17.
COMMITMENTS
On 27 March 2007, the Group entered into an agreement regarding an investment into a Chinese Foreign
Equity Joint Venture Company, Hebei Da Sheng Warranty Company Limited (“Da Sheng”), where the
Group would inject US$6,375,000 (equivalent to approximately HK$51,000,000) as capital. The contribution
by the Group to the registered capital shall be made in the following manner:
(i)
US$3,125,000 (equivalent to approximately HK$25,000,000) within three months after the date of
signing the agreement, that is 26 June 2007, in which HK$10,000,000 has been injected into Da
Sheng, the balance of HK$15,000,000 will be injected; and
(ii)
US$3,250,000 (equivalent to approximately HK$26,000,000) by the end of two years from the date
of issuance of business license of Da Sheng, that is September 2008.
18.
POST BALANCE SHEET EVENT
(a)
On 8 July 2007, the Group entered into the conditional Share Transfer Agreement with Ms Leung
Lai Ching, Margaret as the Vendor. Under the Share Transfer Agreement, the wholly owned
subsidiary of the Company, Smooth Way International Limited (“Smooth Way”) has agreed to
acquire 51% of the entire issued share capital of Kanson Development Limited at completion from
the Vendor at the consideration totaling HK$1,000 million in value (Please also refer the Company’s
announcement dated 20 July 2007 for further details).
(b)
On 18 July 2007, the Company entered into a placement agreement between Guotai Junan Securities
(Hong Kong) Limited as placing agent, pursuant to which an aggregate of 135,000,000 new ordinary
shares were placed by the placing agent on behalf of the Company, on a fully underwritten basis at
the price of HK$0.69 per share to six independent investors on 2 August 2007. These issued new
shares rank pari passu with other shares in issue in all respects. (Please also refer the Company’s
announcement dated 20 July 2007 for further details).
– 120 –
APPENDIX I
4.
MANAGEMENT DISCUSSION AND ANALYSIS
The Group’s turnover for the year ended 31 December 2004 was approximately HK$19.6 million,
which represented a decrease of 84.6% compared to the previous year. The administrative
expenses for the year ended 31 December 2004 were approximately HK$21.2 million, which
represented a decrease of 12.3% compared to the expenses incurred last year.
The consolidated loss for the year ended 31 December 2004 was approximately HK$77.5 million
(2003: HK$31.9 million).
Dividend
The Directors do not recommend the payment of any dividend for the year ended 31 December
2004 (2003: Nil).
Business Review
During the year ended 31 December 2004, carpet manufacturing and distribution were the core
business. However due to the keen competition in the whole carpet industry in the PRC, the
Group recorded a significant decrease in the profits margin and the turnover. Therefore, sales
and marketing offices in Beijing, Guangzhou, Fuzhou and branch office in Shanghai were
closed.
The Hong Kong construction and property markets have sloped down for several years and
thus the demand of carpets has subsequently dropped. However, a strong growth and recovery
in the property market this year and hotel hospitality upgrade programs led to the increase of
demand of carpets in local Hong Kong market.
Sales to United States of America were stable, but the profit margin decreased due to the price
increase of raw materials which could not be wholly absorbed by the customers. In response to
the current competitive environment, the sales and marketing network has been expanded by
linking up additional distributors and dealers with the sales efforts into other markets and
developing an OEM arrangement with leading rug retailers.
Carpet Manufacturing Acquisition
On 22 July 2004 the Company, through its indirectly wholly-owned subsidiary, has acquired
the remaining 49% minority equity interest in Hui Zhou Orient Carpet Manufacturing Co.,
Ltd. (“HZOCM”) (formerly known as Hui Yang Xie Kai Cheng Carpet Company Limited)
from Shenzhen Hao Sheng He Industrial Company Limited for a total consideration of HK$62
million. HK$47 million was already settled last year in the forms of inventory and trade
receivables of the Group. The balance of the consideration of HK$15 million was settled by
issuance of 50 million shares of the Company at HK$0.30 per share on 18 January 2005.
– 121 –
APPENDIX I
DNTC Acquisition
On 10 September 2004 Orient Carpet Trading Limited, an indirectly wholly-owned subsidiary,
entered into the sale and purchase agreement with Mr. Choi Hok Ya and Mr. Ng Yau Wah to
purchase 1,020,000 shares of DNTC Investment Limited (now known as International Carpet
Co., Limited (“ICC”)), a company incorporated in Hong Kong with the entire issued share
capital beneficially owned by Mr. Choi Hok Ya and Mr. Ng Yau Wah, representing 51% of the
issued share capital of ICC for a consideration of HK$9,500,000. The consideration of
HK$9,500,000 was arrived at arm’s length negotiation between the parties.
The Directors believe that the value of ICC lies in its comprehensive range of products and
services as well as its experienced marketing team. It specialises in the supply, design,
installation, trading and contracting of carpet products. ICC distributes a range of international
branded carpet products such as hand-tufted carpets, woven axminster and carpets of Brintons
Carpet. Having considered the current operating environment which is highly competitive in
terms of pricing and the services and the merits of ICC as described above, the directors consider
that ICC’s established sales network and marketing team will assist in boosting the sales of
broadloom carpets and carpet tiles manufactured by the Group and strengthening the Group’s
marketing position in Hong Kong and the PRC.
Capital Reorganisation
Pursuant to the special resolution passed at the extraordinary general meeting held on 31
December 2004 that the issued share capital of the Company be reduced by canceling paid-up
capital to the extent of HK$0.099 on each existing share of HK$0.10 of the Company in issue
as at the effective date of capital reduction on 10 March 2005, so that each such share shall be
treated as one fully paid up share of HK$0.001 each.
Subject to and forthwith upon the capital reduction and subdivision taking effect, every ten
(10) reduced shares be consolidated into one new share with effective on 11 March 2005.
Future Plan and Prospects
Looking forward, the market demand for carpet products will have stable growth due to the
recovery of the property market. However the impact of continuous and frequent increase in
raw material cost such as polypropylene and nylon due to unstable oil prices would substantially
lower profit margin. To help offset the margin pressure, a higher sales turnover would have to
be achieved.
The Group will continue to adhere to the strategy of maintaining balanced exposure to both the
core carpet business and the new business. The Board will seek any possible ways to raise
funds to improve the current tight financial position and to seek new investment. With the new
management team embracing experience and knowledge of manufacturing, trading and
financing, we strongly believe that we have the necessary skills and expertise to enable us to
explore potential investment opportunities that would offer higher returns to shareholders and
enhance the group’s growth.
– 122 –
APPENDIX I
Liquidity and Financial Resources
As at 31 December 2004, the Group had interest-bearing bank borrowings of approximately
HK$10 million (2003: HK$40 million) which are repayable within one year, are interest-bearing
at the prevailing interest rates and denominated in Hong Kong dollars. The Group’s bank
borrowings were secured by (i) corporate guarantees given by the Company and certain
subsidiaries of the Group, (ii) pledge of HK$4.3 million fixed deposits of related parties, and
HK$1 million fixed deposits of a subsidiary, (iii) personal guarantees executed by a related
party and two shareholders of the Company, who also are directors of a subsidiary.
As a significant portion of the Group’s sales and purchases were denominated in Hong Kong
dollars and Renminbi, the directors considered the Group has no significant exposure to foreign
exchange fluctuations in view of the stability of the exchange rates of Hong Kong dollars and
Renminbi. The Directors also consider that there will be sufficient cash resources denominated
in Hong Kong dollars for the repayment of its bank borrowings. During the year ended 31
December 2004, the Group did not use any hedging instrument.
Current and Gearing Ratio
As at 31 December 2004, the Group had total assets of approximately HK$175 million (2003:
HK$221 million), total liabilities of HK$95 million (2003: HK$76 million), indicating a gearing
ratio 0.54 (2003: 0.34) on the basis of total liabilities over total assets. The current ratio of the
Group for the year ended 31 December 2004 was 0.74 (2003: 0.78).
Contingent Liabilities
As at 31 December 2004, the Group did not have any significant contingent liabilities except as
described below:
1.
A wholly-owned subsidiary of the Company, HZOCM has been made defendant of
proceeding in the PRC. The proceedings brought by ૯Γജጙ‫ۺ‬உτࠉʔ̇against
HZOCM at the People’s Court of the Hui Yang District, Hui Zhou City, Guangdong
Province in respect of installation cost due and interest payable. The amount claimed
under this set of proceedings were HK$1,420,560 (RMB1,520,000) and interest payable
HK$2,077,456 (RMB2,222,878). Freezing orders have been obtained by the plaintiff for
this set of proceedings and are in place against certain plant and machinery of HZOCM.
The proceedings were adjourned for hearing on a day to be fixed in due course.
2.
The Company had provided corporate guarantees to banks for banking facilities provided
to certain subsidiaries of approximately HK$20,133,000 (2003: HK$59,710,000). These
banking facilities had been utilised to the extent of approximately HK$8,930,000 (2003:
HK$39,264,000) as at 31 December 2004.
– 123 –
APPENDIX I
Number and Remuneration of Employees
The Group had a total of approximately 136 employees in Hong Kong and the PRC as at 31
December 2004. The Group paid remuneration to its staff at competitive levels and in line with
industry practice. In addition, the Company has adopted a share option scheme of which the
Board may, at its discretion, grant options to employees of the Group. The Company has granted
no share options during the year ended 31 December 2004.
Financial Summary
The Group’s turnover for the year ended 31 December 2005 was approximately HK$41.0 million,
which represented an increase of 110% compared to the previous year. The administrative
expenses for the year ended 31 December 2005 were approximately HK$24.5 million, which
represented an increase of 15.6% compared to the expenses incurred last year.
The consolidated loss attributable to equity holders of the Company for the year ended 31
December 2005 was increased to approximately HK$91.1 million, as compared to HK$77.4
million in the previous corresponding year.
Business Review
During the year ended 31 December 2005, carpet manufacturing and trading were the core
business. The Group benefited from the revival of the construction and property development
markets in Hong Kong and Macau, and the continued growth in the same sector in the PRC.
The Company is also witnessing early encouraging results in its efforts to develop distribution
channels in the international markets. These resulted in a 110% increase in turnover over the
previous corresponding year.
However, profit margins continued to be depressed in the intensely competitive environment
which the Group operates under. The prices of raw material increased in tandem with the increase
in crude oil prices globally. Unfortunately, these additional costs could not be fully passed on
to end customers due to the very keen pricing competition in the markets the Group operates
in. This is further exacerbated by a one time write off on a substantial overseas receivable of
HK$47.9 million and impairment loss of goodwill of approximately HK$35.7 million. Excluding
these non recurring events the Group would have registered a very much dramatic decrease in
its consolidated losses attributable to the equity holders of the Company from HK$77.4 million
for the previous corresponding year to HK$7.5 million for the financial year ended 31 December
2005.
The Company intends to continue its efforts to improve the turnover and profitability of its
core business. In addition, the management team shall seek to identify opportunities that will
help the Group diversify its reliance on the contributions from its carpet business which is
expected to remain robust but fiercely competitive.
– 124 –
APPENDIX I
Logistic and Financial Management System Acquisition
On 3 December 2005 the Company, through its indirectly wholly-owned subsidiary, Aurora
Logistic Software Development Limited, entered into a conditional acquisition agreement (the
“Acquisition Agreement”) to acquire the Logistic and Financial Management System from
China National Materials Storage and Transportation Guangzhou Corp. for a total consideration
of RMB6,000,000. The consideration for the sale and purchase of the Logistic and Financial
Management System shall be satisfied by paying cash of RMB2,500,000 (approximately
HK$2,404,000) and issuing 10,615,827 shares of the Company for the remaining RMB3,500,000
(approximately HK$3,365,000).
Upon completion, the Company believes the acquisition will help reduce the lead time and
costs involved in the sale and trading of carpets in the areas of storage, transport, distribution,
import and export. The Company is cautiously optimistic of the potential of the logistics software
market in the PRC, and that this acquisition, whilst complementary, will also help the Group
diversify its sources of revenue.
The growth of the construction and property development market in the PRC is expected to
contribute to as well as benefit from the continued national GDP growth. Economists estimate
that the “2008 Olympic Games” in Beijing alone would benefit PRC’s GDP by an additional
one per cent. With this as the backdrop, the Company intends to capitalise on the spill over
effect to the carpet industry, whilst trying at the same time to strike an equilibrium against the
decreasing profit margin trend.
Having undergone three major capital raising exercises in 2005 which raised net proceeds of
approximately HK$78.4 million, the Group is now in a much improved financial position. It is
the management’s intention to leverage on this financial strength to explore new potential
investment opportunities in view of the very competitive market environment which its carpet
business operate within.
With the view of enhancing the group’s growth and offering higher returns to shareholders, the
Group will continue to be prudent in its approach, and will strive to maintain a balanced exposure
to both the core carpet business and any new investment opportunities
Strengthening The Capital Base
An open offer to raise funds by issuing 69,500,000 offer shares at the price of HK$0.20 per
offer share on the basis of one offer share for every two new shares held on 10 March 2005 was
completed on 14 April 2005. Net proceeds from the open offer was approximately HK$13
million, of which approximately HK$9.1 million was applied to repay outstanding indebtedness
and the remaining balance of approximately HK$3.9 million used as general working capital
of the Group.
– 125 –
APPENDIX I
Raising Further Capital
On 20 October 2005, Prime Orient International Limited (“POIL”) entered into the placing and
subscription Agreement pursuant to which a placing agent agreed with POIL to place up to
41,700,000 shares at the placing price of HK$0.79 per placing share on behalf of POIL to not
less than six individual investors who were third parties independent of the Company and its
connected persons on a best effort basis. Immediately after the completion of the aforesaid
placing, the Company issued 41,700,000 new ordinary shares at HK$0.79 per share to POIL on
3 November 2005. POIL is wholly and beneficially owned by Mr. Lam Shu Chung, a substantial
shareholder and executive director of the Company.
The aforesaid placing broadened the capital and shareholder base of the Company, and the
subscription raised net proceeds of approximately HL$32.4 million for repayment of the Group’s
indebtedness, working capital and future business development requirements of the Group.
As at 31 December 2005, the Group had interest-bearing bank borrowings of approximately
HK$2 million (2004: HK$10 million) which are repayable within one year, are interest-bearing
at the prevailing interest rates and denominated in Hong Kong dollars. The Group’s bank
borrowings were secured by (i) a pledge of HK$2 million fixed deposits of a subsidiary, and
(ii) personal guarantee executed by a director of the subsidiary.
dollars and Renminbi, the directors considered the Group has no significant exposure to foreign
Renminbi. During the year under review, the Group did not use any hedging instrument.
As at 31 December 2005, the Group has total assets of approximately HK$110 million (2004:
As at 31 December 2005, the Company Group did not have any significant contingent liabilities
except as described below:
A wholly-owned subsidiary of the Company namely HZOCM has been made a defendant of a
proceeding in the PRC. The proceedings were brought by ૯Γജጙ‫ۺ‬உτࠉʔ̇qagainst
HZOCM at the Peoples Court of the Hui Yang District, Hui Zhou City, Guangdong Province in
respect of installation cost due and interest payable. The amount claimed under this set of
proceedings was HK$1,461,000 (RMB1,520,000) and interest payable of HK$2,137,000
(RMB2,223,000). HK$1,461,000 was provided in the Group’s financial statements. No provision
was made on the interest payable of HK$2,137,000 as in the option of the directors, this probably
will not require an outflow of resources of the Group. The proceedings were adjourned for
hearing on a day to be fixed.
– 126 –
APPENDIX I
Employee Information
As at 31 December 2005, the Group employed a total of 141 (2004: 136) full-time employees,
mostly at the Group’s subsidiary factories for manufacturing carpets. The Group’s emolument
policies are formulated on the performance of individual employees and are reviewed annually
in line with industry practice. The Group also provides provident fund schemes (as the case
may be) to its employees depending on the location of such employees.
Shares Option Scheme
The Company adopted a share option scheme (the “Share Option Scheme”) pursuant to an
ordinary resolution passed by the shareholders of the Company on 6 June 2002. The purpose of
the Share Option Scheme is to provide incentives or rewards to participants for their contributions
to the Group and/or to enable the Group to recruit and retain high-caliber employees and attract
human resources that are valuable to the Group.
The shareholders of the Company have approved the refreshment of the general scheme limit
on the grant of options under the Share Option Scheme on the extraordinary general meeting
held on 10 March 2006. The general scheme limit has been reset to 52,520,000 shares, allowing
the Company to grant further options carrying the rights to subscribe for a maximum of
52,520,000 shares.
The Company did not grant any share options during the year ended 31 December 2005.
Change of Auditor
Grant Thornton Certified Public Accountants was appointed as the auditors of the Company
and of its subsidiaries with effect from 16 September 2005 to fill the vacancy left by RSM
Nelson Wheeler, which was not reappointed at the Company’s annual general meeting on 30
June 2006, and to hold office until the conclusion of the next annual general meeting of the
Company.
Dividend
The Directors do not recommend the payment of any dividend for the year ended
31 December 2005 (2004: Nil).
– 127 –
APPENDIX I
BUSINESS REVIEW
During the year ended 31 December 2006, carpet manufacturing and trading were the core
business of the Group. However the Group reported a decrease in turnover and a net loss. The
turnover of the Group was substantially decreased mainly due to the kin market competition in
Hong Kong and PRC.
Profit margins continued to be depressed in the intensely competitive environment which the
Group operates under. The prices of raw material increased in tandem with the increase in
crude oil prices globally and the appreciation of Renminbi. Unfortunately, these additional
costs could not be fully passed on to end customers due to the very keen pricing competition in
the markets of the Group operates in. In addition, the Group provided additional provision for
VAT and corresponding penalties payable of the amount HK$8.9 million arising in previous
year from 1998 to 2003.
The Group continued to focus on the existing business carpet manufacturing and distribution
to take productive approach to improve profitability and market share. In addition the Group
had acquired a carpet trading subsidiary in March 2007 to strengthen the base of core business.
On the other hand, the Group is looking into the opportunity of Logistic business as well as
exploring more investment to offer sustainable growth the new business.
LOGISTIC AND FINANCIAL MANAGEMENT SYSTEM
On 3 December 2005, the Group entered into an acquisition agreement with China National
Materials Storage and Transportation Guangzhou Corp (the “vendor”) to purchase the Logistic
and Financial Management System at a total consideration RMB6,000,000 (equivalent to
approximately HK$5,769,000) which was satisfied (i) as to RMB3,500,000 (approximately
HK$3,365,000) by issuing of 10,516,827 shares of the Company, and (ii) to RMB2,500,000
(approximately HK$2,404,000) for cash. On 24 November 2006, the Group and the vendor
have entered into a revised acquisition agreement which amended the consideration from
HK$6,000,000 to HK$3,000,000. The consideration should be settled in cash based on the
revised terms.
INVESTMENT INTO HEBEI DA SHENG WARRANTY COMPANY
According to the Company’s announcement dated 29 March 2007, the Board announced that
on 27 March 2007, Aurora Logistic Capital Assurance Limited (“Aurora Logistic”), a whollyowned subsidiary of the Company, entered into an agreement with Liaohai International
Investments Limited (“Liaohai”) and Hebei Da Sheng Warranty Company (“Da Sheng”), a
company incorporated in Zhangjiakou, Hebei Province, PRC in connection with the investment
into Da Sheng which engages in logistic, investment and project guarantee business.
Pursuant to the Agreement, Aurora Logistic shall contribute US$6,375,000 (equivalent to
approximately RMB51,000,000) to acquire 51% of the equity interests of Da Sheng.
– 128 –
APPENDIX I
Da Sheng, when it commences its business, will be principally engaged in logistic, investment
and project guarantee business in Zhangjiakou, Hebei Province, PRC. Da Sheng will provide
commodity based financing to the enterprises so that enterprises can obtain additional credit
limit from the financial institutions. In principle, Da Sheng will act as the guarantor of the
enterprise to guarantee the enterprise’s repayment obligations to the financial institutions thereby
allowing the enterprise to obtain additional credit limit. Da Sheng will receive a guarantee fee
from the enterprise based on a certain percentage of the loan advanced by the financial institution
to the enterprise. Da Sheng will also require the enterprise to provide commodity collateral to
Da Sheng. Accordingly, Da Sheng can assist medium to large enterprises to obtain loans from
financial institutions for developing mineral processing operations by providing guarantees to
such financial institutions.
The Group’s investment in Da Sheng can diversify the Group’s business and since Da Sheng
will base on a leveraged operation with a guarantee/lending multiplier, a stable profit and steady
cash flow and return on investment will be expected during the initial year of operation. As a
result, the steady growth of profit and development of Da Sheng will contribute financially to
the Group in future.
Strategic Cooperation Agreement
According to the Company’s announcement dated 27 November 2006, the Board also announced
that on 24 November, 2006, the Company entered into a legally binding strategic cooperation
agreement with CMST (the “Strategic Cooperation Agreement”). Under the Strategic
Cooperation Agreement, CMST will mainly be responsible for the custody and storage of
pledged assets and providing control and management services in respect of the pledged assets
in Mainland China. The Group will, through its subsidiary (“Guarantee Company”), be
responsible for providing guarantee services to customers, liaising and/or introducing mortgagees
or financial institutions to potential customers in Mainland China. CMST will also assist the
Group to develop a logistic finance/banking business by utilizing its existing excellent business
networks with major banks and/or financial institutions in Mainland China. For each of the
transactions conducted through the cooperation between the Company and CMST, the relevant
parties (i.e. the Guarantee Company, CMST, the bank or financial institution and the customer)
will sign an agreement whereby CMST will charge the Guarantee Company a custodian and
management service fee based on the guarantee amount and the Guarantee Company will charge
the customer (i.e. the borrowing enterprise), a guarantee fee.
Acquistion of a 70% Equity Interest in Win Alliance Development Limited
On 8 December 2006, Wise Mount Management Limited (“Wise Mount”), a wholly-owned
subsidiary of the Company entered into an agreement with a third party to, pursuant to which,
the Vendor has conditionally agreed to sell and Wise Mount has agreed to purchase 700,000
shares in Win Alliance Development Limited (“Win Alliance”), representing 70% of the entire
issued share capital of Win Alliance, for an aggregate consideration of HK$14,000,000. Please
refer the Company’s announcement and circular dated 14 December 2006 and 2 January 2007
respectively for more details.
– 129 –
APPENDIX I
The Acquisition was completed on 2 March 2007. The Board believed that the Acquisition will
enable the Group to expand its existing core business of manufacturing and trading of carpets
and may also provide the Group with valuable customer base, which is principally engaged in
trading of seamless steel pipes and steel, for developing its logistic financial business in PRC.
The principal business of the Group is engaged in the design, manufacture and sale of a wide
range of carpets under its own brand name and the trading of carpets of various brand names.
By acquiring 70% of the entire issued share capital of Win Alliance, which will enable the
Group to expand its existing core business of manufacturing and trading of carpets.
The Group also intends to diversify its bisiness by acquiring 51% of Da Sheng, a company
incorporated in Zhangjiakou, Hebei Province, PRC. The principal business of Da Sheng will
be to support the enterprises by acting as the guarantor of the enterprise and to secure bank
finance by providing guarantees to the financial institutions to secure the credit facilities to
these enterprises thereby allowing the enterprise to obtain additional credit limit. Da Sheng
will receive an all-in-fee from the enterprise based on a certain percentage of the loan advanced
by the financial institution to the enterprise. Da Sheng will also require the enterprise to provide
commodity as collateral to Da Sheng. If the completion is taken place, it is expected that both
the assets and liabilities of the Group will increase. In addition this project will contribute a
steady return to the Group in the future.
Raising Further Capital
On 5 March 2007, the Company entered into the Placing Agreement with the Placing Agent
pursuant to which an aggregate of 87,000,000 new shares were placed by the Placing Agent on
behalf of the Company, on a fully underwritten basis, at the price of HK$0.308 per Placing
Share with six independent investors who were third parties independent of the Company and
its connected persons. Immediately after the completion of the aforesaid placing, the Company
issued 87,000,000 new ordinary shares at HK$0.308 per share to the six independent investors
on 16 March 2007.
The aforesaid placing broadened the capital and shareholder base of the Company, and the net
proceeds of the Placing of approximately HK$26 million will be applied as to approximately
HK$18 million for working capital and the balance to new investment opportunities.
Financial Summary
The Group’s turnover for the year ended 31 December 2006 was approximately HK$26.5million,
which represented a decrease of 35% compared to the previous year. The administrative expenses
for the year ended 31 December 2006 were approximately HK$38.3 million, which represented
an increase of 56% compared to the expenses incurred last year.
The consolidated loss attributable to equity holders of the Company for the year ended 31
December 2006 was decreased to approximately HK$46.2 million, as compared to HK$91.1
million in the previous year.
– 130 –
APPENDIX I
dollars and Renminbi, the Directors considered the Group has no significant exposure to foreign
Renminbi. During the year ended 31 December 2006, the Group did not use any hedging
instrument.
As at 31 December 2006, the Group had total assets of approximately HK$101 million (2005:
Charges on Assets
As at 31 December 2006, the Group had not interest-bearing bank borrowings and no assets
were pledged (2005: HK$2 million). At 31 December 2005, the Group’s bank borrowings were
secured by time deposit of HK$2,031,000.
As at 31 December 2006, the Group did not have any contingent liabilities.
Employee Information
As at 31 December 2006, the Group employed approximately 139 full-time employees (2005:
141), mostly at the Group’s subsidiary factories for manufacturing carpets. The Group’s
emolument policies are formulated on the performance of individual employees and are reviewed
annually in line with industry practice. The Group also provides provident fund schemes (as
the case may be) to its employees depending on the location of such employees.
Dividend
The Directors do not recommend the payment of any dividend for the year ended
31 December 2006 (2005: Nil).
– 131 –
APPENDIX I
FOR THE SIX MONTHS ENDED 30 JUNE 2007
Business review and outlook
For the six months period ended 30 June 2007, the Group’s turnover and net loss were
approximately HK$17 million (2006: HK$11 million) and HK$23.94 million (2006: HK$32.29
million) respectively. The turnover of the Group was substantially increased by approximately
58.7% as compared to the corresponding period of last year and this increase was mainly due
to acquire a subsidiary of trading of other goods and improved by Hong Kong economic growth.
The Group continued to focus on the existing business CARPET MANUFACTURING AND
DISTRIBUTION to take productive approach to review and strengthen for its future growth
and improve profitability. In the meantime, the Group invested LOGISTIC AND FINANCE
BUSINESS in Da Sheng which will board the source of the income and contribute steady
profit in the future.
Carpet Manufacturing and Distribution
For the six months period ended 30 June 2007, the Group’s turnover was HK$14 million,
compared with approximately HK$11 million for the same period last year, an increase of
about 27.3% and the loss of the segment is HK$11.7 million as compared with HK$17.4 million
for the same period last year.
For the first half of 2007, the Group continued to engage in the manufacturing and distribution
of carpets. During the Period, although the Group benefited from the revival of the construction
and property development markets in Hong Kong and Macau’s booming casino and resort
markets, and the continued growth in the same sector in PRC, the Group still recorded a net
loss of its business due to the intensive competition of the carpet industry. Furthermore, the
prices of raw material increased in tandem with the increase in crude oil prices globally and
these additional costs could not be fully passed on to end customers due to the very keen
pricing competition in the markets the Group operates in.
The Group will enhance product development and technology innovation and raising product
value with the aim of increasing the profit margin of products and exercised tight control of
incremental selling expenses. Moreover, the Group will try to reduce the effect brought by the
floatation of oil price by reinforcing procurement management.
Trading of Other Goods
In March 2007, the Group acquired 70% interest of Win Alliance Development Limited which
enable the Group to expand the trading of seamless steel and other goods business to diversify
the Group’s source of income. For the six months period ended 30 June 2007, the turnover of
the segment was HK$3 million (2006: Nil) and the loss of the segment is HK$356,000 (2006:
Nil). The Group will try to improve the gross profit of trading and further explore the customer
base to contribute a profit in the future.
– 132 –
APPENDIX I
Logistic and Financial Business
In July 2007, the Group acquired 51% interest of Hebei Da Sheng Warranty Company Limited
(“Da Sheng”), The principal business of Da Sheng is to support the enterprises by acting as
guarantor of the enterprise and to secure bank finance by providing guarantees to the financial
institutional to secure the credit facilities to these enterprises thereby allowing the enterprise to
obtain additional credit limit.
At the beginning of the operation, Da Sheng incurs administrative expenses and does not offer
a very exciting profit profile. Nevertheless, the management of Da Sheng will dedicate more
resources to attract more prospective target customers and will work diligently to achieve the
goal in order to generate a profit to the Group in the coming future.
Liquidity and financial resources
Based on the unaudited management account for the six months ended 30 June 2007, the Group’s
total current assets were HK$113 million and its total current liabilities were HK$51 million.
As at 30 June 2007, the Group cash and bank balances were amounted to HK$89 million (31
December 2006: HK$776,000). The Group recorded the net current assets was HK$62 million.
Current and gearing ratio
As at 30 June 2007, the Group had total assets of HK$211 million (31 December 2006: HK$
100.5 million), total liabilities of HK$60 million (31 December 2006: HK$37.7 million),
indicating a gearing ratio of 0.28 (31 December 2006: 0.37) on the basis of total liabilities over
total assets. The current ratio of the Group for the Period was 2.21 (31 December 2006: 0.49).
Number and remuneration of employees
The Group total number of employees was approximately 141 employees (2006: 140) in Hong
Kong and PRC for the period ended 30 June 2007. The Group recognized the importance of
maintaining good working relationships with its employees and accordingly, strives to maintain
remunerations at competitive levels and in line with industry practice.
The Company adopted a share option scheme (the “Share Option Scheme”) pursuant to an
ordinary resolution passed by the shareholders of the Company on 6 June 2002. The purpose of
the Share Option Scheme is to provide incentives or rewards to participants for their contributions
to the Group and to enable the Group to recruit and retain high-caliber employees and attract
human resources that are valuable to the Group.
Foreign currency exposure
The Group did not have any significant exposure to and did not hedge against risks associated
with foreign currency fluctuation.
– 133 –
APPENDIX I
Contingent liabilities
As at 30 June 2007, the Group did not have any significant contingent liabilities.
5.
INDEBTEDNESS, LIQUIDITY AND FINANCIAL RESOURCES
At the close of business on 31 August 2007 (being the latest practicable date for the purpose of
this indebtedness statement prior to the printing of this circular), the Enlarged Group had
unsecured loans of approximately HK$3.6 million and obligation under finance lease of
HK$249,080. As at 31 August 2007, the Enlarged Group does not have any mortgages, charges,
contingent liabilities or guarantees.
Save as aforesaid or as otherwise disclosed herein, and apart from intra-group liabilities, the
Enlarged Group did not have outstanding at the close of business on 31 August 2007 any loan
capital issued and outstanding or agreed to be issued, bank overdrafts, loans or other similar
indebtedness, liabilities under acceptances or acceptable credits, debentures, mortgages, charges,
hire purchases commitments, guarantees or other material contingent liabilities.
The Group’s monetary assets, liabilities and transactions are mainly denominated in Hong
Kong dollars and Renminbi. As Hong Kong dollars is pegged to United States dollars, and
there is no significant fluctuation in the exchange rate between Hong Kong dollars and Renminbi,
the Group believes that its risk of exposure to exchange rate is not high.
6.
EMPLOYEES
As at 31 August 2007, the Group had approximately 145 full-time employees in Hong Kong
and the PRC. The remuneration committee and the management review the remuneration policy
regularly on the basis of performance and experience of the employees as well as the prevailing
industry practice. The Group also provides various training courses on relevant business or
skills for the management and staff at all levels. Pension contributions are made by the Group
for its PRC employees in accordance with the relevant PRC laws. Insurance and mandatory
provident fund schemes are also effected for its Hong Kong staff.
The Company operates a the Share Option Scheme whereby the Board may at their absolute
discretion, grant options to employees and executive Directors of the Company and any of its
subsidiaries to subscribe for shares in the Company. The subscription price, exercisable period
and the maximum number of options to be granted are determined in accordance with the
prescribed terms of the Share Option Scheme.
– 134 –
APPENDIX I
7.
WORKING CAPITAL
With regard to the capital investment to bring the Target Mine to commercial production, the
Company intends to finance the same by the Company’s internal resources, bank borrowings,
and if considered appropriate, proceeds from any future fund raising activity of the Company.
The Company has appointed Macquarie (Hong Kong) Limited as its financial advisor to advise
the Company on the fund raising, which is intended to be finalized subsequent to the completion
of the mine feasibility study. The capital investment shall be significantly contingent on the
results of those fund raising activities, after the completion of the mine feasibility study.
The Directors have also included a paragraph about the significant and continuous capital
investment required by the Target Mine under the paragraph headed “Risk factor(s)” in the
letter from the Board in this circular.
The estimated funds required of the Group for the two years following the issue of this circular
is RMB1,080,000,000, in order to bring the Mineral Resources of the Target Mine into
commercial production, which includes the funds required to obtain the Mining Licence and to
conduct a drilling program to further exploit the proven reserves of the Target Mine. As it will
typically take 12 months to 18 months to establish the mining operation upon obtaining of the
Mining Licence, the Target Mine is not expected to generate any revenue for at least the next
12 months from the date of this circular.
Other than the above, the Directors are of the opinion that, taking into account the internal
resources available to the Group, the Enlarged Group will have sufficient working capital to
continue to operate in next 24 months from the date of this circular in the absence of unforeseen
circumstances.
– 135 –
APPENDIX I
8.
MATERIAL ADVERSE CHANGE
The Directors are not aware of any material adverse change in the financial or trading position
of the Group since 31 December 2006, being the date of which the latest audited financial
statements of the Group were made up.
9.
BUSINESS PROSPECTS
Trend of business of the Group
The principal business of the Group is the design, manufacture and sale of a wide range of
carpets under its own brand name and the trading of carpets of various brand names since 31
December 2006, being the date of which the latest audited financial statements of the Group
were made up. In March 2007, the Group acquired 70% of entire issued share capital of Win
Alliance, which will enable the Group to expand its existing core business of manufacturing of
trading of carpets. In addition, the Group acquired 51% of entire issued share capital of Da
Sheng, a company incorporated in Zhangjiakou, Hebei Province, the PRC in July 2007. The
principal business of Da Sheng will be to support enterprises (not connected or otherwise related
to the Group) by acting as their guarantor so as to secure credit facilities from financial
institutions by providing guarantees to the financial institutions and thereby allowing those
enterprises to obtain additional credit limit. Da Sheng will receive an all-in-fee from those
enterprises based on a certain percentage of the loan advanced by the financial institutions to
those enterprises. Da Sheng will also require those enterprises to provide commodity as collateral
to Da Sheng. If the business is commenced, it is expected that Da Sheng will contribute a
steady return to and will diversify the sources of income of the Group in the future in terms of
the said all-in-fee.
Trading and financial prospects of the Enlarged Group
The Directors consider that the Group may broaden its source of income by diversifying into
the exploration and mining of natural resources. The Directors believe that the demand for
metals such as iron, titanium and vanadium will be considerable given the fact that the economy
of the PRC will grow rapidly, and therefore the national consumption of such metals will rise
in the near future. Further, the prices of such metals have been rising over the past years. Since
the Target Mine contains substantial reserves of the said metals, the Directors believe that the
Acquisition will bring satisfactory returns to the Group.
– 136 –
APPENDIX IIA
ACCOUNTANTS’ REPORT ON THE TARGET GROUP
The following is the text of a report on the Target Company, prepared for the sole purpose of inclusion
in this circular, received from the independent reporting accountants, Grant Thornton.
The Directors
Suites 5303-04, 53/F
Central Plaza
18 Harbour Road
Wanchai
Hong Kong
Dear Sirs,
We set out below our report on the combined financial information of Kanson Development Limited
(the “Target Company”) and its subsidiaries (hereinafter collectively referred to as the “Target Group”)
including the balance sheets of the Target Group as at 31 December 2004, 2005 and 2006 and 30 June
2007, income statements, cash flow statements and statements of changes in equity for the period
from 8 April 2004 (being the date of incorporation of one of its subsidiaries, Qinghai Forest Source
Mining Industry Development Company Limited (‫ࣵڇ‬౲฻ᘊพ඀ೕτࠉʔ̇) (“Qinghai Senyuan”)
to 31 December 2004, each of the two years ended 31 December 2005 and 2006 and the six months
ended 30 June 2007 (the “Relevant Periods”) and notes thereto, together with the unaudited combined
financial information of the Target Group including the income statement, cash flow statement and
statement of changes in equity for the six months ended 30 June 2006 (the “30 June 2006 Corresponding
Information”), prepared for inclusion in the circular (the “Circular”) dated 15 October 2007 issued
by Aurora Global Investment Holdings Limited (the “Company”) in connection with the very
substantial acquisition: acquisition of interests in a company involving issue of consideration shares
and convertible bonds (the “Acquisition”) .
The Target Company was incorporated in the British Virgin Islands with limited liability on 12 July
2005 with an authorised share capital of US$50,000 divided into 50,000 ordinary shares of US$1
each. The registered office of the Target Company is at P.O. Box 3444, Road Town, Tortola, British
Virgin Islands and its principal place of business is located at Units 3-4, 15th Floor, Goldfield Industrial
Centre, 1 Sui Wo Road, Fotan, Shatin, New Territories, Hong Kong.
Pursuant to a reorganisation (the “Reorganisation”) as detailed in subsection headed “Reorganisation”
in Letter from the Board of the Circular, the Target Company became the holding company of the
subsidiaries now comprising the Target Group at the completion of the Reorganisation.
– 137 –
APPENDIX IIA
The principal activity of the Target Company is investment holding. As at the date of this report, the
Target Company has the following subsidiaries:
Name of subsidiaries
Nominal value
of issued and fully
paid ordinary/
registered capital
Date and place
of incorporation/
establishment
Principal
place of
operation
Attributable
interest held by
the Target
Company
Principal
activities
Hong Kong Forest
Source Mining
Industry Holding
Company Limited
ࠗಋ౲฻ᘊพઁٖ
τࠉʔ̇
(“Hong Kong FSMI”)
HK$20,000,000
26 September 2005,
Hong Kong
Hong Kong
100%
Investment
holding
Qinghai Senyuan#
HK$18,312,000
8 April 2004,
The People’s
Republic of China
(the “PRC”)
The PRC
100%*
Exploration
of mine
*
equity interest indirectly held by the Target Company
#
The unoffical English translation is for identification purpose only
No audited financial statements have been prepared for the Target Company since its date of
incorporation as there are no statutory audit requirements.
No audit has been performed on the management accounts of Hong Kong FSMI as it was newly
incorporated on 26 September 2005.
The financial statements of Qinghai Senyuan were prepared in accordance with the relevant accounting
rules and regulations applicable to enterprises in the PRC. Qinghai Senyuan has adopted 31 December
as its financial year-end date. The financial statements of Qinghai Senyuan for the years ended 31
December 2005 and 2006 were audited by ‫ڌړࣵڇ‬ผ߮࢑ԑ৻ֺτࠉʔ̇ (“Qinghai Baoxin
Certified Public Accountant Co., Ltd”) (for identification purpose only), a firm of certified public
accountants registered in the PRC. No audited financial statements have been prepared for the periods
from 8 April 2004 (date of establishment) to 31 December 2006 and for the six months ended 30 June
2007.
For the purpose of this report, the director of the Target Company has prepared the combined financial
statements (the “Underlying Financial Statements”) of the Target Group for the Relevant Periods in
accordance with Hong Kong Financial Reporting Standards (“HKFRS”). We have, for the purpose of
this report, carried out appropriate audit procedures in respect of the Underlying Financial Statements
of the Target Company for the Relevant Periods, in accordance with Hong Kong Standards on Auditing
issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).
– 138 –
APPENDIX IIA
The financial information and the notes thereto for the Relevant Periods (the “Financial Information”)
as set out in this report has been prepared by the director of the Target Company based on the Underlying
Financial Statements and in accordance with HKFRSs. For the purpose of this report, we have examined
the Financial Information of the Target Group and carried out such additional procedures as are
necessary in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant”
issued by the HKICPA.
The director of the Target Company is responsible for the preparation of the Underlying Financial
Statements and the Financial Information which gives a true and fair view. The directors of the
Company are responsible for the contents of the Circular in which this report is included. In preparing
the Financial Information which gives a true and fair view, it is fundamental that appropriate accounting
policies are selected and applied consistently. It is our responsibility to form an independent opinion,
based on our examination, on the Financial Information and to report our opinion to you.
In our opinion, the Financial Information, for the purpose of this report, gives a true and fair view of
the state of affairs of the Target Group and the Target Company as at 31 December 2004, 2005 and
2006 and 30 June 2007 and of the combined results and combined cash flows of the Target Group for
each of the Relevant Periods.
For the purpose of this report, we have reviewed the 30 June 2006 Corresponding Information, which
are prepared in accordance with accounting principles generally accepted in Hong Kong and for
which the director of the Target Company is responsible, in accordance with Statement of Auditing
Standard 700 “Engagements to review interim financial reports” issued by the HKICPA. Our review
consisted principally of making enquiries of management and applying analytical procedures to the
30 June 2006 Corresponding Information and based thereon assessing whether the accounting policies
and presentation have been consistently applied unless otherwise disclosed. A review excludes audit
procedures such as tests of controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit and therefore provides a lower level of assurance than an
audit. Accordingly we do not express an audit opinion on the 30 June 2006 Corresponding Information.
For the purpose of this report and on the basis of our review of the 30 June 2006 Corresponding
Information, which does not constitute an audit, we are not aware of any material modifications that
should be made to the unaudited 30 June 2006 Corresponding Information.
Emphasis of matter — fundamental uncertainty relating to going concern basis
Without qualifying our opinion, we draw attention to note 2 in Section II to Underlying Financial
Statements which discloses that as at 30 June 2007, the Target Group had deficit in equity of
approximately HK$18,750,000 (30 June 2006: HK$2,053,000) and the Target Group also incurred a
loss attributable to equity holder of the Company of approximately HK$5,991,000 (30 June 2006:
HK$2,976,000) for the six months then ended. These conditions, along with other matters as disclosed
in note 2 in Section II to the Financial Information, indicate the existence of a material uncertainty
which may cast significant doubt about the Target Group’s ability to continue as a going concern.
– 139 –
APPENDIX IIA
I.
FINANCIAL INFORMATION
COMBINED INCOME STATEMENTS
Notes
Revenue
4
Bank interest income
Income tax expense
Loss for the period/year
5
6
From
8 April 2004
to
31 December
2004
HK$’000
2005
2006
HK$’000
HK$’000
2007
2006
HK$’000
HK$’000
(unaudited)
—
—
—
—
—
1
(1,150)
1
(1,703)
13
(9,793)
5
(5,996)
12
(2,988)
(1,149)
—
(1,702)
—
(9,780)
—
(5,991)
—
(2,976)
—
(1,149)
(1,702)
(9,780)
(5,991)
(2,976)
– 140 –
APPENDIX IIA
COMBINED BALANCE SHEETS
Notes
2004
HK$’000
As at 31 December
As at 30 June
2005
2006
2007
HK$’000
HK$’000
HK$’000
Non-current assets
Intangible assets – “exploration and
evaluation assets”
9
1,442
1,188
1,709
1,923
10
1,579
2,536
8,505
12,243
3,021
3,724
10,214
14,166
122
20
22
247
544
229
797
222
142
269
773
1,019
1,096
1,719
1,308
2,167
4,103
15,961
2,471
31,464
2,815
3,475
20,064
33,935
Net current liabilities
(2,673)
(3,206)
(19,291)
(32,916)
348
518
(9,077)
(18,750)
1,512
(1,164)
3,351
(2,833)
3,501
(12,578)
—
(18,750)
348
518
(9,077)
(18,750)
Current assets
Deposits, prepayments and other receivables
Current liabilities
Amounts due to a shareholder
EQUITY
Equity attributable to the equity holder of the
Target Company
Share capital
Reserves
12
13
14
15
16
Total equity
– 141 –
APPENDIX IIA
BALANCE SHEET
Notes
2004
HK$’000
As at 31 December
As at 30 June
2005
2006
2007
HK$’000
HK$’000
HK$’000
Non-current assets
Interests in a subsidiary
11
—
—
—
20,000
Current liabilities
Amounts due to a shareholder
14
—
5
9
20,009
Net current liabilities
—
(5)
(9)
(20,009)
Net liabilities
—
(5)
(9)
(9)
—
—
—
(5)
—
(9)
—
(9)
—
(5)
(9)
(9)
EQUITY
Share capital
Accumulated losses
15
16
Total equity
– 142 –
APPENDIX IIA
COMBINED STATEMENTS OF CHANGES IN EQUITY
The Target Group
Share
capital
HK$’000
Exchange
reserve
HK$’000
Accumulated
losses
HK$’000
Total
HK$’000
At 8 April 2004
—
—
—
(15)
—
—
—
(15)
Net expenses recognised directly in equity
Loss for the period
—
—
(15)
—
—
(1,149)
(15)
(1,149)
Total recognised income and
expenses for the period
Capital injection to Qinghai Senyuan
—
1,512
(15)
—
(1,149)
—
(1,164)
1,512
At 31 December 2004 and at 1 January 2005
1,512
—
(15)
33
(1,149)
—
348
33
—
—
33
—
—
(1,702)
33
(1,702)
expenses for the year
—
1,839
33
—
(1,702)
—
(1,669)
1,839
At 31 December 2005 and
at 1 January 2006
3,351
—
18
35
(2,851)
—
518
35
—
—
35
—
—
(9,780)
35
(9,780)
—
150
35
—
(9,780)
—
(9,745)
150
3,501
—
53
(181)
(12,631)
—
(9,077)
(181)
—
—
(181)
—
—
(5,991)
(181)
(5,991)
—
800
(181)
—
(5,991)
—
(6,172)
800
(4,301)
—
—
(4,301)
—
(128)
(18,622)
(18,750)
Net income recognised directly in equity
Loss for the year
Net income recognised directly in equity
Loss for the year
expenses for the year
Net expenses recognised directly in equity
Loss for the period
Total recognised income and expenses for
the period
Elimination of share capital of Hong Kong
FSMI and Qinghai Senyuan upon
Reorganisation
At 30 June 2007
– 143 –
APPENDIX IIA
COMBINED CASH FLOW STATEMENTS
From
8 April 2004
to
31 December
2004
Notes
HK$’000
Adjustments for:
Interest income
Depreciation of property,
plant and equipment
9
2005
2006
HK$’000
HK$’000
Six months
ended 30 June
2007
2006
HK$’000
HK$’000
(Unaudited)
(1,149)
(1,702)
(9,780)
(5,991)
(2,976)
(1)
(1)
(13)
(5)
(12)
188
338
522
319
236
(962)
(1,365)
(9,271)
(5,677)
(2,752)
Operating loss before
working capital changes
(Increase)/Decrease in deposits,
prepayments and other receivables
Increase/(Decrease) in
other payables and accruals
Increase in amounts due to a shareholder
(122)
100
(522)
(253)
(442)
1,096
1,719
212
448
2,795
13,794
(1,632)
15,503
402
3,989
Cash generated from/(used in)
operations and net cash generated from/
(used in) operating activities
1,731
(605)
6,796
7,941
1,197
Cash flows from investing activities
Purchase of property, plant and equipment
Expenditure in exploration and evaluation
costs
Investment in subsidiaries
Interest received
(1,630)
(42)
(996)
(533)
(870)
(1,579)
—
1
(911)
—
1
(5,867)
—
13
(3,738)
(4,301)
5
(462)
—
12
(3,208)
(952)
(6,850)
(8,567)
(1,320)
Cash flows from financing activities
1,512
1,839
150
800
150
1,512
1,839
150
800
150
Net increase in cash and cash equivalents
35
282
96
174
27
Cash and cash equivalents at beginning
of the year/period
—
20
247
229
247
Effect of foreign exchange rate changes
(15)
(55)
(114)
(181)
(114)
at end of the year/period
20
247
229
222
160
20
247
229
222
160
Analysis of the balances of cash and
cash equivalents, representing
Bank balances and cash
at end of the year/period
12
– 144 –
APPENDIX IIA
II
NOTES TO THE COMBINED FINANCIAL INFORMATION AND THE 30 JUNE 2006
CORRESPONDING INFORMATION
1.
BASIS OF PRESENTATION
The Financial Information and the 30 June 2006 Corresponding Information set out in this report have
been prepared in accordance with all applicable HKFRSs, which include all applicable individual Hong
Kong Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations issued by the
HKICPA and have been consistently applied throughout the Relevant Periods.
The Target Group is regarded as a continuing entity resulting from the Reorganisation since all companies
within the Target Group were under common control before and immediately after the Reorganisation.
Consequently, immediately after the Reorganisation, there was a continuation of the risks and benefits to
the ultimate shareholder that existed prior to the Reorganisation. The Reorganisation has been accounted
for as a reorganisation under common control in a manner similar to pooling of interests. Accordingly, the
combined financial information has been prepared on the basis of merger accounting.
The Financial Information and the 30 June 2006 Corresponding Information also comply with the applicable
disclosure requirements of the Hong Kong Companies Ordinance and the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Adoption of new and amended HKFRSs
The Target Group has not early adopted the following HKFRSs that have been issued but are not yet
effective. The director of the Target Company is currently assessing the impact of these HKFRSs but are
not yet in a position to state whether they would have material financial impact on the Target Group’s
HK(IFRIC) Int 11
Group and Treasury Share Transactions 1
HK(IFRIC) Int 12
Service Concession Arrangements 2
HKFRS 8
Operating Segments 3
HKAS 23 (Revised)
Borrowing Costs
3
1
2
3
Basis of preparation of Financial Information
The Financial Information has been prepared on the basis of merger accounting in accordance with the
Accounting Guideline No.5 “Merger Accounting for Common Control Combination” issued by the HKICPA,
under which Target Company is considered as the holding company of the Target Group during the Relevant
Periods. The results and cash flows of the Target Group for the Relevant Periods include the results and
cash flows of the Target Company and its subsidiaries from 8 April 2004, being the date of incorporation of
Qinghai Senyuan, or since the Target Company and Hong Kong FSMI respective dates of incorporation/
establishment whichever is shorter, as if current group structure had been in existence throughout the
Relevant Periods. The combined balance sheets as at respective balance sheet dates of the Relevant Periods
is a combination of the balance sheets of the Target Company and its subsidiaries at each balance sheet
date as if the current group structure had been in existence at these dates.
– 145 –
APPENDIX IIA
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of preparation of Financial Information (Continued)
The Financial Information has been prepared in accordance with the significant accounting policies set out
below. The Financial Information is prepared under the historical cost convention except for the revaluation
of certain financial assets and liabilities. The measurement bases are fully described in the accounting
policies below.
It should be noted that accounting estimates and assumptions are used in preparation of the Financial
Information. Although these estimates are based on management’s best knowledge of current events and
actions, actual results may ultimately differ from those estimates. The areas involving higher degree of
judgement or complexity, or areas where assumptions and estimates are significant to the Financial
Information are disclosed in note 3.
In preparing the Financial Information, the director of the Target Company has given consideration to the
future liquidity of the Target Group in light of its deficit in equity of approximately HK$18,750,000 as at
30 June 2007 and loss of approximately HK$5,991,000 attributable to the equity holder of the Target
Company for the six months ended 30 June 2007. Notwithstanding this, the Financial Information has been
prepared on a going concern basis on the assumption that the Target Group and the Target Company will
continue to operate as a going concern. The going concern basis has been adopted on the basis that the
shareholder of the Target Company has agreed to provide additional share capital of HK$50,000,000 and
the shareholder’s loan of HK$31,464,000 will be capitalised and transferred to equity of Target Company
before the Acquisition.
Should the Target Group and the Target Company be unable to continue in business as a going concern,
adjustments would have to be made to reduce the value of assets to their recoverable amount, to provide for
any further liabilities which might arise, and to reclassify non-current assets as current assets. These
adjustments have not been reflected in the Financial Information.
(a)
Basis of combination and subsidiaries
Subsidiaries are all entities (including special purpose entities) over which the Target Company has
the power to control the financial and operating policies so as to obtain benefits from their activities.
The existence and effect of potential voting rights that are currently exercisable or convertible are
considered when assessing whether the Target Company controls another entity. Subsidiaries are
fully consolidated from the date on which control is transferred to the Target Company. They are
excluded from consolidation from the date that control ceases.
The Financial Information incorporates the financial statements of the Target Company and its
subsidiaries after elimination of intercompany transactions. As explained above, the Financial
Information has been accounted for using the merger method of accounting.
– 146 –
APPENDIX IIA
2.
Basis of preparation of Financial Information (Continued)
(a)
Basis of combination and subsidiaries (Continued)
The net assets of the combining entities are combined using the existing book values from the
controlling parties’ perspective. No amount is recognised as consideration for goodwill or excess
of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent
liabilities over cost at the time of common control combination. The combined income statements
includes the results of each of the combining entities from the date of incorporation/establishment
or since the date when the combining entities first came under the common control, where this is a
shorter period, regardless of the date of the common control combination. All significant intragroup transactions, balances and unrealised gains on transactions have been eliminated on
combination. Unrealised losses are also eliminated unless the transactions provide evidence of an
impairment of the asset transferred.
In the Target Company’s balance sheet, subsidiaries are carried at cost less impairment loss. The
results of the subsidiaries are accounted for by Target Company on the basis of dividends received
and receivables at the balance sheet date.
(b)
Foreign currency translation
The functional currency of the Target Group is Renminbi (“RMB”). In the opinion of the director of
the Target Company, the presentation of the Financial Information of the Target Group in Hong
Kong Dollars (HK$) provides more relevant information about the Acquisition. Accordingly, in the
Financial Information, the financial statements of the Target Group originally presented in a currency
different from the Target Group’s presentation currency, have been converted into HK$.
In the individual financial statements of the combined entities, foreign currency transactions are
translated into the functional currency of the individual entity using the exchange rates prevailing
at the dates of the transactions. At each balance sheet date, monetary assets and liabilities
denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance
sheet dates. Foreign exchange gains and losses resulting from the settlement of such transactions
and from the balance sheet dates retranslation of monetary assets and liabilities are recognised in
the combined income statements.
Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated
at the rates prevailing on the date when the fair value was determined and are reported as part of the
fair value gain or loss. Non-monetary items that are measured in terms of historical cost in a foreign
currency are not retranslated.
– 147 –
APPENDIX IIA
2.
(b)
Foreign currency translation (Continued)
In the combined financial statements, all individual financial statements of foreign operations,
originally presented in a currency different from the Target Group’s presentation currency, have
been converted into HK$. Assets and liabilities have been translated into HK$ at the closing rates at
the balance sheet dates. Income and expenses have been converted into the HK$ at the exchange
rates ruling at the transaction dates, or at the average rates over the reporting period provided that
the exchange rates do not fluctuate significantly. Any differences arising from this procedure have
been dealt with separately in the exchange reserve in equity.
Other exchange differences arising from the translation of the net investment in foreign entities are
taken to shareholders’ equity. When a foreign operation is sold, such exchange differences are
recognised in the income statement as part of the gain or loss on sale.
(c)
Revenue recognition
Provided it is probable that the economic benefits will flow to the Target Group and the revenue can
be measured reliably, revenue is recognised as follows:
Interest income is recognised on a time-proportion basis using the effective interest method.
(d)
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated
impairment losses.
The cost of an item of property, plant and equipment comprises its purchase price and any directly
attributable costs of bringing the asset to the working condition and location for its intended use.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as
appropriate, only when it is probable that future economic benefits associated with the item will
flow to the Target Group and the cost of the item can be measured reliably. All other costs, such as
repairs and maintenance are charged to the combined income statements during the financial period
in which they are incurred.
– 148 –
APPENDIX IIA
2.
(d)
Property, plant and equipment (Continued)
Depreciation is provided to write off the cost less their estimated residual values over their estimated
useful lives, using the straight-line method, at the following rates per annum:
Motor vehicles
20 %
Furniture, fixtures and office equipment
20%-25%
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance
sheet date.
The gain or loss arising on retirement or disposal is determined as the difference between the sales
proceeds and the carrying amount of the asset and is recognised in the combined income statements.
(e)
Impairment of assets
Property, plant and equipment and interests in a subsidiary are subject to impairment testing.
All these assets are tested for impairment whenever there are indications that the asset may be
impaired.
An impairment loss is recognised as an expense immediately for the amount by which the asset’s
carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value,
reflecting market conditions less costs to sell, and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessment of time value of money and the risk specific to the asset.
For the purposes of assessing impairment, where an asset does not generate cash inflows largely
independent from those from other assets, the recoverable amount is determined for the smallest
group of assets that generate cash inflows independently (i.e. a cash-generating unit). As a result,
some assets are tested individually for impairment and some are tested at cash-generating unit
level.
An impairment loss is reversed if there has been a favourable change in the estimates used to
determine the asset’s recoverable amount and only to the extent that the asset’s carrying amount
does not exceed the carrying amount that would have been determined, net of depreciation or
amortisation, if no impairment loss had been recognised.
– 149 –
APPENDIX IIA
2.
(f)
Leases
An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the
Target Group determines that the arrangement conveys a right to use a specific asset or assets for an
agreed period of time in return for a payment or a series of payments. Such a determination is made
based on an evaluation of the substance of the arrangement and is regardless of whether the
arrangement takes the legal form of a lease.
Operating lease as the lessee
Where the Target Group has the right to use the assets held under operating leases, payments made
under the leases are charged to the combined income statement on a straight line basis over the
lease terms except where an alternative basis is more representative of the pattern of benefits to be
derived from the leased assets. Lease incentives received are recognised in the combined income
statements as an integral part of the aggregate net lease payments made. Contingent rental are
charged to the combined income statement in the accounting period in which they are incurred.
(g)
Financial assets
The Target Group’s accounting policies for financial assets other than interest in subsidiaries are
set out below.
Recognition and measurement
The Target Group financial assets include deposits, prepayments and other receivables. These are
classified into loans and receivables. Management determines the classification of its financial
assets at initial recognition depending on the purpose for which the financial assets were acquired
and where allowed and appropriate, re-evaluates this designation at every reporting date.
All financial assets are recognised when, and only when, the Target Group becomes a party to the
contractual provisions of the instrument. When financial assets are recognised initially, they are
measured at fair value plus directly attributable transaction costs.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that
are not quoted in an active market. They are subsequently measured at amortised cost using the
effective interest rate method, less any impairment losses. Amortised cost is calculated taking into
account any discount or premium on acquisition and includes fees that are an integral part of the
effective interest rate and transaction cost.
Derecognition
Derecognition of financial assets occurs when the rights to receive cash flows from the investments
expire or are transferred and substantially all of the risks and rewards of ownership have been
transferred. At each balance sheet date, financial assets are reviewed to assess whether there is
objective evidence of impairment. If any such evidence exists, impairment loss is determined and
recognised based on the classification of the financial asset.
– 150 –
APPENDIX IIA
2.
(g)
Financial assets (Continued)
Impairment of financial assets
At each balance sheet date, financial assets are reviewed to determine whether there is any objective
evidence of impairment. If any such evidence exists, the impairment loss is measured and recognised
as follows:
If there is objective evidence that an impairment loss on loans and receivables has been incurred,
the amount of the loss is measured as the difference between the asset’s carrying amount and the
present value of estimated future cash flows (excluding future credit losses that have not been
incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest
rate computed at initial recognition). The amount of the loss is recognised in the combined income
statements of the period in which the impairment occurs. If, in subsequent period, the amount of
the impairment loss decreases and the decrease can be related objectively to an event occurring
after the impairment was recognised, the previously recognised impairment loss is reversed to the
extent that it does not result in a carrying amount of the financial asset exceeding what the amortised
cost would have been had the impairment not been recognised at the date the impairment is reversed.
The amount of the reversal is recognised in the combined income statements in the period in which
the reversal occurs.
(h)
Accounting for income taxes
Income tax comprises current tax and deferred tax.
Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal
authorities relating to the current or prior reporting period, that are unpaid at the balance sheet
dates. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to
which they relate, based on the taxable profit for the year/period. All changes to current tax assets
or liabilities are recognised as a component of tax expense in the combined income statement.
Deferred tax is calculated using the liability method on temporary differences at the balance sheet
dates between the carrying amounts of assets and liabilities in the combined financial statements
and their respective tax bases. Deferred tax liabilities are generally recognised for all taxable
temporary differences. Deferred tax assets are recognised for all deductible temporary differences,
tax losses available to be carried forward as well as other unused tax credits, to the extent that it is
probable that taxable profit will be available against which the deductible temporary differences,
unused tax losses and unused tax credits can be utilised.
Deferred tax assets and liabilities are not recognised if the temporary differences arises from initial
recognition of assets and liabilities in a transaction that affects neither taxable nor accounting profit
or loss.
– 151 –
APPENDIX IIA
2.
(h)
Accounting for income taxes (Continued)
Deferred tax is calculated, without discounting, at tax rates that are expected to apply in the period
the liability is settled or the asset realised, provided they are enacted or substantively enacted at the
balance sheet date.
Changes in deferred tax assets or liabilities are recognised in the combined income statements or in
equity if they relate to items that are charged or credited directly to equity.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to
the extent that it is no longer probable that sufficient taxable profits will be available to allow all or
part of the asset to be recovered.
(i)
Cash and cash equivalents include cash at bank and in hand.
(j)
Share capital
Ordinary shares are classified as equity. Share capital is determined using the nominal value of
shares that have been issued.
(k)
Retirement benefit costs and short term employee benefits
Retirement benefits to employee are provided through defined contribution plans.
Defined contribution plan
The Target Group operates a defined contribution Mandatory Provident Fund retirement benefits
scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for those
employees who are eligible to participate in the MPF Scheme. Contributions are made based on a
percentage of the employees’ basic salaries and are charged to the combined income statement as
they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF
Scheme are held separately from those of the Target Group in an independently administered fund.
The Target Group’s employer contributions vest fully with the employees when contributed into
MPF scheme.
The employees of the Target Group’s subsidiary which operates in the PRC, except Hong Kong are
required to participate in the retirement benefits scheme (the “RB Scheme”) operated by the respective
local municipal government in the PRC. The subsidiary is required to contribute a certain percentage
of their payroll costs to the RB Scheme to fund the benefits. The only obligation of the Target
Group with respect to the RB Scheme is to pay the ongoing required contributions under the RB
Scheme. Contributions under the RB Scheme are charged to the combined income statements as
they become payable in accordance with the rules of the RB Scheme.
– 152 –
APPENDIX IIA
2.
(k)
Retirement benefit costs and short term employee benefits (Continued)
Short-term employee benefits
Employee entitlements to annual leave are recognised when they are accrued to employees. A
provision is made for the estimated liability for annual leave as a result of services rendered by
employees up to the balance sheet dates.
Non-accumulating compensated absences such as sick leave and maternity leave are not recognised
until the time of leave.
(l)
The Target Group’s financial liabilities include other payables and accruals, and amounts due to a
shareholder.
Financial liabilities are recognised when the Target Group becomes a party to the contractual
provisions of the instrument. All interest related charges are recognised as an expense in finance
costs in the combined income statement.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled
or expires.
Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amount is recognised in the combined income
statements.
Other payables and accruals and amounts due to a shareholder are recognised initially at their fair
value and subsequently measured at amortised cost, using the effective interest method.
(m)
Provisions, contingent liabilities and contingent assets
Provisions are recognised when the Target Group has a present obligation (legal or constructive) as
a result of a past event, and it is probable that an outflow of economic benefits will be required to
settle the obligation and a reliable estimate can be made. Where the time value of money is material,
provisions are stated at the present value of the expenditure expected to settle the obligation.
All provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate.
– 153 –
APPENDIX IIA
2.
(m)
Provisions, contingent liabilities and contingent assets (Continued)
Where it is not probable that an outflow of economic benefits will be required, or the amount
cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability
of outflow of economic benefits is remote. Possible obligations, whose existence will only be
confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as
contingent liabilities unless the probability of outflow of economic benefits is remote.
(n)
Intangible assets – exploration and evaluation assets
Exploration and evaluation assets are stated at cost less impairment losses. Exploration and evaluation
assets include topographical and geological survey drilling, exploratory drilling, sampling and
trenching and expenditure incurred for the technical feasibility studies and incurred to secure further
mineralisation in the mine ore. Expenditure incurred prior to obtaining the exploration and evaluation
rights to explore an area is written off as incurred. Once the technical feasibility and commercial
viability of extracting the mineral resource had been determined and that the project reaches
development phase, exploration and evaluation costs capitalised are amortised. If exploration property
is abandoned during the evaluation stage, the total expenditure thereon will be written off.
(o)
Related parties
A party is considered to be related to the Target Group if:
(i)
directly, or indirectly through one or more intermediaries, the party (i) controls, is controlled
by, or is under common control with, the Target Group; (ii) has an interest in the Target
Group that gives it significant influence over the Target Group; or (iii) has joint control over
the Target Group;
(ii)
the party is an associate;
(iii)
the party is a jointly-controlled entity;
(iv)
the party is a member of the key management personnel of the Target Group;
(v)
the party is a close member of the family or any individual referred to in (i) or (iv);
(vi)
the party is an entity that is controlled, jointly controlled or significantly influenced by or
for which significant voting power in such entity resides with, directly or indirectly, any
individual referred to in (iv) or (v); or
(vii)
the party is a post-employment benefit plan for the benefit of employees of the Target Group,
or of any entity that is a related party of the Target Group.
– 154 –
APPENDIX IIA
3.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Estimates and judgements are continually evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances.
The Target Group makes estimates and assumptions concerning the future. The resulting accounting estimates
will, by definition, seldom equal the related actual results. The estimates and assumptions that have a
significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the
next financial year/period are discussed below:
(i)
Depreciation
The Target Group depreciates its property, plant and equipment on a straight-line basis over their
estimated useful lives. The estimate useful lives reflect the director’s estimate of the period that the
Target Group will derive future economic benefits from the use of the Target Group’s property,
plant and equipment.
(ii)
Impairment of receivables
Allowances for impairment of receivables are determined by management based on the repayment
history of its debtors and the current market condition. It could change significantly as a result of
changes in the financial position of the debtors. Management would re-assess the amount of
impairment allowances of receivables, if any, at each balance sheet date.
(iii)
Impairment of intangible assets — “exploration and evaluation assets”
The carrying value of exploration and evaluation assets is reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable. The Target Group
considers no fact and circumstance occurred which would suggest that the carry amount of the
exploration and evaluation assets may exceed its recoverable amount.
4.
REVENUE
The Target Group did not generate any revenue during the Relevant Periods and the six months ended 30
June 2006.
5.
From
8 April 2004
to
31 December
2004
HK$’000
Loss before income tax is
arrived at after charging:
Auditors’ remuneration
Depreciation
Minimum lease payments
under operating leases in
respect of rented premises
Staff cost including director’s
emoluments (note 7)
2005
2006
HK$’000
HK$’000
2007
2006
HK$’000
HK$’000
(unaudited)
—
188
3
338
8
522
—
319
—
236
150
450
2,451
1,365
931
105
366
3,067
1,780
1,062
– 155 –
APPENDIX IIA
6.
INCOME TAX EXPENSE
No income tax has been provided as the Target Group had no estimated assessable profits arising in or
derived from Hong Kong and in other jurisdiction during the Relevant Periods.
Reconciliation between income tax expense and accounting loss at applicable tax rates is as follows:
From
8 April 2004
to
31 December
2004
HK$’000
2005
2006
HK$’000
HK$’000
2007
2006
HK$’000
HK$’000
(unaudited)
(1,149)
(1,702)
(9,780)
(5,991)
(2,976)
(201)
(298)
(1,712)
(1,048)
(521)
Hong Kong profits tax rate
of 17.5%
Effect of different tax rates
of subsidiaries operating in
(178)
(228)
(414)
(222)
(181)
Tax effect of non-deductible expenses
other jurisdictions
15
47
1,254
803
322
Tax effect of non-taxable revenue
—
—
(2)
(1)
(2)
not recognised
364
479
874
468
382
Income tax expense
—
—
—
—
—
Deferred tax assets on
pre-commencement expenses
No deferred tax asset has been recognised due to the uncertainty of future taxable profit.
7.
EMPLOYEE BENEFIT EXPENSE (INCLUDING DIRECTOR’S EMOLUMENTS)
From
8 April 2004
to
31 December
2004
HK$’000
Salaries and allowances
Retirement benefits scheme
contributions
2005
2006
HK$’000
HK$’000
2007
2006
HK$’000
HK$’000
(unaudited)
105
366
3,030
1,740
1,060
—
—
37
40
2
105
366
3,067
1,780
1,062
– 156 –
APPENDIX IIA
8.
DIRECTOR’S REMUNERATION AND SENIOR MANAGEMENT’S EMOLUMENTS
(a)
Director’s emoluments
From
8 April 2004
to
31 December
2004
2005
2006
2007
2006
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
(unaudited)
Fees
—
—
—
—
—
—
—
988
528
460
—
—
—
—
—
—
—
988
528
460
Basic salaries, housing and
other allowances and benefits
in kind
— Leung Lai Ching,
Margaret
Contributions to pension
scheme
— Leung Lai Ching,
Margaret
Leung Lai Ching, Margaret was appointed on 8 August 2005.
During the Relevant Periods and the six months ended 30 June 2006, no emoluments were paid by
the Target Group to the director of Target Company as an inducement to join or upon joining the
Target Group, or as compensation for loss of office.
No director of the Target Company waived any emoluments paid by the companies now comprising
the Target Group during the Relevant Periods and for the six months ended 30 June 2006.
– 157 –
APPENDIX IIA
8.
DIRECTOR’S REMUNERATION AND SENIOR MANAGEMENT’S EMOLUMENTS (Continued)
(b)
Five highest paid individuals
The five individuals whose emoluments were the highest in the Target Group for the Relevant
Periods and for the six months ended 30 June 2006 included one director whose emoluments are
reflected in the analysis presented above. The emoluments payable to the remaining four individuals
during the Relevant Periods and the six months ended 30 June 2006, which fell within the salary
band of Nil – HK$1,000,000 are as follows:
From
8 April 2004
to
31 December
2004
HK$’000
Salaries and allowance
Retirement benefits
scheme contributions
2005
2006
HK$’000
HK$’000
2007
2006
HK$’000
HK$’000
(unaudited)
53
267
1,245
612
445
—
—
21
18
1
53
267
1,266
630
446
During the Relevant Periods and the six months ended 30 June 2006, no emoluments were paid by
the Target Group to the five highest paid individuals, including the director, as an inducement to
join or upon joining the Target Group or as compensation for loss of office.
– 158 –
APPENDIX IIA
9.
PROPERTY, PLANT AND EQUIPMENT
Motor
vehicles
HK$’000
Furniture,
fixtures and
office
equipment
HK$’000
Total
HK$’000
Period ended 31 December 2004
Additions
Depreciation
—
—
1,630
(188)
1,630
(188)
—
1,442
1,442
At 31 December 2004
Cost
—
—
1,630
(188)
1,630
(188)
Net book amount
—
1,442
1,442
Additions
Depreciation
—
—
—
—
1,442
42
(338)
42
1,442
42
(338)
42
—
1,188
1,188
At 31 December 2005
Cost
—
—
1,720
(532)
1,720
(532)
Net book amount
—
1,188
1,188
Additions
Depreciation
—
314
(57)
—
1,188
682
(465)
47
1,188
996
(522)
47
257
1,452
1,709
At 31 December 2006
Cost
314
(57)
2,470
(1,018)
2,784
(1,075)
Net book amount
257
1,452
1,709
Six months ended 30 June 2007
Additions
Depreciation
257
506
(57)
1,452
27
(262)
1,709
533
(319)
706
1,217
1,923
At 30 June 2007
Cost
820
(114)
2,497
(1,280)
3,317
(1,394)
706
1,217
1,923
Net book amount
– 159 –
APPENDIX IIA
10.
INTANGIBLE ASSETS — “EXPLORATION AND EVALUATION ASSETS”
As at 31 December
Exploration right
As at 30 June
2004
2005
2006
2007
HK$’000
HK$’000
HK$’000
HK$’000
1,121
1,154
1,200
1,200
—
—
—
1,690
458
1,382
6,856
7,469
—
—
449
1,884
1,579
2,536
8,505
12,243
Technical feasibility studies
Exploratory drilling
Sampling
No impairment was made during the Relevant Periods.
11.
INTERESTS IN SUBSIDIARIES
As at 31 December
As at 30 June
2004
2005
2006
2007
HK$’000
HK$’000
HK$’000
HK$’000
—
—
—
20,000
Unlisted shares, at cost
Particulars of the subsidiaries of the Target Company at 30 June 2007 are as follows:
Percentage of
Name of subsidiaries
Hong Kong Forest Source
Place of
Issued and fully
incorporation and
paid/registered
operation
share capital
Hong Kong
Mining Industry
Ordinary
registered and
issued capital held by the Principal
Target Company
activities
Directly
Indirectly
100%
—
Investment holding
—
100%
Exploration of mine
HK$20,000,000
Holding Company Limited
ࠗಋ౲฻ᘊพઁٖ
τࠉʔ̇
(“Hong Kong FSMI”)
Qinghai Forest Source
Mining Industry
PRC
Registered
HK$18,312,549
Development Company
Limited
‫ࣵڇ‬౲฻ᘊพ඀ೕτࠉʔ̇
(“Qinghai Senyuan”)
– 160 –
APPENDIX IIA
12.
CASH AND CASH EQUIVALENTS
As at 31 December 2004, 2005 and 2006 and as at 30 June 2007, included in cash at banks and in hand of
the Target Group are HK$4,000, HK$241,000, HK$2,000 and HK$61,000 of bank balances denominated
in RMB placed with banks in the PRC. RMB is not freely convertible into foreign currencies.
13.
OTHER PAYABLES AND ACCRUALS
As at 31 December
Other payables
2005
2006
2007
HK$’000
HK$’000
HK$’000
HK$’000
1,096
1,128
2,973
1,510
—
180
1,130
961
1,096
1,308
4,103
2,471
Accruals
14.
As at 30 June
2004
AMOUNTS DUE TO A SHAREHOLDER
The amounts due are unsecured, interest-free and repayable on demand.
15.
SHARE CAPITAL
Target Group
As at 31 December
As at 30 June
2004
2005
2006
2007
HK$’000
HK$’000
HK$’000
HK$’000
1,512
3,351
3,501
—
Hong Kong FSMI
—
—
—
—
Target Company
—
—
—
—
1,512
3,351
3,501
—
Qinghai Senyuan
As at 31 December 2004, the share capital of the Target Group represented the capital of Qinghai Senyuan.
Hong Kong FSMI and Target Company were not yet incorporated as at 31 December 2004.
As at 31 December 2005, the share capital represented the aggregate capital of Qinghai Senyuan of
HK$3,351,000, Hong Kong FSMI of HK$1 and the Target Company of HK$8.
As at 31 December 2006, the share capital represented the aggregate capital of Qinghai Senyuan of
HK$3,501,000, Hong Kong FSMI of HK$1 and the Target Company of HK$8.
As at 30 June 2007, as Hong Kong FSMI and Qinghai Senyuan had become the subsidiaries of the Target
Company upon Reorganisation, their share capital was eliminated when drawing up the combined accounts.
– 161 –
APPENDIX IIA
15.
SHARE CAPITAL (Continued)
Target Company
As at 31 December
As at 30 June
2004
2005
2006
2007
HK$’000
HK$’000
HK$’000
HK$’000
—
390
390
390
HK$
HK$
HK$
HK$
—
HK$8
HK$8
HK$8
Authorised:
50,000 ordinary shares of US$1 each
Issued and fully paid :
1 ordinary share of US$1.00
16.
RESERVES
Target Group
The Target Group’s reserves and the movements therein for the Relevant Periods are presented in the
combined statement of changes in equity in Section I of the Financial Information.
Target Company
Total
HK$’000
At date of incorporation
—
Loss and total recognised expense for the period
(5)
(5)
Loss and total recognised expense for the year
(4)
(9)
Loss and total recognised expense for the period
—
At 30 June 2007
(9)
– 162 –
APPENDIX IIA
17.
Target Group
At the respective balance sheet dates, the total future minimum lease payments under non-cancellable
operating leases are payable by the Target Group as follows:
As at 31 December
As at 30 June
2004
2005
2006
2007
HK$’000
HK$’000
HK$’000
HK$’000
Within one year
214
1,534
3,607
2,677
In the second to fifth years
846
2,519
1,336
428
1,060
4,053
4,943
3,105
The Target Group leases a number of properties under operating leases. The leases run for an initial period
of 1 to 5 years, with an option to renew the lease and renegotiated the terms at the expiry date or at dates as
mutually agreed between the Target Group and respective landlords. None of the leases include contingent
rentals.
Target Company
Target Company did not have any significant operating lease commitments at the respective balance sheet
dates.
18.
CAPITAL COMMITMENTS
Target Group
Capital commitments of the Target Group in relation to technical feasibility studies, exploratory drilling
and sampling are as follows:
As at 31 December
As at 30 June
2004
2005
2006
2007
HK$’000
HK$’000
HK$’000
HK$’000
—
—
—
3,065
Intangible assets
Contracted but not provided for
Target Company
Target Company did not have any significant capital commitments at the respective balance sheet dates.
– 163 –
APPENDIX IIA
19.
RELATED PARTY TRANSACTIONS
Key management personnel compensation:
Included in staff costs are key management personnel compensation. The key management personnel is the
director of the Target Company, the details of remuneration paid to the director is set out in note 8.
20.
SEGMENT INFORMATION
No separate analysis of segment information by business or geographical segments is presented as the
Target Group’s sole business is the exploration of mine. The Target Group’s results, assets and liabilities
and capital expenditure are principally attributable to a single geographical region, which is the PRC.
21.
RISK MANAGEMENT OBJECTIVES AND POLICIES
The Target Group is exposed to a variety of financial risks which results from both its operating and investing
activities. The Target Group does not have written risk management policies and guidelines. However, the
director analyses and formulates strategies periodically to manage the Target Group’s exposure to market
risks, including changes in interest rates and currency exchange rates. Generally, the Target Group introduces
conservative strategies on its risk management. The Target Group’s exposure to market risk is kept to
minimum. The Target Group has not used any derivatives or other instruments for hedging purposes. The
Target Group does not issue derivative financial instruments for trading purposes. The most significant
financial risks to which the Target Group is exposed to are described below.
(a)
Foreign currency risk
Subsidiaries of the Target Company have foreign currency transactions, which expose the Target
Group to foreign currency risk. The Target Group does not hedge its foreign currency risks, as the
management does not expect any significant movements in the exchange rate between RMB and
HK$.
(b)
Credit risk
All the Target Group’s cash and cash equivalents are deposited with major banks located in Hong
Kong and the PRC.
The carrying amounts of deposits, prepayments and other receivables represent the Target Group’s
maximum exposure to credit risk in relation to its financial assets. These financial assets are actively
monitored to avoid significant concentrations of credit risk. No other financial assets carry a
significant exposure to credit risk.
(c)
Interest rate risk
The Target Group has no significant interest bearing assets and liabilities.
– 164 –
APPENDIX IIA
21.
RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
(d)
Liquidity risk
As mentioned in Section II note 2, the Target Group had taken measures to improve its working
capital. Provided that the shareholder of the Target Company has agreed to provide additional share
capital of HK$50,000,000 and the shareholder’s loan of HK$31,464,000 will be capitalised and
transferred to equity of the Target Group before the Acquisition, the director of the Target Company
is satisfied that the Target Group will be able to meet its financial obligations as they fall due in the
foreseeable future. Accordingly, the financial statements have been prepared on a going concern
basis.
(e)
Fair value
The fair values of the Target Group’s current financial assets and liabilities are not materially different
from their carrying amounts because of the immediate or short term maturity.
(f)
Summary of financial assets and liabilities by category
The carrying amounts of the Target Group’s financial assets and liabilities as recognised at the
balance sheet dates of the Relevant Periods under review may also be categorised as follows. See
notes 2(g) and 2(l) for explanations about how the category of financial instruments affects their
subsequent measurement.
Financial assets
As at 31 December
As at 30 June
2004
2005
2006
2007
HK$’000
HK$’000
HK$’000
HK$’000
— Other receivables
12
12
33
201
20
247
229
222
32
259
262
423
1,096
1,128
2,973
1,510
1,719
2,167
15,961
31,464
2,815
3,295
18,934
32,974
Current assets
Loans and receivables
Current liabilities
Financial liabilities measured
at amortised cost
— Other payables
— Amounts due to
a shareholder
– 165 –
APPENDIX IIA
22.
CAPITAL MANAGEMENT
The Target Group’s objectives when managing capital are:
(a)
To safeguard the Target Group’s ability to continue as a going concern, so that it continues to
provide returns and benefits for stakeholders;
(b)
To support the Target Group’s stability and growth; and
(c)
To provide capital for the purpose of strengthening the Target Group’s risk management capability.
The Target Group actively and regularly reviews and manages its capital structure to ensure optimal capital
structure and shareholder returns, taking into consideration the future capital requirements of the Target
Group and capital efficiency, prevailing and projected profitability, projected operating cash flows, projected
capital expenditures and projected strategic investment opportunities. The Target Group currently does not
adopt any formal dividend policy. Management regards total equity as capital, for capital management
purpose.
23.
POST BALANCE SHEET EVENTS
On 8 July 2007, Smooth Way International Limited, which is a wholly-owned subsidiary of the Company,
entered into a conditional share transfer agreement with Leung Lai Ching, Margaret. Details of the conditional
share transfer agreement are set out in Letter from the Board of this Circular.
24.
SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared for the Target Group in respect of any period subsequent
to 30 June 2007.
Yours faithfully,
Grant Thornton
Hong Kong
– 166 –
APPENDIX IIB
FINANCIAL INFORMATION ON THE TARGET GROUP
MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP
Financial summary
As set out in the audited financial statement of the Target Group for the period/year ended 31 December
2004, 2005, 2006 and the six months ended 30 June 2007.
From
8 April 2004
to 31 December
2004
HK$’000
Revenue
Loss for the period/year
—
(1,149)
Year 2005
HK$’000
—
(1,702)
Year 2006
HK$’000
—
(9,780)
Six months
ended 2007
HK$’000
—
(5,991)
The Target Group did not have any revenue in the relevant period. Therefore the Target Group did not
have any profit and had only incurred a loss due to administrative expenses and professional fee
during the relevant period.
Amount due to a shareholder
As at 31 December 2004, 31 December 2005, 31 December 2006 and 30 June 2007, amount due to a
shareholder is unsecured, interest free and has no fixed terms of repayment.
Treasury policies
As at 31 December 2004, 31 December 2005, 31 December 2006 and 30 June 2007, there was no
other borrowing from bank or financial institution during the period.
Liquidity and financial resources
Net Assets/Liabilities
Set out below is a summary of the audited accountant report of the Target Group as at 31 December
2004, 2005 and 2006 and 30 June 2007 which prepared on the bases set out on pages 140 to 141 of
this circular and details of which are set out in Appendix IIA to this circular:
Total assets
Total liabilities
Gearing ratio
As at
31 December
2004
HK$’000
2005
HK$’000
3,163
2,815
348
1,719
0.89
3,993
3,475
518
2,167
0.87
The gearing ratio is the basis of total liabilities over total assets.
– 167 –
2006
HK$’000
10,987
20,064
(9,077)
15,961
1.83
As at
30 June
2007
HK$’000
15,185
33,935
(18,750)
31,464
2.23
APPENDIX IIB
FINANCIAL INFORMATION ON THE TARGET GROUP
Liquidity
The Target Group had total cash and bank balances of approximately HK$20,000, HK$247,000,
HK$229,000, and HK$222,000 as at 31 December 2004, 31 December 2005, 31 December 2006 and
30 June 2007. The current ratio was approximately 0.05, 0.08, 0.04, and 0.03.
Contingent liabilities
As at 31 December 2004, 31 December 2005, 31 December 2006 and 30 June 2007, the Target Group
did not have any contingent liabilities.
Charges on assets
had no interest-bearing borrowings and no assets were pledged.
Foreign exchange exposure
The Target Group does not hedge its foreign currency risks, as the management does not expect any
significant movements in exchange rate between, United States Dollar, RMB and HK$, During the relevant
periods under review, The Target Group did not use any hedging instrument.
Employee
had employed around 7, 7, 16, and 17 full time staffs in Hong Kong and the PRC respectively.
– 168 –
APPENDIX III
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
1.
INTRODUCTION
The following is the unaudited pro forma financial information of the Enlarged Group prepared
in accordance with the Listing Rules for the purpose of illustrating the effect of the Acquisition
on the financial position of the Group as at 30 June 2007 and the results and cash flows of the
Group for the year ended 31 December 2006. As it is prepared for illustrative purpose only,
and because of its nature, it may not give a true picture of the financial position, results and
cash flows of the Enlarged Group following completion of the Acquisition.
The unaudited pro forma consolidated balance sheet of the Enlarged Group is prepared based
on the unaudited consolidated balance sheet of the Group as at 30 June 2007 extracted from the
published interim report of the Group as of 30 June 2007 as set out in Appendix I to this
circular and the audited combined balance sheet of the Target Group as at 30 June 2007 as
extracted from the accountants’ report set out in Appendix IIA to this circular as if the Acquisition
had been completed on 30 June 2007.
The unaudited pro forma consolidated income statement and cash flow statement of the Enlarged
Group are prepared based on the audited consolidated income statement and cash flow statement
of the Group for the year ended 31 December 2006 extracted from the published annual report
of the Group as of 31 December 2006 as set out in Appendix I to this circular and the audited
combined income statement and cash flow statement of the Target Group for the year ended 31
December 2006 as extracted from the accountants’ report set out in Appendix IIA to this circular
as if the Acquisition had been completed on 1 January 2006.
The unaudited pro forma financial information of the Enlarged Group is presented in two stages.
The first stage assumes that the Acquisition has been completed but the mining license has not
yet been obtained by the Target Group whilst the second stage assumes that the Acquisition has
been completed and the mining license has been obtained by the Target Group.
– 169 –
APPENDIX III
2.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF THE
ENLARGED GROUP
The Group
as at
30 June 2007
HK$’000
(Unaudited)
Target
Group
as at
30 June
2007
HK$’000
(Audited)
Notes
Pro forma
adjustments Pro forma
relating to the Enlarged
Acquisition Group (at
(at completion) completion)
HK$’000 HK$’000
(Unaudited)
Pro forma
adjustments
Pro forma
relating to the
Enlarged
Acquisition (at
Group (at
completion completion
and upon
and upon
obtaining obtaining the
the mining
mining
license)
license)
Notes
HK$’000
HK$’000
(Unaudited)
76,587
4,855
18,355
729,188
—
76,587
4,855
18,355
—
2,484,062
Non-current assets
Deposits
Goodwill
Intangible assets — “Mining rights”
Intangible assets — “Exploration
and evaluation assets”
Current assets
Inventories
Deposits, prepayments and
other receivables
Current liabilities
Trade payables
Deposits received, other payables
and accruals
Tax payable
74,664
4,855
18,355
—
—
1,923
—
—
—
—
—
12,243
12,243
12,243
97,874
14,166
841,228
2,596,102
4,611
9,374
—
—
4,611
9,374
4,611
9,374
9,709
89,596
797
222
10,506
130,518
10,506
130,518
113,290
1,019
155,009
155,009
15,847
—
15,847
15,847
34,161
1,100
87
—
143
2,471
—
—
31,464
—
36,632
1,100
87
—
143
36,632
1,100
87
—
143
51,338
33,935
53,809
53,809
(3a)
(4)
(6)
– 170 –
729,188
40,700
(31,464)
(3b)
(3b)
(729,188)
2,484,062
APPENDIX III
2.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF THE
ENLARGED GROUP (Continued)
Pro forma
adjustments Pro forma
relating to the Enlarged
Acquisition Group (at
(at completion) completion)
HK$’000 HK$’000
(Unaudited)
Pro forma
adjustments
Pro forma
relating to the
Enlarged
Acquisition (at
Group (at
completion completion
and upon
and upon
obtaining obtaining the
the mining
mining
license)
license)
Notes
HK$’000
HK$’000
(Unaudited)
The Group
as at
30 June 2007
HK$’000
(Unaudited)
Target
Group
as at
30 June
2007
HK$’000
(Audited)
Net current assets/(liabilities)
61,952
(32,916)
101,200
101,200
159,826
(18,750)
942,428
2,697,302
176
—
176
176
9,010
—
—
—
9,186
—
238,729
484,516
150,640
(18,750)
703,699
2,212,786
EQUITY
Equity attributable to equity
holders of the Company
Share capital
Reserves
8,135
142,722
—
(18,750)
4,050
537,029
12,185
661,001
291,897
12,185
952,898
Minority interests
150,857
(217)
(18,750)
— (3a) & (10)
30,730
673,186
30,513 (3b) & (10)
1,217,190
965,083
1,247,703
Total equity
150,640
(18,750)
Amounts due to minority
shareholders
Convertible bonds
Notes
(7a)
(8)
(9a)
229,543
9,010
229,543
703,699
– 171 –
(7b)
(9b)
245,787
9,010
475,330
2,212,786
APPENDIX III
3.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT OF THE
ENLARGED GROUP
The Group Target Group
year ended year ended
31 December 31 December
2006
2006
HK$’000
HK$’000
(Audited)
(Audited)
Notes
Pro forma
Pro forma
adjustments Enlarged Group
relating to the year ended 31
Acquisition December 2006
(at completion) (at completion)
HK$’000
HK$’000
(Unaudited)
Pro forma
Pro forma
(at completion (at completion
and upon
and upon
obtaining the
obtaining the
mining license) mining license)
HK$’000
HK$’000
(Unaudited)
Revenue
Cost of sales
26,523
(29,240 )
—
—
26,523
(29,240 )
26,523
(29,240 )
Gross loss
(2,717 )
7,476
(1,865 )
(38,299 )
(10,603 )
—
13
—
(9,793 )
—
(2,717 )
7,489
(1,865 )
(48,092 )
(10,603 )
(2,717 )
7,489
(1,865 )
(48,092 )
(10,603 )
Operating loss
Finance costs
(46,008 )
(149 )
(9,780 )
—
(55,788 )
(149 )
(55,788 )
(149 )
Income tax expense
(46,157 )
—
(9,780 )
—
(55,937 )
—
(55,937 )
—
Loss for the year
(46,157 )
(9,780 )
(55,937 )
(55,937 )
Attributable to :
Minority interests
(46,167 )
10
(9,780 )
—
(51,155 )
(4,782 )
(51,155 )
(4,782 )
Loss for the year
(46,157 )
(9,780 )
(55,937 )
(55,937 )
(11)
(11)
– 172 –
4,792
(4,792 )
APPENDIX III
4.
UNAUDITED PRO FORMA CONSOLIDATED CASH FLOW STATEMENT OF THE
ENLARGED GROUP
2006
2006
HK$’000
HK$’000
(Audited)
(Audited)
Adjustments for:
Depreciation of property, plant
and equipment
Bad debts written off
Provision from impairment of trade
receivable
Loss on disposals of property, plant
and equipment
Interest income
Interest expenses
Pro forma
Pro forma
HK$’000
HK$’000
(Unaudited)
Pro forma
Pro forma
and upon
and upon
obtaining the
obtaining the
HK$’000
HK$’000
(Unaudited)
(46,157 )
(9,780 )
(55,937 )
(55,937 )
7,447
112
65
522
—
—
7,969
112
65
7,969
112
65
314
—
314
314
2
(85 )
149
10,777
—
(13 )
—
—
2
(98 )
149
10,777
2
(98 )
149
10,777
(27,376 )
1,680
843
(9,271 )
—
—
(36,647 )
1,680
843
(36,647 )
1,680
843
(1,870 )
516
(522 )
—
(2,392 )
516
(2,392 )
516
14,911
1,143
—
2,795
—
13,794
17,706
1,143
13,794
17,706
1,143
13,794
Cash (used in)/generated from operations
Interest paid
(10,153 )
(149 )
6,796
—
(3,357 )
(149 )
(3,357 )
(149 )
Net cash (used in)/generated from
operating activities
(10,302 )
6,796
(3,506 )
(3,506 )
Operating loss before working
capital changes
Decrease in inventories
Decrease in trade and bills receivables
Increase in deposits, prepayments,
and other receivables
Increase in trade payables
Increase in deposit received, other
payables and accruals
Increase in amounts due to directors
Increase in amount due to a shareholder
– 173 –
APPENDIX III
4.
UNAUDITED PRO FORMA CONSOLIDATED CASH FLOW STATEMENT OF THE
ENLARGED GROUP (Continued)
2006
2006
HK$’000
HK$’000
(Audited)
(Audited)
Cash flows from investing activities
Deposit paid
Purchases of property, plant and equipment
Proceeds from disposals of property,
plant and equipment
Exploration and evaluation costs
Interest received
Acquisition of subsidiaries
Proceeds from issuance shares
Notes
Pro forma
Pro forma
HK$’000
HK$’000
(Unaudited)
Pro forma
Pro forma
and upon
and upon
obtaining the
obtaining the
HK$’000
HK$’000
(Unaudited)
(2,750 )
(943 )
—
(996 )
(2,750 )
(1,939 )
(2,750 )
(1,939 )
5
—
85
—
—
—
(5,867 )
13
—
—
5
(5,867 )
98
(99,753 )
90,700
5
(5,867 )
98
(99,753 )
90,700
(3,603 )
(6,850 )
(19,506 )
(19,506 )
9,465
(2,257 )
(70 )
2,031
—
—
—
—
9,465
(2,257 )
(70 )
2,031
9,465
(2,257 )
(70 )
2,031
(1,432 )
—
(1,432 )
(1,432 )
—
—
150
—
150
50,000
150
50,000
7,737
150
57,887
57,887
(6,168 )
96
34,875
34,875
6,931
8
247
(114 )
6,931
(106 )
6,931
(106 )
Cash and cash equivalents at 31 December
771
229
(41,700 )
(41,700 )
Analysis of balances of cash and
cash equivalents
Cash and bank balances
771
229
(41,700 )
(41,700 )
Cash flows from financing activities
Proceeds from issue of shares upon
exercise of share options
Decrease in trust receipt loans
Capital element of finance lease payments
Decrease in pledged time deposits
Decrease in amount due to minority
shareholders
Capital injection by the equity holder
of a subsidiary
Capital contribution
Net (decrease)/increase in cash and
cash equivalents
Cash and cash equivalents at
beginning of year
Effect of foreign exchange rate changes
(5)
(5)
(5)
(5)
– 174 –
(99,753 )
90,700
50,000
(247 )
APPENDIX III
Notes to unaudited pro forma financial information of the Enlarged Group
(1)
On 8 July 2007, Smooth Way International Limited, a wholly-owned subsidiary of the Company, entered
into an agreement with the Vendor to acquire 51% of the entire share capital of the Target Company. The
fair value of total consideration for the acquisition is HK$1,298,856,000 as at 30 June 2007 which is to be
satisfied in the following manners:
HK$’000
Issue of Consideration Shares (including a premium of HK$207,900,000)
210,600*
Issue of Convertible Bonds (Tranche 1 Bonds)
450,572#
Cash
100,000
Cost of investments at Completion of the Acquisition
761,172
Issue of Convertible Bonds (Tranche 2 Bonds)
537,684#
Cost of investments at Completion of the Acquisition and upon obtaining
mining license
1,298,856
Upon Completion of the Acquisition, the Target Company is considered by the directors of the Company as
a subsidiary of the Company as the Target Company will be controlled by the Group after completion. The
consolidated balance sheet of the Target Group will be consolidated with that of the Group from the date on
which control is transferred to the Group. The Tranche 2 Bonds will be issued by the Company when the
mining license is to be obtained by the Target Group.
*
The fair value of the Consideration Share is equal to the published price of the Consideration Shares
on 29 June 2007 (the closest trading day to 30 June 2007) times the number of shares in issue.
#
The valuation of the Convertible Bonds was carried out by LCH (Asia-Pacific) Surveyors Limited,
an independent firm of chartered surveyors. The basis of the valuation is detailed in Note 7.
(2)
A shareholder of Target Company has agreed to inject capital of HK$50,000,000 to the Target Company
before the completion date of the Acquisition. In the meantime, the shareholder’s loan of HK$31,464,000,
immediately before completion of the Acquisition, will be capitalised and transferred to share capital of
the Target Company. Consequently, total net identifiable assets of the Target Group are as follows:
HK$’000
Net liabilities as at 30 June 2007 (as extracted in Appendix IIA)
HK$’000
(18,750)
Capital injection
50,000
Capitalisation of shareholder’s loan
31,464
Additional net identifiable assets for Acquisition
81,464
Total net identifiable assets for Acquisition
62,714
– 175 –
APPENDIX III
Notes to unaudited pro forma financial information of the Enlarged Group
(3a)
The adjustment is to reflect the effect of the Acquisition, before the mining license is obtained, on the
consolidated balance sheet of the Group as if the Acquisition had taken place on 30 June 2007.
Details of net identifiable assets to be acquired and the goodwill arising on the Acquisition are as follows:
HK$’000
Cost of investments at Completion of the Acquisition (Note 1)
761,172
Less: Fair value of net identifiable assets to be acquired — as shown below
(31,984)
Goodwill
729,188
The identifiable assets and liabilities arising from the Acquisition are as follows:
Acquiree’s
Intangible assets - “exploration and evaluation assets”
Fair value
carrying amount
HK$’000
HK$’000
1,923
1,923
12,243
12,243
797
797
222
222
(2,471)
(2,471)
(31,464)
(31,464)
Net liabilities as at 30 June 2007 (as extracted from Appendix IIA)
(18,750)
(18,750)
Additional net identifiable assets for Acquisition (Note 2)
81,464
62,714
Minority interest (49%)
(30,730)
Net identifiable assets to be acquired
31,984
It is assumed that the fair value of the identifiable assets and liabilities of the Target Group as at 30 June
2007 is the carrying amounts as recorded in the books of the Target Group as extracted from the accountants’
report of the Target Group as set out in Appendix IIA to this circular, plus the additional net identifiable
assets for Acquisition. As the mining license has not yet been obtained, it is assumed that surplus of
consideration over the fair value of net identifiable assets is goodwill.
On Completion, the fair value of the consideration and the net identifiable assets and liabilities of the
Target Group will have to be assessed. As a result of the assessment, the amount of goodwill may be
different from that estimated based on the basis stated above for the purpose of preparation of the unaudited
pro forma financial information. Accordingly, the actual goodwill at the date of completion may be different
from that presented above.
– 176 –
APPENDIX III
Notes to unaudited pro forma financial information of the Enlarged Group (Continued)
(3b)
The calculation is to reflect the effect of the Acquisition, after the mining license is obtained, on the
consolidated balance sheet of the Group as if the Acquisition had taken place, and the feasibility study of
the underlying mine has been completed on 30 June 2007.
Details of net identifiable assets to be acquired and goodwill arising on the Acquisition are as follows:
HK$’000
Cost of investments at Completion of the Acquisition and
upon obtaining mining license (Note 1)
1,298,856
Less: Fair value of net identifiable assets to be acquired — as shown below
(1,298,856)
Goodwill
—
The identifiable assets and liabilities arising from the Acquisition are as follows:
Acquiree’s
Fair value
carry amount
HK$’000
HK$’000
1,923
1,923
12,243
12,243
797
797
222
222
Intangible assets — “exploration and evaluation assets”
(2,471)
(2,471)
(31,464)
(31,464)
Net liabilities as at 30 June 2007 (as extracted from Appendix IIA)
(18,750)
(18,750)
Additional net identifiable assets for Acquisition (Note 2)
Intangible assets — “Mining rights” (balancing figure)
Minority interest (49%)
81,464
2,484,062
2,546,776
(1,247,920)
Net identifiable assets to be required
1,298,856
It is assumed that the fair value of the identifiable assets and liabilities of the Target Group as at 30 June
2007 is the carrying amounts as recorded in the books of the Target Group as extracted from the accountants’
report of the Target Group as set out in Appendix IIA to this Circular, plus the mining rights and the
additional net identifiable assets for Acquisition.
– 177 –
APPENDIX III
(3b)
(Continued)
The fair value of the mining rights is assessed assuming the feasibility study of the underlying mine has
been completed and the mining license has been obtained by the Target Group as at 30 June 2007. For
details of the status when the mining license is obtained, please refer to paragraph headed “Status when the
Mining License is obtained” in the Letter from the Board of this Circular.
Based on the assumption that the cost of investments equal to the fair value of net identifiable assets to be
acquired and there is no goodwill arising from the Acquisition, the fair value of the mining rights will be
equal to HK$2,484,062,000.
On Completion, the fair value of the consideration and the net identifiable assets and liabilities of the
Target Group will have to be assessed. As a result of the assessment, the amount of goodwill may be
different from that estimated based on the basis stated above for the purpose of preparation of the unaudited
pro forma financial information. Accordingly, the actual goodwill at the date of completion may be different
from that presented above.
The adjustments are to reflect the effect of the Acquisition on the consolidation balance sheet of the Group
as if the Acquisition had taken place and the mining license had been obtained and the feasibility study of
the underlying mine has been completed on 30 June 2007.
Intangible
assets —
“Mining
Balance at Completion
Minority
rights”
Goodwill
interest
HK$’000
HK$’000
HK$’000
—
729,188
30,513
Transfer to intangible assets from goodwill
when the mining license is obtained (as the
balance is regarded as a part of the fair
value of the mining rights)
729,188
(729,188)
—
Shortfall between HK$2,484,062,000 (being the
fair value of the intangible assets - “Mining rights”)
and HK$729,188,000 (being the amount transferred
from goodwill as shown above)
1,754,874
—
—
—
—
1,217,190
2,484,062
—
1,247,703
Shortfall between the balance of HK$30,730,000
(minority interest of the Target Group as at the
Completion (Note 3a)) and the balance of
HK$1,247,920,000 (being minority interest of
the Target Group as at the Completion
and upon obtaining the mining licence (Note 3b))
Balance at Completion and upon obtaining
the mining license
– 178 –
APPENDIX III
(4)
The adjustment is to reflect the effect on cash and cash equivalents at banks and in hands arising from the
Acquisition on the consolidated balance sheet of the Group as if the Acquisition had taken place on 30 June
2007 and is detailed as follows:
HK$’000
Cash consideration to be paid to the vendor (Note 1)
Cash injection to the Target Group (Note 2)
Net proceeds from placing of new shares
(100,000)
50,000
90,700
40,700
Based on the unaudited consolidated balance sheet of the Group as at 30 June 2007, the Group did not have
adequate cash to settle the above cash consideration of HK$100,000,000. Pursuant to an announcement
issued by the Company dated 20 July 2007 regarding the placing agreement to place for 135,000,000
shares at HK$0.69 per share, net proceeds of approximately HK$90,700,000 has been raised. This can be
used to settle part of the cash consideration of HK$100,000,000.
(5)
The adjustment is to reflect the effect on cash flows arising from the Acquisition on the consolidated cash
flow statement of the Group as if the Acquisition had taken place on 1 January 2006 and is detailed as
follows:
HK$’000
Cash consideration to be paid to the vendor (Note 1)
(100,000)
Cash and cash equivalents in the Target Group
as at 1 January 2006 (as extracted in Appendix IIA)
Net cash outflow on acquisition
(6)
247
(99,753)
Cash injection to the Target Group (Note 2)
50,000
Net proceeds from placing of new shares (Note 4)
90,700
The adjustment is to reflect the capitalisation of the shareholder’s loan of HK$31,464,000, immediately
before completion of the Acquisition, by the shareholder of the Target Group (Note 2).
(7)
This adjustment relates to the Convertible Bonds (Tranche 1 Bonds and Tranche 2 Bonds) (Note 1) issued
for the purpose of the Acquisition. In accordance with Hong Kong Accounting Standards 32, Financial
Instruments: Presentation, the Convertible Bonds are accounted for by two elements, equity component
and liability component. The valuation of the Convertible Bonds was carried out by LCH (Asia-Pacific)
Surveyors Limited, an independent firm of chartered surveyors. The major assumption adopted in the
valuation is the Convertible Bonds (Tranche 2 Bonds) is to be granted three months after the issuing date of
the Convertible Bonds (Tranche 1 Bonds). The fair value of the liability component of the Convertible
Bonds is estimated using the discounted cash flow approach at the prevailing market rate of approximately
9.72%. The fair value of the equity component of the Convertible Bonds is estimated using the Binomial
Option Pricing Model.
– 179 –
APPENDIX III
(7)
(8)
(Continued)
(a)
At Completion of the Acquisition, an amount of HK$229,543,000 is credited as the liability
component of the Convertible Bonds (Tranche 1 Bonds). The amount of HK$221,029,000,
representing the difference between HK$450,572,000, being the fair value of the Convertible Bonds
(Tranche 1 Bonds)(Note 1), and the liability component of HK$229,543,000, is recorded as the fair
value of the equity component of the Convertible Bonds (Tranche 1 Bonds).
(b)
At Completion of the Acquisition and upon obtaining mining license, an amount of HK$245,787,000
is credited as the liability component of the Convertible Bonds (Tranche 2 Bonds). The amount of
HK$291,897,000, representing the difference between HK$537,684,000, being the fair value of the
Convertible Bonds (Tranche 2 Bonds)(Note 1), and the liability component of HK$245,787,000, is
recorded as the fair value of the equity component of the Convertible Bonds (Tranche 2 Bonds).
The adjustment is to reflect the effect of the placing of shares (Note 4) and the issue of Consideration
Shares by the Company.
HK$’000
Share capital
Placing of shares (being 135,000,000 shares of HK$0.01 each)
Issue of Consideration Shares (being 270,000,000 shares of HK$0.01 each)
1,350
2,700
4,050
Premium on share issues
Placing of shares
Issue of Consideration Shares
89,350
207,900
297,250
(9a)
The adjustments are to reflect the following transactions arising upon Completion of the Acquisition.
HK$’000
Premium on the share issues (Note 1 and Note 8)
Reserves of the Target Group as at 30 June 2007 (as extracted from Appendix IIA)
Equity component on Convertible Bonds (Tranche 1 Bonds) (Note 7a)
297,250
18,750
221,029
Adjustment at Completion of the Acquisition
537,029
(9b)
This represents the adjustment of the equity component of the Convertible Bonds (Tranche 2 Bonds) (Note
7b).
(10)
The adjustment is to reflect the effect on minority interest arising from the Completion of the Acquisition.
The calculation of minority interest has been detailed in Note 3a and 3b above.
(11)
The adjustment is to reflect the share of loss to minority interest.
– 180 –
APPENDIX III
5.
ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL
The following is the text of an accountants’ report dated 15 October 2007, prepared for the
sole purpose of inclusion in this circular, received from the independent reporting accountants,
Grant Thornton, Certified Public Accountants, Hong Kong, in respect of the unaudited pro
forma financial information of the Enlarged Group.
UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED
GROUP
15 October 2007
The Directors
Suites 5303-04, 53/F
Central Plaza
18 Harbour Road
Wanchai
Hong Kong
Dear Sirs
We report on the unaudited pro forma financial information of Aurora Global Investment
Holdings Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as
the “Group”) and Kanson Development Limited (“Target Company”) and its subsidiaries (the
“Target Group” and together with the Group hereinafter collectively referred to as the “Enlarged
Group”), which has been prepared by the directors of the Company for illustrative purposes
only, to provide information about how the acquisition of interests in a company involving
issue of consideration shares and convertible bonds (the “Acquisition”) might have affected
the financial information presented, for inclusion in Appendix III to the circular of the Company
dated 15 October 2007 (the “Circular”). The basis of preparation of the unaudited pro forma
financial information of the Enlarged Group is set out in the section headed “Unaudited Pro
Forma Financial Information of the Enlarged Group” on page 169 Appendix III to the Circular.
– 181 –
APPENDIX III
5.
INFORMATION OF THE ENLARGED GROUP (Continued)
Respective Responsibilities of Directors of the Company and Reporting Accountants
It is the responsibility solely of the directors of the Company to prepare the unaudited pro
forma financial information of the Enlarged Group in accordance with paragraph 4.29 of the
Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the
“Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma
Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute
of Certified Public Accountants (the “HKICPA”).
It is our responsibility to form an opinion, as required by paragraph 4.29 of the Listing Rules,
on the unaudited pro forma financial information and to report our opinion to you. We do not
accept any responsibility for any reports previously given by us on any financial information
used in the compilation of the unaudited pro forma financial information beyond that owed to
those to whom those reports were addressed by us at the dates of their issue.
Basis of opinion
We conducted our engagement in accordance with Hong Kong Standard on Investment Circular
Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in
Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the
unadjusted financial information with source documents, considering the evidence supporting
the adjustments and discussing the unaudited pro forma financial information with the directors
of the Company. This engagement did not involve independent examination of any of the
underlying financial information.
We planned and performed our work so as to obtain the information and explanations we
considered necessary in order to provide us with sufficient evidence to give reasonable assurance
that the unaudited pro forma financial information has been properly compiled by the directors
of the Company on the basis stated, that such basis is consistent with the accounting policies of
the Group and that the adjustments are appropriate for the purposes of the unaudited pro forma
financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.
Our work did not constitute an audit or review made in accordance with Hong Kong Standards
on Auditing or Hong Kong Standards on Review Engagements issued by the HKICPA, and
accordingly, we did not express any such assurance on the unaudited pro forma financial
information.
– 182 –
APPENDIX III
5.
INFORMATION OF THE ENLARGED GROUP (Continued)
Basis of opinion (Continued)
The unaudited pro forma financial information is for illustrative purposes only, based on the
judgements and assumptions of the directors of the Company, and because of its hypothetical
nature, does not give any assurance or indication that any event will take place in the future and
may not be indicative of
—
the financial position of the Enlarged Group as at 30 June 2007 or any future date; or
—
the results and cash flows of the Enlarged Group for the year ended 31 December 2006
or any future periods.
Opinion
In our opinion:
a.
the unaudited pro forma financial information has been properly compiled by the directors
of the Company on the basis stated;
b.
such basis is consistent with the accounting policies of the Group; and
c.
the adjustments are appropriate for the purposes of the unaudited pro forma financial
information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.
Yours faithfully,
Grant Thornton
Hong Kong
– 183 –
APPENDIX IV
VALUATION OF THE TARGET MINE — FIRST PORTION
The following is the text of the summary report in the valuation of the Target Mine — First Portion as
at 31 August 2007 prepared by LCH for the purposes of inclusion in this circular.
The readers are reminded that the following report has been prepared in accordance with general
evaluation procedures and practice that entitle the valuer to make assumptions which may on further
investigation, for instance by the readers’ legal representative, prove to be inaccurate. Any exception
is clearly stated below. Headings are inserted for convenient reference only and have no effect in
limiting or extending the language of the paragraphs to which they refer. It is emphasised that the
findings and conclusion presented below are based on the documents and facts known to the valuer
at the date of this report. If additional documents and facts are made available, the valuer reserves
the right to amend this report and its conclusion.
17th Floor
Champion Building
Nos. 287-291 Des Voeux Road
Central
Hong Kong
15 October 2007
The Directors
Suites 5303-4 on the 53rd Floor
Central Plaza
18 Harbour Road
Wanchai
Hong Kong
Dear Sirs,
In accordance with the instruction given to us by the management of Aurora Global Investment
Holdings Limited (hereinafter referred to as the “Company”), we have conducted an agreed-upon
procedures evaluation of a project to be comprised of a mining portion and a by-product processing
portion (hereinafter referred to as the “Project” and to be defined later in this report) as at 31 August
2007 (hereinafter referred to as the “Relevant Date”) for the Company’s internal management reference
purpose. The location at which the mining portion of the Project will be carried out is in ɻਝʑၬ̀
Ϭ‫ਂ؝‬ᔾᏜढ़࿏ɩ޴ɬ Xiaohongshan, Ejinaqi, Inner Mongolia Autonomous Region of the People’s
Republic of China (hereinafter referred to as the “PRC” or “China”). Our findings and conclusion are
documented in a narrative report (hereinafter referred to as the “Narrative Report”) and submitted to
the Company at today’s date.
– 184 –
APPENDIX IV
At the request of the management of the Company, we prepared this summary report to summarise
our findings and conclusion as documented in the Narrative Report for the purpose of inclusion in a
circular at today’s date for the Company’s shareholders’ reference. Terms used herein without definition
shall have the same meanings as in the Narrative Report, and the assumptions and caveats adopted in
the Narrative Report also apply to this report.
We understand that the management of the Company will use our work product as part of its business
due diligence and we have not been engaged to make specific sale or purchase recommendations. We
further understand that the management of the Company will not rely solely on our work, and that the
use of our work product will not supplant other due diligence which the management of the Company
should conduct in reaching its business decision with regards to the Project.
Our findings and conclusion in this agreed-upon procedures evaluation are summarised as follows:
INTRODUCTION
On 20 July 2007, the management of the Company announced that Smooth Way International Limited
(hereinafter referred to as the “Purchaser”), a company incorporated in the British Virgin Islands and
a wholly-owned subsidiary of the Company, had entered into a conditional share transfer agreement
with, among others, Ms. Leung Lai Ching, Margaret (hereinafter referred to as the “Vendor”) , pursuant
to which the Purchaser has agreed to acquire 51% of the entire issued share capital of Kanson
Development Limited (hereinafter referred to as the “Target Company”), a company incorporated in
the British Virgin Islands and wholly-owned by the Vendor, at a consideration totaling HK$1,000
million in value. The Company, as the warrantor of the Purchaser, also entered into a Share Transfer
Agreement, giving representations, warranties and undertakings jointly and severally with the Purchaser
in favor of the Vendor.
The Target Company is an investment holding company which shall hold 100% interest in Hong Kong
Forest Source Mining Industry Holding Company Limited (hereinafter referred to as “Hong Kong FSMI”),
an incorporation established in Hong Kong, immediately after the completion of the reorganisation
involving the members of the group of companies consisting of the Target Company, Hong Kong FSMI
and various PRC business entities and the businesses carried on by them or their predecessors.
We were given to understand that the principal economic asset of Hong Kong FSMI is its 100%
holding of ‫ࣵڇ‬౲฻ᘊพ඀ೕτࠉʔ̇ Qinghai Forest Source Mining Industry Developing Company
Limited (hereinafter referred to as “Qinghai Senyuan”), a wholly foreign owned enterprise established
in the PRC on 9 April 2004. The registered address of Qinghai Senyuan is at ‫ޘࣵڇ‬Ϲྟ̟௝С༏
53໔ (‫ࣁڇ‬ɣ෨10ᅢ) No. 53 Shengli Road, Xining City, Qinghai Province (10th Floor Qinglu
Building). According to a ͬพؒɁᏪพਨ๑ Enterprise Legal Person Business License dated
16 August 2007, the operating term of Qinghai Senyuan is 20 years till 8 April 2024. Qinghai Senyuan
is licensed to carry out§ᘊพଐ‫ؿۂ‬඀ೕ (ɺф඀ઔ), ˱ɮ, ሻਕ, ‫ޚ‬ᗐҌ୺‫ڸ‬໺‫(¨৻ר‬translated
as exploration (excluding mining), processing, selling and its related technical consultancy services
of mineral products). Qinghai Senyuan is the holder of a Mineral Resource Exploration License
(hereinafter referred to as the “Exploration Licence”) in respect of the Xiaohongshan (or known as
Little Red Mountain in this report) Iron-Titanium-Vanadium Mine (hereinafter referred to as the
“Existing LRM Mine”).
– 185 –
APPENDIX IV
We were further given to understand that a portion of the Existing LRM Mine of about 2 km (kilometers)
times 1 km with an area of about 2 sq. km. (square kilometers) has been undergoing a detailed
exploration program, and this parcel of land is referred to as the Target Mine in our report.
OUR INSTRUCTIONS TO THIS ENGAGEMENT
At the instruction of the management of the Company, we were retained to analyse and prepare an
agreed-upon procedures project evaluation report to evaluate the financial net present value of the
Project as proposed in a business plan titled “The Iron-Titanium-Vanadium-Ilmenite Mine in
Xiaohongshan Business Plan” dated May 2007 and its supplementary information (collectively,
hereinafter referred to as the “Business Plan”) provided by the Company’s financial advisor and the
appointed personnel of the Vendor. As instructed, our work was based on the Business Plan and a
technical report titled “An Independent Technical Assessment on the Little Red Mountain IronTitanium-Vanadium Deposit, Xiao Hong Shan, People’s Republic of China” prepared by a qualified
technical consultant, Watts, Griffis and McOuat Limited of Canada, in August 2007 (hereinafter
referred to as the “Technical Report”) on the Target Mine.
PROCEDURES TO EVALUATE
In performing our work, we have adopted the following procedures which were agreed with the
management of the Company before the engagement. They were:
•
To prepare and submit a list(s) of required documents and information regarding the Project
during the course of evaluation. The completeness of our evaluation depends on the availability
of the required information being supplied by the management of the Company or its appointed
personnel.
•
To read and based on the content of the supplied Business Plan and Technical Report, such as
mineral resources estimation, by-product information, market information, financial information,
and its related materials such as exploration program, explanatory statements and relevant
correspondence, to arrive at our conclusion. In the course of our evaluation, we will assume
that the information provided in the materials are correct and we will only verify the information
when and where possible. However, we will not ascertain the correctness of the information
contained in the materials like an auditor in giving an audit opinion.
•
To hold discussions with relevant personnel in order to have a better understanding of the
Project.
•
To conduct a limited scope of physical inspection to the Target Mine and to give us an
understanding of the general environment of the Target Mine. The purpose of the inspection is
not to have a full scope investigation on the quantity and the quality of the subjects as contained
in the Business Plan and the Technical Report; rather, it is designed to give the valuer a better
understanding of the subjects as contained in both documents.
– 186 –
APPENDIX IV
•
To conduct appropriate research and technical consultation in order to obtain sufficient
information to arrive at our conclusion. The extent of research and consultation is at our
discretion.
•
To evaluate the financial net present value of the Project using the appropriate method(s).
•
To document our findings in our project evaluation report.
THE BASIS OF EVALUATION AND ASSUMPTIONS
The Project is evaluated on the basis of continued use and as part of a going concern business of a
business enterprise (see Note) i.e. the legally interested party in the Project-Qinghai Senyuan. The
continued use premise assumes that the Project will be used for the purpose for which it was conceived
or is currently carried out.
Our evaluation has been made on the assumption that, as at the Relevant Date,
1.
the legally interested party in the Project has free and uninterrupted rights to use or assign the
interests of the Project for the whole of the unexpired terms as granted and any premiums/
administrative costs payable have already been fully paid;
2.
the legally interested party in the Project successfully completed the detailed exploration program
(as described in this report) and obtained the expected result within the scheduled time frame;
3.
the detailed exploration program and the subsequent mining operations in the Target Mine
confirmed the quality and quantity expected in the Business Plan and the Technical Report;
4.
the relevant Enterprise Legal Person Business License and/or business registration documents
(including Tax Registration Certificate) are able to be renewed after their expiration from time
to time in order to achieve the planned extraction phase;
5.
the subsequent feasibility studies and governmental endorsement confirmed the quality and
quantity discovered during the mine development stage under various reserve classification
commonly adopt in the world or in China (the Solid Minerals Resource Classification (GB/
T17766-1999));
6.
the legally interested party in the Exploration Licence is able to obtain, upon completion of the
exploration program and successfully achieved the expected result, the mining right of the
Target Mine for a term of, say 13 years, from the relevant authorities in China;
7.
all required licenses, certificates, consents, or other legislative or administrative authority from
any local, provincial, or national government or private entity or organisation have been or can
readily be obtained or renewed or replaced on which the evaluation contained in our report are
based;
Note: A business enterprise is defined as a commercial, industrial, service, or investment entity, or a combination thereof,
pursuing an economic activity.
– 187 –
APPENDIX IV
8.
the legally interested party in the Project successfully raises fund to finance and to develop the
Project as planned, and is able to transport and to sell the predicted by-products to its clientele
at market price as projected;
9.
the Project successfully yielded the economic benefits as projected in the Business Plan and
the Technical Report;
10.
the prospective earnings would provide a reasonable return to the legally interested party in the
Project and that the legally interested party in the Project has adequate working capital to
implement the scheduled exploration program, the mining operations and the operation of the
four by-products processing plants from time to time;
11.
the legally interested party in the Project has the rights to transport, produce and sell the extracted
mineral ores and its by-products after processing to the market, both locally and internationally;
12.
the legally interested party in the Project has adopted reasonable and necessary security measures
and has considered several contingency plans against any disruption (such as fire, change of
government policy, labour dispute, implementation of serious statutory mining safety measures,
geologic formation structurally deformed, soil erosion and other types of unexpected accidence)
to the scheduled exploration program and mining operations; and
13.
the Project, as part of a going concern business of the legally interested party in the Project,
can be freely disposed and transferred free of all encumbrances for its existing or approved
uses in the market to both local and overseas purchasers without payment of any premium to
the government.
Should this not be the case, it will have an adverse impact to the reported findings and conclusion
herein.
– 188 –
APPENDIX IV
INDUSTRY AND MARKET OVERVIEW (SEE NOTE)
The Economic Outlook of China
The GDP (Gross Domestic Product) growth of China for the last year was 10.7%. With the strong
growth of China’s economy at a compound annual growth rate of approximately 10.16% from 1990
to 2006, it is expected that China’s economic growth would remain at 8.5% to 9% from 2008 to 2011.
Economists further estimated that the 2008 Olympic Games in Beijing would benefit the nation’s
GDP by additional one per cent.
For Inner Mongolia Autonomous Region, despite of the Macro Regulation and Control from the
Chinese government, the growth rate of the GDP in 2005 was about 21.6% and the growth rate in
2006 was 18.0%. The following table listed out the development trend of GDP of Inner Mongolia
Autonomous Region in recent years (as at the end of each year).
Year
2002
2003
2004
2005
2006
GDP Growth (%)
12.1
16.3
19.4
21.6
18
Source: From National Bureau of Statistics of China
Mining Industry
Mining is a very risky business and the initial work which needs to be carried out in order to find and
prove up a deposit will, more often than not, prove it to be uneconomic rather than profitable to exploit.
Exploration can be split into two separate parts — one is to find a new mine in the vicinity of an old one,
the other is built from scratch by deciding what geological environments are most likely to contain the
mineral which is being sought then to be followed by reading through literature to find where those
environments are to be found and then sending out an exploration team to test the hypothesis.
All mining activity takes place within the earth’s crust, about the top 7-35 km of the solid matter
comprising the bulk of the planet. However, the distribution of metals within the crust is by no means
uniform, as can be seen by the differences in the types of rock which it contains, be it limestone,
granite, sandstone or basalt. Nevertheless, these different rock types are generally of uniform
composition, at least locally, and further concentrations need to occur in order to produce concentrations
of materials which can be mined and sold at a profit. Such concentrations decided whether a mineral
deposit is economically worth to extract or not. There are some generally accepted background
concentrations of the major metallic elements and the concentration factors required for economic
viability identified by some industry practitioners such as Charles Kernot (1999). These concentration
factors are only of importance for the metals because of the geological controls on their formation.
Note: The information provided in this section relating to the minerals industry and market is derived in part or extracted
or referred to from various official and unofficial sources. The official sources include various quasi-governmental
or world organisation websites (such as gov.cn, National Bureau of Statistics of China and World Bank). The
unofficial sources include information provided by the management of the Company, various websites (include
steel35.com, asianmetal.cn, cnmn.com.cn, alibaba.com.cn, fenmoyejin.com, Bloomberg.com, en.wikipedia.org and
Yahoo! Finance), newspapers, research reports and journals (such as U.S. Geological Survey) from various industry
practitioners or analysts. We need to state that such official and unofficial information have not been prepared or
independently verified by us, and may not be consistent with other information complied within or outside China.
None of our staff involved in preparing this report make any representation as to the correctness or accuracy of
such information and accordingly such information should not be unduly relied upon. The readers should conduct
his/her due diligence with regard to the correctness and accuracy of such information for his/her own use.
– 189 –
APPENDIX IV
Metal deposits are categorised both in terms of the metals which they contain and the controls on
their origin which governs their three dimensional shape. The metals themselves are deemed to be
either ferrous (containing iron) or non-ferrous. Non-ferrous metals are, in turn, subdivided into those
which are precious, base or minor. The precious metals are essentially limited to gold, platinum and
silver as these metals are relatively rare, but have great demand and widely traded.
Since 1998, when the Chinese government issued the laws regulating exploration and mining rights,
operating a mining business in China must first obtain those rights from the government with a price.
The business was considered to be opened to foreign investors in 2003 when the Chinese government
allowed the transfer of the mining rights to all kinds of entities. It is now easier and more secure than
ever for these foreign mining companies to operate in China. Apart from the above, several measures
have also been taken to encourage foreign investment and participation in developing China’s mining
industry by the government. These measures include the privatisation of the mining sector, streamlining
of permitting and approval processes, granting irrevocable exclusive mining rights to foreign entities
and relaxing rules on repatriation of capital profit. These measures benefit not only the foreign investors
but also the local miners in that the cost of mining can be reduced and thus more profit can be
generated.
According to the data released by the China National Bureau of Statistics, China’s total industrial
iron and steel products have increased three-fold from 1995 to 2004. China’s crude steel output for
year 2006 was 423 million tonnes, up by 19.7% from previous year. Steel use is expected to increase
by 13% in 2007, then 10% in 2008 taking the total to 443 million tonnes which accounts for 35% of
the world total. A continued and sustained growth in the China steel market is expected in the coming
years.
The research and development of the titanium industry had started 40 years ago. Now, China is
ranked the 4th in the global titanium production market with an annual production of 1,015,000
tonnes in 2005. The output of titanium mill products in China is expected to reach 18,000 tonnes by
2007 with consumption at 20,500 tonnes. The titanium industry in China will continue to grow.
THE PROJECT DESCRIPTION (SEE NOTE)
A.
Historical Background
From the information made available to us, Qinghai Senyuan (or the legally interested party in
the Project) holds the Exploration License No. 0100000410104 issued by the Ministry of Land
Resources of the PRC. This license allows Qinghai Senyuan to explore from 31 December
2006 to 25 November 2008 in an approximately 15.47 sq. km. area lying in Ejinaqi. Under this
license, an exploration area of about 15.47 sq. km. from longitude 97˚58’00”E to 98˚01’00”E
and latitude 41˚25’00”N to 41˚27’00”N i.e. the Existing LRM Mine was granted to Qinghai
Senyuan.
Note: Sources from the Business Plan and the Technical Report.
– 190 –
APPENDIX IV
The Existing LRM Mine is located approximately 180 km north of Jiayugan City, just east of
Gansu Province and situated at the western part of the Inner Mongolia Autonomous Region on
a gentle, well rounded, low-hilly land forms, in the eastern end of the Beishan Mountain Range,
on the western margin of the Bandanjilin Desert. Elevations ranged from 1,470 meters (m) to
1,580 m above sea level with the difference in elevation generally about 60 m.
The Target Mine forms part of the Existing LRM Mine where detailed exploration has been
concentrated. It has a rectangular area of 2 km by 1 km oriented NorthWest-SouthEast with the
following corner coordinates:
Latitudes
Longitudes
41˚26’44"N
41˚26’14"N
41˚25’45"N
41˚26’15"N
97˚58’51"E
98˚00’07"E
97˚59’47"E
97˚58’31"E
According to the Technical Report, we were further given to understand that extensive drilling
program was conducted at the western part of the Target Mine, about an area of 0.7 sq. km.,
and this particular portion of land is referred to as the Target Mine — First Portion in our
report.
According to the information provided to us, prior geologic work in the region is summarised
below:
•
1966 to 1969 —
The Geophysical Prospecting Group of the Ministry of Geology discovered two magnetic
anomalies. The resulting 1:200,000 scale geologic map was completed by the Geological
Survey Team of the Second Region Geology Department of Gansu province.
•
1980 —
A Level III aerial survey was carried out on the Xiaohongshan magnetic anomaly by the
Geophysical Prospecting Team of the Geology Department of Gansu Province. This survey
resulted in the decision to carry out additional exploration in the area.
•
1986 —
A 1:1,000,000 aerial magnetic survey by the Aerial Geophysical Prospecting Team of
the Geology and Mineral Ministry further defined the magnetic anomalies.
– 191 –
APPENDIX IV
•
2004 —
Qinghai Senyuan commissioned Qinghai Geology Survey of Nuclear Industry to conduct
an initial exploration program. A preliminary geological map at 1:2,000 scale, trenches
and shallow shafts and mapping of the iron deposits were completed. Qinghai Senyuan
further commissioned the Fourth Geology and Mineral Survey Institute of Gansu Province
to carry out a 1:2,000 scale topographic mapping of the 2 sq. km. area (i.e. the Target
Mine) within the larger permit Target Mine, and to make an analysis of the previous
detailed magnetic survey with particular attention to the buried or concealed magnetite
anomalies to assist future drilling programs.
A total of 37 magnetic anomalies were outlined by geophysical surveying, 18 of which
are exposed magnetite orebodies, 6 are blind orebodies and the remaining 13 are caused
by gabbros with magnetite mineralization.
•
2005 to 2006 —
In early November 2005, a contract was signed by Hong Kong FSMI with SINOREX
Resource and Environment Engineering (Beijing) Co., Ltd. (hereinafter referred to as
“SINOREX”) for SINOREX to carry out the first stage and second stage exploration
programs, as mandated by the Chinese requirements. The following table outlines the
exploration works that were completed during the first stage and second stage, starting
with geological mapping, followed by trenching then by diamond drilling:
Description
Amount
Geological mapping at 1:2,000 scale
Geological profile mapping at 1:500 scale
Geological profile mapping at 1:1,000 scale
Trenching
Diamond drilling
Trench sampling
Diamond drill core samples
Hydrogeology drillhole monitoring
Groundwater level monitoring
Engineering, environmental and hydrogeological mapping
Drill core logging
Hydrogeological logging of drill core
Standard assay sampling
Complete assaying
Surveying GPS
Samples (individual)
Polished and thin sections
2 km2
8 linear km
4 linear km
3,053.4 m3
7,510.24 m
2,614.6 m
6,921.33 m
26 dh
3 locations
2 km2
7,510.24 m (26 ddh)
11 ddh
31,617 samples
188 samples
105 stations
100
48
– 192 –
APPENDIX IV
The diamond drilling at the Existing LRM Mine was carried out by SINOREX in two
stages, the first stage during 2005 consisting of 13 drillholes (2,461.94 m) and the second
stage also consisting of 13 drillholes (5,048.30 m) during 2006. All the diamond drilling
has been concentrated in the Target Mine — First Portion on the west side of the Target
Mine designated for the detailed exploration program.
B.
Existing State
Qinghai Senyuan has been conducting a geological exploration program within the Target Mine,
with the intention to obtain rights for the development of an Iron-Titanium-Vanadium mine.
Though the previous drillings were concentrated on the west side of the Target Mine i.e. the
Target Mine — First Portion, we were advised that additional exploration is being carried out
in the remaining portion (east side) of the Target Mine.
While the entire concession covers an area of 15.47 sq. km., the exploration and mining area
staked out for the current state is set at the Target Mine. From the information provided, the
exploration programs carried out have already determined the overall geometry of seven, separate
lenticular ore bodies (located at the western end of the Target Mine) of titaniferous magnetite
that contain recoverable amounts of iron, titanium, vanadium and phosphorous. The average
grade of contained metal in ores is 19.5% iron, 3.86% titanium and 0.03% vanadium. After
metallurgical dressing processes, the recovery rate of iron concentrate is 56-57%, of phosphate
concentrate is 28-35% and of titanium concentrate is 43-48%.
Geological investigation and metallurgical testing conducted on the Target Mine since 2004 by
SINOREX and the Changsha Research Institute of Mining and Metallurgy confirmed that, the
mineral ores at the Target Mine contains titaniferous magnetite which contains recoverable
amounts of iron, titanium, vanadium and phosphorous. These test results were further verified
by the qualified technical consultant we referred to in this report.
According to the research conducted by SINOREX, the mineral resources of the seven identified
orebodies within the Target Mine — First Portion are divided into three categories: category
(331), category (332) and category (333). A total of approximately 30 million tonnes (including
the inferred category) mineral resources has been estimated. After testing and sampling, results
show that the Target Mine possess valuable minerals mainly iron, titanium and vanadium with
good grindability. High quality saleable product can be produced commercially.
Based on the Technical Report we referred to in this report, we were given to understand that
the total indicated mineral resources was estimated at approximately 16.2 million tonnes for
the three zones in the Target Mine — First Portion i.e. Zone 101, Zone 102 and Zone 103, and
the total inferred mineral resources was estimated at approximately 260,000 tonnes for Zone
103 only.
– 193 –
APPENDIX IV
The qualified technical consultant in the Technical Report mentioned the estimation of the
mineral resources of the Existing LRM Mine prepared by China ENFI Engineering Corporation
(hereinafter referred to as “ENFI”) in its mine engineering report. It reported that ENFI estimated
within the Target Mine — First Portion, has a total measured and indicated mineral resources
of approximately 18.78 million tonnes and an inferred mineral resources of approximately
11.68 million tonnes. However, the Technical Report made no further comments on such
estimation. The qualified technical consultant agreed with ENFI that additional drilling is
required immediately to increase the mineral resources/reserve to produce a viable and profitable
operation. It was reported that mine recoverable mineral reserves contained within the designed
open pit by ENFI totaled 12 million tonnes @ 19.5% Fe (iron) and 4.2% TiO2 (titanium dioxide),
and the mine life was estimated by the qualified technical consultant to be 5 years. However,
the potential for increasing mineable reserves, and mine life, through revised pit optimization
and additional drilling is considered by the qualified technical consultant to be highly probable.
According to the advice given by the appointed personnel of the Vendor, a detailed feasibility
study and a mine plan are in the process of preparation by ENFI, and it is expected that Qinghai
Senyuan will receive all the necessary approvals from the authorities in late 2007. Qinghai
Senyuan will then start to design and construct the mine. The Technical Report reported that a
diamond drilling program began in early August this year with two rigs on the south side of the
present design pit and a third rig on the untested magnetic anomalies to the east of the pit
within the Target Mine. It is expected that the construction of the mine will be completed in
2009 and mining operations will start simultaneously and be normalised in 2010 onwards.
A dressing plant will be built at a location very close to the mining site in order to carry on the
dressing processes. The ore rock recovered from open pit mining will be delivered to the dressing
plants and will undergo various dressing processes including magnetic separation and floatation
for the extraction of the mineral concentrates. After a series of weak magnetic separations, iron
concentrates of 56-57% grading will be extracted from the ores. The iron concentrates will be
totally used to stock feed the direct reduction of iron concentrate plant. The remaining substance
after the weak magnetic separations will go through a strong magnetic separation. After a
phosphate flotation process, a phosphate concentrate of 28-35% grading will be formed. The
remaining substance will go through a titanium flotation process and titanium concentrate of
43-48% grading will be formed. When the production is fully normalised in 2010, an amount
of 156,000 tonnes of titanium concentrate and an amount of 124,800 tonnes of phosphate
concentrate will be produced annually. The phosphate concentrate will be sold as end-products
but the titanium concentrates will be used as input in the direct reduction of titanium concentrate
process.
A Direct Reduction of Iron Concentrate plant will be built in Qingshan, near Yumen, Gansu
Province in 2008. In this plant, iron concentrate from the dressing plant will be fed in and go
through a process of pelletisation. After cooling, crushing, grinding and magnetic separation,
direct reduced iron powder will be produced. It will be sold as end product to the market. In
2010, an amount of 185,472 tonnes of direct reduced iron will be produced from the iron
– 194 –
APPENDIX IV
concentrates annually. The tailings from the production of direct reduced iron powder contain
titanium and vanadium. With further processing of the tailings, vanadium pentoxide graded at
99% and titanium dioxide graded at 46% will be obtained. The vanadium pentoxide is sold as
an end product called direct reduced vanadium. In 2010, an amount of 1,142 tonnes of direct
reduced vanadium will be produced annually.
A High-End DRI plant will be built in 2009 in the same area as the Direct Reduction of Iron
Concentrate plant. Some of the direct reduced iron from the DRI plant will be further used to
make High-End Direct Reduced Iron Powder (98% Fe). From 2010 onwards, there will be a
production of 85,169 tonnes of high-end direct reduced iron powder each year.
A Direct Reduction of Titanium Concentrate plant will be constructed within the same area for
the production of high grade titanium oxide with grading of more than 90%. This plant contains
a reduction plant and a corrosion plant. With a reducing temperature of 1100 degree Celsius
and two and a half hours of reduction time, metallized pellets has been obtained. After further
corrosion separation, high grade titanium oxide will be produced. In 2010, 74,412 tonnes of
high grade titanium oxide will be produced. In the process of producing high grade titanium
oxide, two substances: hematite and iron concentrate are formed too. Both substances will be
sold into the market. In 2010, there will be 8,642 tonnes of hematite produced annually.
Currently there is no water and power supply at the mining site in Xiaohongshan. A few essential
infrastructures are to be constructed at the site including an access road from Yumen, water
supply, power supply and communication systems.
Together, the Target Mine — First Portion and the four by-product processing plants form the
subject of the Project as part of a going concern business of the legally interests party in the
Project. As at the Latest Practical Date of this circular, no detailed construction or development
schedule of the Target Mine — First Portion or the named by-product processing plants were
made available to us for inspection, thus, our work depends solely on the advices given by the
management of the Company and the documents provided to us.
C.
Establishment of Titles
Due to the purpose of this engagement, the management of the Company was requested to
provide us the necessary documents to support that the legally interested party in the Project
i.e. Qinghai Senyuan has free and uninterrupted rights to assign or to transfer the Project (a
part of or the whole of) free of all encumbrances and any premiums/administrative costs payable
have already been paid in full.
We have been provided with various copies of title documents and a PRC legal opinion dated
15 October 2007 issued by Jingtian & Gongcheng (hereinafter referred to as the “Legal Opinion”)
regarding the Target Mine — First Portion. According to the Legal Opinion, Qinghai Senyuan
– 195 –
APPENDIX IV
has obtained full legal and beneficial title in respect of the exploration of the Target Mine —
First Portion, and is the legally interested party in the exploration of the Target Mine — First
Portion. Thus, Qinghai Senyuan, after complying with the rules and regulations in China and
having registered in the relevant governmental authorities, has the right to transfer and assign
part of its exploration rights in the Target Mine. However, we have not inspected the original
documents to verify ownership or to verify any amendment which may not appear on the copies
handed to us. We have complied with the requirements as stated in Practice Note No. 12 of the
Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and
relied solely on the copy of the Legal Opinion with regard to the existing legally interested
party in the Target Mine — First Portion. No responsibility and liability is assumed in relation
to those opinions or copies of documents.
Due to inherent defects in the land registration system of China, we are unable to inspect the
original documents from the relevant land registration departments to verify the existing titles
of or any material encumbrances that might be attached to the land related subjects in the
Project. We are not in the legal profession, thus we are unable to ascertain the titles and to
report any encumbrances that may be registered against the land related subjects in the Project.
We further emphasised that we are unable to, or not in the position of, opining or commenting
on the legal procedures and time to be required to achieve the final goal of the Project. No
responsibility or liability is assumed. Having said that, we were given to understand that the
management of the Company has obtained the Legal Opinion to satisfy them as to the legal
status of it.
D.
Inspections and Investigations of the Target Mine
We have, when and where possible, conducted a limited scope of inspections of the Target
Mine in respect of which we have been provided with such information as we have requested
for the purpose of our evaluation. With regard to the occupation status of the Target Mine, we
have relied solely on the information provided by the management of the Company and its
appointed personnel. No verification from our part is assumed.
Due to the agreed-upon procedures basis, we were unable to inspect those parts which were
covered, unexposed, inaccessible or not being arranged for inspection. We cannot express an
opinion about or advice upon the condition of the Target Mine and our report should not be
taken as making any implied representation or statement about the conditions of the Target
Mine. We did not conduct any structural survey, drilling, sampling, investigation, test or
examination, or any means of geological test or assay or engineering or survey in the Target
Mine. No tests were carried out to any utilities (if any) and we are unable to identify those
utilities covered, unexposed or inaccessible.
It is emphasised that the inspection and the use of our report do not purport to be a conditional
survey of the Target Mine. We have assumed that the Target Mine is free of rot and inherent
danger or serious geologic formation structurally deformed and soil erosion. We were given to
understand that the management of the Company has employed various technical consultants
to advise them on this area.
– 196 –
APPENDIX IV
As agreed, the purpose of the inspection is not to have a full scope investigation on the quantity
and the quality of the Target Mine; rather, it is designed to give us a better understanding of the
Target Mine and its surrounding areas. No responsibility or liability is assumed.
We have not carried out on-site measurements to verify the correctness of the dimensions,
specifications and areas of the Target Mine, but have assumed that the figures shown on the
documents and handed to us are correct. All dimensions, measurements and areas are
approximations.
Our engagement and the agreed procedures to work did not include an independent land survey
to verify the legal boundaries and the exact location of the Target Mine. We need to state that
we are not in the land survey profession in China, therefore, we are not in the position to verify
or ascertain the correctness of the legal boundaries and location of the Target Mine that appeared
on the documents handed to us. No responsibility from our part is assumed.
FACTORS CONSIDERED IN THE EVALUATION
Unless otherwise stated, the evaluation of the Project has taken account of all pertinent factors affecting
the Project and its ability, if successful, to generate future investment returns as part of a going
concern business of the legally interested party in the Project. The factors considered in the evaluation
included, but were not limited to, the following:
•
the nature and the characteristics of the Project, including the historical background and the
ground work for the Project;
•
the use of the Project as part of a going concern business of the legally interested party in the
Project;
•
the initial life of the Project, as advised in the Business Plan, i.e. 13 years;
•
the cost and financial information as contained in the Business Plan;
•
technical evaluation of the mining portion of the Project;
•
business advices of the by-product processing portion of the Project;
•
projected future results in the Business Plan based on assumptions made by the appointed
personnel from Hong Kong FSMI;
•
the nature of the exploration right and the mining right (if obtained) such as the remaining life
and its characteristics;
– 197 –
APPENDIX IV
•
the nature and the going concern business of Qinghai Senyuan in the Project;
•
the legally interested party in the Project is able to obtain a valid Mining License following the
Exploration License and be part of the going concern business of the legally interested party in
the Project;
•
the quality of the proposed mining facilities;
•
the capability of the legally interested party in the Project to raise fund to finance the exploration
program, the construction of the mine and its subsequent operations;
•
the capability and determination of the legally interested party in the Project to follow the
planned development schedule in the Business Plan;
•
the capability and determination of the legally interested party in the Project to maintain its
proposed clientele as disclosed in the Business Plan;
•
the capability and determination of the legally interested party in the Project to continue the
proposed marketing strategy of its predicted by-products, if successful;
•
the capability and determination of the legally interested party in the Project to construct and
implement the scheduled production process to produce relevant by-products to attract customers
as predicted;
•
the capability and determination of the legally interested party in the Project to follow the
government and industry management quality standards and to review/up-lift its standards to
catch the industry need from time to time;
•
the capability and determination of the legally interested party in the Project to protect its
mining operations, if successful, against any disruption of the normal operation of the proposed
mine;
•
the capability and determination of the legally interested party in the Project to maintain a cost
effective and stable supply chain of the materials to produce its predicted products;
•
the capability and determination of the legally interested party in the Project to maintain an
experienced management team as part of its going concern business;
•
the economic and industry data affecting the Project and the mining industry in China;
•
the market-derived investment returns of similar business; and,
•
the risks facing the operations as proposed in the Business Plan.
PROJECT COST
Please refer to the Technical Report in Appendix VII in this circular with sections heading Capital
Cost Summary and Operating Costs for the details.
– 198 –
APPENDIX IV
FINANCIAL EVALUATION
Generally speaking, there are several conventional capital investment evaluation techniques, namely
the Payback Period, the Rate of Return Method and the Discounted Cash Flows Method. The use of
the Payback Period and the Rate of Return Method or the like is designed to serve the purpose of
comparing between two or more capital investment projects simultaneously, and to help the investor(s)
to examine a sound investment decision between the analysed projects by comparing the period to
recover cost of investments or rate of return on capital employed. While the Discounted Cash Flows
Method is designed to serve the purpose of evaluating the total sum of money to be received during
the useful life of a project by investing certain amount of capital after considered the time value of
money (see Note).
The first step of the evaluation is to estimate the economic income projection. The projections of the
future revenues used in this evaluation were prepared by the appointed personnel of Hong Kong
FSMI and provided by the management of the Company, and they are responsible for the assumptions
upon which the projections are based. Having discussed with the appointed personnel of Hong Kong
FSMI, we understood that the assumptions they adopted reflected their judgment of their ability to
market and to produce the predicted products through its marketing strategy and client networks. The
projections used in our evaluation are based on the view of the management of Hong Kong FSMI and
contained in the Business Plan. The management of Hong Kong FSMI confirmed to us that they have
had due regard to published research data, current industry conditions and relevant experience, and
they attested that the supplied data are accurate and reasonable. We were given to understand that it
represented the most likely result to be made by Qinghai Senyuan in operating the Project, if successful.
These data have been utilised without further verification.
Payback Period
Payback measures the number of years it is expected to take to recover the cost of the original
investment. It is calculated by estimating the annual cash flows from the commencement of a project
to the end of its useful life. Initially the outflow will be negative, but, within a year or two from the
start of most projects, positive cash flows will occur. This is a simple method and usually used as a
first screening method (quoted from Investment Appraisal by G. Mott for the readers’ easy reference).
However, we have reservation to use this simple method for it ignores any cash received after the
payback period which cash flows after the payback period are usually much larger than before. And,
it makes no attempt to relate the cash earned on the investment to the amount actually invested. In
other words, it failed to measure the total profitability over the whole life of the investment. Some
analysts commented this method encouraging a short term view and discriminate against long term
projects and growth projects, like this Project. This technique is only good to making comparison
between two capital investment projects and to help to examine a sound investment decision between
the two projects and, appropriate for entity where short term cash flows is more important than long
term cash flows.
Return on Capital Employed
This method also known as the accounting rate of return. It is calculated by estimating average annual
pre-tax profit as a percentage of the average capital employment i.e. the original investment. Analysts
considered this method is good to measure a project if the entity is concerned with profits rather than
liquidity over a period of time. However, like the previous method, it ignores the time value of money
and takes no account of the timing of the profits for it take averaging over a period of time (quoted
from Investment Appraisal of The CIMA for the readers’ easy reference).
Note: The time value of money is based on the premise that one will prefer to receive a certain amount of money today
than the same amount in the future, all else equal.
– 199 –
APPENDIX IV
We consider this method as irrelevant for the ratio in consideration is based on averaging profit over
a period of time, not cash flows, which is hard to determine to the Project at present moment.
Ipso facto, we have reservation to use the non-discounting but comparison evaluation techniques in
appraising the Project for there did not have other capital investment project(s) for compare. We take
the view that the comparison evaluation techniques, in this instance, can only be used when there are
benchmarks to compare, say, statutory planned rate of return or payback period, and the evaluation is
required for statutory purposes. However, to the best of our understanding, this evaluation is not
intended to serve such statutory purposes nor there are reasonable, market-orientated benchmarks
published by any recognised authorities in China for the investors to follow. Last but not the least, our
instruction was to conduct a financial evaluation based on the materials provided in the Business Plan
and to arrive at the financial net present value of the Project, if successful. Under such circumstance,
we consider the use of the non-discounting comparison evaluation techniques in this engagement is
irrelevant.
Discounted Cash Flows Method (see Note)
In considering the Discounted Cash Flow (“DCF”) Method as the most appropriate method to assess
the profitability of the Project, we have used the Net Present Value Method. By using this method, the
expected cash flows on the Project are set out year by year and brought to a present value by use of
present value factors at the appropriate rate. In constructing the cumulative present value table, positive
present values are netted off against deficit present values so as to arrive at the “net present value” or
in short form, NPV. When this net figure is positive then the Project is said to be viable because the
stream if inflows is sufficient to pay the interest at the specified rate. Conversely, when the net present
value is negative then the Project is not viable.
The NPV is the difference between the present values of project benefits and project costs. The
financial NPV is computed using the following formula (for illustration purpose):
NPV
bi – ci
∑n
i =0 (1 + r)i
where
bi = benefits in period i
ci = costs in period i
r = discount rate
n = discounting period
The decision criterion is, as said, simple — to accept a project with NPV greater than or equal to
zero, and reject if otherwise.
Note: Data from Bloomberg.com
– 200 –
APPENDIX IV
By constructing a cumulative present value table, a cash flows table is required. In preparing the cash
flows table, this would necessitate the subtraction, from net income, the capital expenditures and net
changes in working capital and the addition of depreciation in the computation of cash flows year by
year. The use of the NPV Method and its related analysis reflect investment criteria and requires the
valuer to make empirical and subjective assumptions.
The next step is to estimate the appropriate present value factor i.e. discount rate. Discount rate
equals cost of capital. The cost of capital represents investors’ expectations and for any given investment
is a combination of three basic factors, namely the risk-free rate, the expected inflation and a premium
for risk. There are many ways to estimate the discount rate such as the Build-up Model, the Capital
Asset Pricing Model and the Arbitrage Pricing Model for equity investment and the Weighted Average
of Cost of Capital for normal project investment. The use of the appropriate model in each analyse
depends on numerous factors, in particular the future capital structure of the investment. There is no
universal model that applies to all cases. In this engagement, we have considered the Weighted Average
Cost of Capital (“WACC”).
The WACC Model is an average representing the expected return on all of a company’s capital. Each
source of capital, such as stocks, bonds, and other debt, is assigned a required rate of return, and then
these required rates of return are weighted in proportion to the share each source of capital contributes
to the company’s capital structure. The resulting rate is what the firm would use as a minimum for
evaluating a capital project or investment (extracted from investorwords.com for readers’ easy
understanding).
The WACC is computed using the following formula (for illustration purpose):
WACC = Pe x Re + P1 x R1
Where
Pe = percentage of equity investment to total capital funds
P1 = percentage of loaned funds
Re = opportunity cost of capital of equity funds
R1 = effective cost of loaned funds
In estimating the appropriate WACC in this engagement, we have considered two available sources
of WACC and choose the most appropriate source. Firstly, we noticed that there are a numbers of
– 201 –
APPENDIX IV
publicly traded companies in the Shenzhen Stock Exchange or Shanghai Stock Exchange in China
that have approximately similar line of business as the Project. Examples of these companies are as
follow:
Name
Market
Capitalisation
(RMB in Million)
Weighting
WACC
Weighted
WACC
4,679.74
0.01
13.50%
0.17%
26,049.92
27,908.67
21,933.08
12,495.97
13,133.70
4,882.68
0.07
0.08
0.06
0.03
0.04
0.01
10.36%
12.11%
12.68%
11.59%
11.54%
9.40%
0.74%
0.93%
0.77%
0.40%
0.42%
0.13%
31,710.90
0.09
11.79%
1.03%
5,065.69
0.01
12.02%
0.17%
5,258.43
0.01
12.63%
0.18%
14,918.40
21,025.20
1,726.72
0.04
0.06
0.00
12.83%
13.50%
12.62%
0.53%
0.78%
0.06%
15,262.92
0.04
13.79%
0.58%
30,157.99
0.08
12.13%
1.01%
13,180.16
0.04
9.79%
0.36%
53,046.50
0.15
9.40%
1.37%
38,844.38
0.11
11.47%
1.23%
22,158.43
0.06
10.11%
0.62%
363,439.48
1.0
Guizhou Yibai Pharmaceutical
Co., Ltd.
Sichuan Hongda Co., Ltd.
Huludao Zinc Industry Co., Ltd.
Baoji Titanium Industry Co., Ltd.
Xiamen Tungsten Co., Ltd.
Zhuzhou Smelter Group Co., Ltd.
Henan Yuguang Gold & Lead
Co., Ltd.
Yunnan Chihong Zinc &
Germanium Co., Ltd.
China Tungsten and Hightech
Materials Co., Ltd.
Tibet Mineral Development
Co., Ltd.
Shandong Gold-Mining Co., Ltd.
Zhongjin Gold Co., Ltd.
Qinghai Jinrui Mineral
Development Co., Ltd.
Inner Mongolia Baotou Steel
Rare-Earth Hi-Tech Co., Ltd.
Shenzhen Zhongjin Lingnan
Nonfemet Company Limited
Chengde Xinxin Vanadium
and Titanium Co., Ltd.
Maanshan Iron & Steel
Company Limited
Tangshan Iron and Steel
Company Limited
Jinan Iron and Steel
Company Ltd.
Total:
Source: From Bloomberg.com at August 2007
* Due to rounding process, the figures in the table may not be added up to totals
– 202 –
11.45%
APPENDIX IV
Secondly, we take the view that cost of capital in a capital investment project is forward looking,
same as the capital investment project itself. Thus, we need to take into consideration of the capital
structure of the project in the future to determine its required cost of capital i.e. discount rate. In this
respect, we understand that it is the Company’s intention to acquire the interest of the Project soon,
after that, the Project will form part of the going concern business of the Company, and that the
capital structure of the Project will be tied up with the Company. We, then, used the WACC of the
Company at 8.99 per cent. (or %) plus the difference between Hong Kong and mainland China (about
0.3 per cent. as quoted from damodaran.com) for discounting the Project’s estimated economic benefit
because the Project and the Company will have the same systematic risk and the same debt capacity
in the future.
Moreover, an additional risk premium, say 6% was added to both scenarios to reflect the possible risk
of this Project.
For the estimation of the long-term growth rate, we have made reference to the Company, China’s
economy and the iron, titanium and vanadium ores markets as a whole.
Having considered the quantity and quality of available data, and each analysed method in providing
a valid indication of discount rate, we have, therefore, assigned a discount rate of 16.4% (rounding)
in the evaluation before inflation factor (2 per cent. per annum) adjustment.
Thus, our financial evaluation of the Project, if successful, subject to the assumptions and financial
parameters stated above became:
WACC
Net Present Value
(RMB)
Range
15.4%
16.4%
17.4%
2,379,000,000
2,255,000,000
2,139,000,000
Optimistic
Expected
Pessimistic
We have conducted a sensitivity analysis to determine whether or not the Project will remain feasible
if changes in the assumptions used in the calculations/projections were to take place. Three sensitivity
analysis scenarios are used in the financial evaluation of the Project:
Case I:
Increase in projected costs by 10 per cent. till 2010 then constant.
WACC
15.4%
16.4%
17.4%
Net Present Value
(RMB)
Range
2,241,000,000
2,118,000,000
2,005,000,000
Optimistic
Expected
Pessimistic
– 203 –
APPENDIX IV
Case II:
Decrease in revenues by 10 per cent till 2010 then constant.
WACC
Net Present Value
(RMB)
Range
2,259,000,000
2,137,000,000
2,025,000,000
Optimistic
Expected
Pessimistic
15.4%
16.4%
17.4%
Case III:
Combination of Cases I and II.
WACC
Net Present Value
(RMB)
Range
2,121,000,000
2,001,000,000
1,891,000,000
Optimistic
Expected
Pessimistic
15.4%
16.4%
17.4%
The summarised sensitivities analysis scenarios indicated that under a pessimistic scenario with a
projected cost increase 10 per cent. and projected sales decrease 10 per cent. simultaneously, there
would have a drop of NPV of RMB 364 million, about 16 per cent. dropped. The Project remains
feasible at an internal rate of return of 16.4% per cent.
Cost increased
Revenue decrease
Combined
Variables
Optimistic
10%
10%
10% both
2,241
2,259
2,121
Net Present Value
RMB (million)
Expected
2,118
2,137
2,001
Pessimistic
2,005
2,025
1,891
RISKS AND ISSUES FACING THE PROJECT
A.
Mineral Resources Classification Systems
In establishing the level of economic viability, the terms Resources and Reserves are the key
terms generally used. Definitions excerpted from the JORC Code adequately reflect the typical
meanings of these two terms.
Resource
•
Mineral Resources — A concentration or occurrence of material of intrinsic economic
interest in or on the Earth’s crust in such form, quality and quantity that there are
reasonable prospects for eventual economic extraction. The location, quantity, grade,
geological characteristics and continuity of a Mineral Resource are known, estimated or
interpreted from specific geological evidence and knowledge. Mineral Resources are
sub-divided, in order of increasing geological confidence, into Inferred, Indicated and
Measured categories.
– 204 –
APPENDIX IV
Reserve
•
Ore Reserve — The economically mineable part of a Measured and/or Indicated Mineral
Resource. It includes diluting materials and allowances for losses, which may occur
when the material is mined. Appropriate assessments and studies have been carried out,
and include consideration of and modification by realistically assumed mining,
metallurgical, economic, marketing, legal, environmental, social and governmental factors.
These assessments demonstrate at the time of the reporting that extraction could
reasonably be justified. Ore Reserves are sub-divided in order of increasing confidence
into Probable Ore Reserves and Proved Ore Reserves.
In summary, resources are considered to be potentially economic to extract, although this has
not been determined at the date of the estimate, and their estimation is based on geologic
knowledge. Various degrees of geologic assurance are applied to resource estimates.
Similarly, estimates of reserves are based on geologic knowledge. However, a number of
additional criteria must be met, including the ability to extract economically as well as meeting
legal, environmental, and a number of other factors.
B.
Exploration Standards
Based on China’s technical standards, exploration is generally divided into four stages, as
follows:
•
Reconnaissance —
This level of work identifies areas of enhanced mineral potential on a regional scale
based primarily on the results of a variety of tasks, including geological studies, regional
geologic mapping, airborne and indirect methods, preliminary field inspection in addition
to geologic inference and extrapolation. The objective is to identify mineralized areas
worthy of further investigation towards deposit identification. Estimates of quantities
should be made only if sufficient data are available and when an analogy with known
deposit(s) of similar geologic character is possible, and then only on an order-of-magnitude
basis.
•
Prospecting —
This level of work comprises a systematic process of searching for a mineral deposit by
narrowing down areas of promising enhanced mineral potential. The methods utilized
are outcrop identification, geological mapping, and indirect methods such as geophysical
and geochemical studies. Limited trenching, drilling, and sampling may be carried out.
The objective is to identify a deposit that will be the target for further exploration.
Estimates of quantities are inferred, based on interpretation of geological, geophysical,
and geochemical results.
– 205 –
APPENDIX IV
•
General Exploration —
This level of work involves the initial delineation of an identified deposit. Methods used
include surface mapping; widely spaced sampling, trenching, and drilling for preliminary
evaluation of mineral quantity and quality (including mineralogical tests on a laboratory
scale if required), and limited interpolation based on indirect methods of investigation.
The objectives are to establish the primary geologic features of the deposit, give a
reasonable indication of continuity, and provide an initial estimate of size, shape, structure,
and grade. The degree of accuracy should be sufficient to allow a decision to be made as
to whether a prefeasibility study and detailed exploration are warranted.
•
Detailed Exploration —
This level of work involves a detailed three-dimensional delineation of a known deposit
achieved through sampling, such as from outcrops, trenches, drill holes, shafts, and
tunnels. Sampling grids are closely spaced such that size, shape, structure, grade, and
other relevant characteristics of the deposit are estimated with a high degree of accuracy.
Processing tests involving bulk samples may be required. A decision whether to conduct
a feasibility study can be made from the information provided by detailed exploration.
As advised, the existing exploration program is designed to meet the requirements of the Detailed
Exploration stage. According to the Technical Report we referred to in this report, the project
was classified by the qualified technical consultant as at Scoping Study or Preliminary
Assessment level.
C.
Budgeted Tonnage
The Technical Report stated three different sets of estimated tonnage on the mineral resources
of the Target Mine — First Portion, namely from the qualified technical consultant, from the
SINOREX and from the ENFI. The figures are summarised below for reader’s easy reference:
Tonnes
Measured (331)
Indicated (332)
Inferred (333)
Total
Technical Report
SINOREX
ENFI
—
16,207,012
259,689
11,880,312
4,338,962
13,294,512
14,390,000
4,390,000
11,680,000
16,466,701
29,513,786
30,460,000
In the Technical Report, the qualified technical consultant explained the reason for the difference
as “The WGM (qualified technical consultant) Indicated Mineral Resource estimate at 16.2
million tonnes @ 19.46% Fe and 3.86% TiO2 compares favourable with ENFI Measured and
Indicated Mineral Resources of 18.78 million tonnes at 19.44% Fe and 3.87% TiO2. WGM
mineral resources were estimated only for Zones I, II, and III. SINOREX estimated 1.7 Mt for
Zones IV and V in classifications 331 and 332, equivalent to Measured and Indicated categories”.
We made no comments on the difference between the measured and the indicated mineral
resources. In the course of our work, we were advised to base on the estimated tonnage by
ENFI to start our evaluation.
– 206 –
APPENDIX IV
D.
Environmental
We were not aware of the content of any environmental audit or other environmental investigation
or soil survey which may have been carried out in the Target Mine and which may draw attention
to any contamination or the possibility of any such contamination as at the Latest Practical
Date of this circular. In undertaking our work, we have been instructed to assume that no
contaminative or potentially contaminative uses have ever been carried out in the Target Mine.
We have not carried out any investigation into past or present uses, either of the Target Mine or
of any neighbouring land, to establish whether there is any contamination or potential for
contamination to the Target Mine from these uses or sites, and have therefore assumed that
none exists. However, should it be established subsequently that contamination, seepage or
pollution exists at the Target Mine or on any neighbouring land, or that the premises have been
or are being put to a contaminative use, this might affect the conclusion now reported. For the
detail of the environmental issue, please refer to the Technical Report in Appendix VII in this
circular with section heading Environmental Assessment for the details.
MATTERS THAT MIGHT AFFECT THE EVALUATION
We noted that the progress of exploration of the mining portion of the Project was technically classified
as at Scoping Study or Preliminary Assessment level in the Technical Report and the qualified technical
consultant opined that this is equivalent to Detailed Exploration level in accordance with the China
exploration standard. In the absence of any approved feasibility study report of the Target
Mine — First Portion by the relevant governmental authorities or reserve estimation of the Target
Mine — First Portion made by the qualified technical consultant as at the Latest Practical Date of this
circular, our work is preliminary in nature and suitable only for making a reference as to whether the
Business Plan, if successful, will yield the economic benefit to the legally interested party in the
Project subject to the known facts and hypothesises as contained in the above documents. We need to
state that this report is not a detailed evaluation of the feasibility of developing a mine and its subsequent
four by-product processing plants as proposed in the Business Plan; rather, it is an objective evaluation
of the financial net present value of the Project as proposed in the Business Plan and the Technical
Report.
No allowance has been made in the evaluation for any charges, mortgages, outstanding premium or
amounts owing on the subjects as contained in the Project.
In the course of evaluation, we have assumed that the Project is able to implement without any legal
impediment (especially from the regulators). Should this not be the case, it will affect the reported
conclusion significantly. The readers are reminded to have their own legal due diligence work on
such issues. No responsibility or liability is assumed.
As at the Latest Practical Date of this circular, we have not identify any adverse news against the
Project which may affect our findings and conclusion in our report. Thus, we are not in the position
to report and comment on its impact (if any) to the Project. However, should it be established
subsequently that such news did exist as at the date of this report, we reserve the right to amend this
report and conclusion reported herein.
– 207 –
APPENDIX IV
SOURCES OF INFORMATION AND ITS VERIFICATION
For the purpose of our work, we were furnished with the Business Plan and the Technical Report and
other documents related to the Project as part of a going concern business of Qinghai Senyuan. The
projections of the future revenues and expenditures as part of a going concern business of Qinghai
Senyuan were prepared by the appointed personnel of Hong Kong FSMI and they are responsible for
the assumptions upon which the projections are based. Having discussed with the management of
Hong Kong FSMI, we understood that the assumptions adopted by them reflect their judgment on the
ability of the Project, if successful, as part of the going concern business of Qinghai Senyuan to
derive economic income within a hypothetical and legally allowed operation term. The projections
are based on their view of the most likely result to be arrived at on a going concern basis. These data
have been utilised without further verification. We have had no reason to doubt the truth and accuracy
of the information that we have been furnished. No responsibility is assumed for the accuracy of the
provided information.
For the purpose of this evaluation, we were furnished with various copies of the above named
documents related to this report and these copies have been referenced without further verifying with
the relevant bodies and/or authorities. We need to state that we are not attorney of laws by nature,
therefore, we are not in the position to advise and comment on the legality and effectiveness of the
documents provided by the management of Hong Kong FSMI via the Company. No responsibility is
assumed.
We have relied solely on the information provided by the management of Hong Kong FSMI via the
Company or its appointed personnel without further verification and have fully accepted advice given
to us on such matters as planning approvals or statutory notices, procedures to obtain necessary
approvals, locations, titles, easements, tenure, occupation, clientele, products (type and class), site
areas and all other relevant matters.
Our procedures to evaluate did not include undertaking a feasibility study of the proposed expansion
of the Project. Accordingly we do not express an opinion as to the merit or demerit of any future
expansion (if any).
Unless otherwise stated, we have not carried out an evaluation on a redevelopment basis on the Target
Mine — First Portion and the study of possible alternative development options and the related
economics do not come within the scope of our report.
We are not contracted to conduct a due diligence to review the existing mining industry and the
official policy on grating out mining right of mineral resources in China. In the course of our work,
we have solely depended on the advice given by the management of Hong Kong FSMI via the Company.
We are unable to accept any responsibility for the reliability of the advice.
Also, we are not contracted to conduct a detailed geological study or pre-feasibility study or feasibility
study or mining report, thus, the report is not a detailed evaluation of the feasibility of developing a
mine in the Target Mine. In the course of our work, we have solely depended on the Technical Report
and advice given by the management of Hong Kong FSMI via the Company. We are unable to accept
any responsibility for the reliability of the advice.
– 208 –
APPENDIX IV
Our engagement did not include an independent land or geological survey to verify the information
provided. Since we are not the authorised person to conduct geological survey in China and the enormous
resources required in conducting a detailed inspection and survey, we were further instructed to conduct
our work based on the information given in the Business Plan and the Technical Report. We are
unable to accept any responsibility for the reliability of the information given in these documents.
Information furnished by others, upon which all or portions of our report are based, is believed to be
reliable but has not been verified in all cases. Our procedures to evaluate or work do not constitute an
audit, review, or compilation of the information provided. Thus, no warranty is made nor liability
assumed for the accuracy of any data, advice, opinions, or estimates identified as being furnished by
others which have been used in formulating our report.
When we adopted the work products from other professions, external service/data providers and/or the
management of Hong Kong FSMI in our evaluation, the assumptions and caveats adopted by them in
arriving at their opinions also apply in our evaluation. The procedures we have taken do not require us
to examine all the evidences, like an auditor, in reaching at our opinion. As we have not performed an
audit, we are not expressing an audit opinion in our evaluation.
We are unable to accept any responsibility for the information that has not been supplied to us by the
management of Hong Kong FSMI via the Company. We have sought and received confirmation from
the management of the Company that no material factors have been omitted from the information
supplied. The report is based upon the assumption of full disclosure between the Company and us of
material and latent facts that may affect the appraisal. No responsibility is assumed for withheld
information (if any).
Unless otherwise stated, the base currency of our report is Renminbi Yuan (“RMB”).
CONCLUSION
Based on the investigation, analysis, stated assumptions, limitations, reasoning and data outlined as
above, and on the evaluation methods employed, it is our opinion that as of the Relevant Date the
financial net present value of the Project (before taking into consideration any transaction costs), as
part of a going concern business of Qinghai Senyuan, if successful, under the Business Plan, is
reasonably stated by the amounts of RENMINBI TWO THOUSAND TWO HUNDRED AND FIFTY
FIVE MILLION YUAN (RMB2,255,000,000).
LIMITING CONDITIONS
This report is provided strictly for the sole use of the Company. Neither the whole nor any part of this
report or any reference made hereto may be included in any published documents, circular or statement,
or published in any way, without our written approval of the form and context in which it may appear.
Nevertheless, we consent to the publication of this report in this circular for the Company’s
shareholders’ reference.
Our findings and conclusion in this report are valid only for the stated purpose and only for the
Relevant Date. We or our personnel shall not be required to give testimony or attendance in court or to
any government agency by reason of this report, and we accept no responsibility whatsoever to any
other person.
– 209 –
APPENDIX IV
No responsibility is taken for changes in market conditions and no obligation is assumed to revise
this report to reflect events or change of government policy or financial condition or other conditions,
which occur subsequent to the date hereof.
Our maximum liability relating to services rendered under this engagement (regardless of form of
action, whether in contract, negligence or otherwise) shall be limited to the charges paid to us for the
portion of its services or work products giving rise to liability. In no event shall we be liable for
consequential, special, incidental or punitive loss, damage or expense (including without limitation,
lost profits, opportunity costs, etc.), even if it has been advised of their possible existence.
The Company is required to indemnify and hold us and our personnel harmless from any claims,
liabilities, costs and expenses (including, without limitation, attorney’s fees and the time of our
personnel involved) brought against, paid or incurred by us at a time and in any way based on the
information made available in connection with our report except to the extent that any such loses,
expenses, damages or liabilities are ultimately determined to be the result of gross negligence of our
engagement team in conducting its work. This provision shall survive even after the termination of
this engagement for any reason.
STATEMENTS
This report is based on generally accepted procedures and practices that rely extensively on assumptions
and considerations, not all of which can be easily quantified or ascertained exactly. While we have
exercised our professional judgement in performing the report, the readers and the client are urged to
consider carefully the nature of such assumptions which are disclosed in this report and should exercise
caution in interpreting this report.
The evaluation has been undertaken by valuer, acting as external valuer, qualified for the purpose of
the evaluation.
We retain a copy of our report together with the data from which it was prepared, and these data and
documents will, according to the Laws of Hong Kong, keep for a period of 6 years from the date of
our report and to be destroyed thereafter. We considered these records confidential, and we do not
permit access to them by anyone, with the exception for law enforcement authorities or court order,
without the Company’s authorisation and prior arrangement made with us. Moreover, we will add the
Company’s information into our client list for our future reference.
– 210 –
APPENDIX IV
We hereby certify that the fee for this service is not contingent upon our conclusion and we have no
present nor prospective interest in the Project, the Company and Qinghai Senyuan.
Yours faithfully,
LCH (Asia-Pacific) Surveyors Limited
Joseph Ho Chin Choi
BSc PgD RPS (GP)
Managing Director
Contributing valuers in the report:
Elsa Ng Hung Mui BSc MSc RPS(GP)
Sam Lai Siu Nam BBA
Vivian Ting Wai BSc MSc
Notes:
1.
Mr. Joseph Ho Chin Choi has been conducting asset valuations and advisory work in Hong Kong, Macau, Taiwan,
mainland China, Japan, South East Asia, Australia, Scotland, Germany, Finland, Guyana, Canada and the United
States of America for various purposes since 1988. He obtained the Examination Certificate of the Uniform Standards
of Professional Appraisal Practice issued by the American Society of Appraisers in 1996. He has extensive experience
in the valuation of various types of intangible assets and power plants, toll road, health products and foodstuffs,
mineral extracting, agricultural property assets, financial services, luxurious consumer goods, pharmaceutical and
biotechnology, electronic consumer products manufactory, telecommunication, media and information technology
related businesses for the listed companies in Hong Kong, Taiwan, Singapore, Canada and the United States of
America. At present, he is a valuer on the List of Property Valuers for Undertaking Valuation for Incorporation or
Reference in Listing Particulars and Circulars and Valuations in Connection with Takeovers and Mergers published
by the HKIS (Hong Kong Institute of Surveyors). Over the length of his professional experience, he has valued and
managed the valuation of a number of mineral extracting industry related projects for merger and acquisition, fund
raising, financial reporting and management reference purposes. He also prepared and signed technical review
reports of mineral extraction industry for public documents purpose.
2.
Ms Elsa Ng Hung Mui has been conducting valuation of real estate properties in Hong Kong since 1994 and has
more than 8 years of experience in valuing properties in mainland China. She obtained a Master Degree of Science
in Finance and involved in various financial assets valuations in the past years. At present, she is a valuer in the
List of Property Valuers for Undertaking Valuation for Incorporation or Reference in Listing Particulars and Circulars
and Valuations in Connection with Takeovers and Mergers published by the HKIS. Over the length of her professional
experiences, she has valued and managed the valuation of a number of mineral extracting industry related projects
for merger and acquisition, fund raising, financial reporting and management reference purposes.
3.
Mr. Sam Lai Siu Nam has been conducting business enterprise, financial and intangible asset valuations in Hong
Kong since 2006. He has experiences in valuing a wide variety of financial assets such as employee stock option,
convertible bond, equity-linked note and financial guarantee contract and business enterprise such as mining,
forestry, property development, toll road and commercial retail business for purposes like merger and acquisition,
disposal and annual accounting.
4.
Ms. Vivian Ting Wai specialises in financial analysis and valuation. She has been conducting business enterprise,
financial and intangible asset valuations in Hong Kong since her graduation of Master of Science Degree in Financial
Mathematics and Actuarial Science. She has experiences in valuing a wide variety of financial assets such as
employee stock option, convertible bond, equity-linked note and various business enterprises.
– 211 –
APPENDIX V
REPORTS ON FORECASTS UNDERLYING
THE VALUATION OF THE TARGET MINE — FIRST PORTION
Set out below are texts of the reports from Grant Thornton and Macquarie (Hong Kong) Limited in
connection with the cash flow forecasts underlying the asset valuation on the Target Mine — First
Portion as at 31 August 2007 and prepared for the purpose of inclusion in this circular.
(A)
REPORT FROM GRANT THORNTON
15 October 2007
The Directors
Suites 5303-04, 53/F
Central Plaza
18 Harbour Road
Wanchai
Hong Kong
Dear Sirs
We have examined the arithmetical accuracy of the calculations of the discounted cash flow
forecast underlying the asset valuation on the mine site held by ‫ࣵڇ‬౲฻ᘊพ඀ೕτࠉʔ̇
(“Qinghai Forest Source Mining Industry Development Company Limited”) as of 31 August
2007 (hereinafter referred to as the “Underlying Forecast”) as set out in Appendix IV “Valuation
of the Target Mine — First Portion” to the circular of Aurora Global Investment Holdings
Limited (the “Company”) and its subsidiaries dated 15 October 2007 (the “Circular”).
Responsibilities
The directors of the Company (the “Directors”) are responsible for the preparation of the
Underlying Forecast and the reasonableness and validity of the assumptions based on which
the Underlying Forecast are prepared (the “Assumptions”).
– 212 –
APPENDIX V
It is our responsibility to form an opinion, based on our work on the arithmetical accuracy of
the calculations of the Underlying Forecast and to report our opinion solely to you, as a body,
solely for the purpose of reporting under paragraph 14.62 (2) of the Rules Governing the Listing
of Securities on the Stock Exchange of Hong Kong Limited and for no other purpose. We
accept no responsibility to any other person in respect of, arising out of, or in connection with
our work. Because the Underlying Forecast relates to cash flows, no accounting policies of the
Company have been adopted in its preparation. The Assumptions include hypothetical
assumptions about future events as detail in Appendix IV to the Circular and management
actions that cannot be confirmed and verified in the same way as past results. These Assumptions
may or may not occur. Even if the events and actions anticipated do occur, actual results are
still likely to be different from the Underlying Forecast and the variation may be material.
Accordingly, we have not reviewed, considered or concluded any work on the reasonableness
and the validity of the Assumptions and do not express opinion whatsoever thereon.
Basis of opinion
We conducted our work in accordance with Hong Kong Standard on Assurance Engagements
3000 “Assurance Engagements Other Than Audits or Reviews of Historical Financial
Information” issued by the Hong Kong Institute of Certified Public Accountants.
We have examined the arithmetical accuracy of the calculations of the Underlying Forecast.
Our work has been undertaken solely to assist the Directors in evaluating whether the Underlying
Forecast, so far as the arithmetical accuracy of the calculations are concerned, has been properly
compiled in accordance with the Assumptions made by the Directors. Our work does not
constitute any valuation on the mine site held by Qinghai Forest Source Mining Industry
Development Company Limited.
Opinion
In our opinion, so far as the arithmetical accuracy of the calculations are concerned, the
Underlying Forecast has been properly compiled in accordance with the Assumptions made by
the Directors.
Yours faithfully,
Grant Thornton
Hong Kong
– 213 –
APPENDIX V
(B)
REPORT FROM MACQUARIE (HONG KONG) LIMITED
15 October 2007
The Directors
Aurora Global Investments Holding Limited
Suites 5303-4, 53/F
Central Plaza
18 Harbour Road
Wanchai, Hong Kong
Dear Sirs,
We refer to the valuation prepared by LCH (Asia Pacific) Surveyors Limited (“LCH”) in relation
to the appraisal of the valuation of a business unit, which comprises the operation of the
Xiaohongshan (Little Red Mountain) iron-titanium-vanadium mine and four various processing
plants with eight products (the “Valuation”) as set out in Appendix IV to the circular of the
Company dated 15 October 2007 (the “Circular”), of which this report forms part of.
We have reviewed the forecasts upon which the Valuation has been made for which you as the
directors of the Company are solely responsible and discussed with you and LCH the information
and documents provided by you which formed part of the basis and assumptions upon which
the forecasts have been prepared. We have also considered the letter from Grant Thornton
dated 15 October 2007 addressed to yourselves as set out in Section (A) of Appendix V to the
Circular regarding the accounting policies and calculations upon which the forecasts have been
made.
On the basis of the foregoing, we are of the opinion that the forecasts upon which the Valuation
has been made, for which you as the directors of the Company are solely responsible, have
been made after due and careful enquiry by you.
Yours faithfully,
Macquarie (Hong Kong) Limited
Willaim JE
Managing Director, Corporate Finance
Xia SHEN
Managing Director, Corporate Finance
– 214 –
APPENDIX VI
PROPERTY VALUATION
The following is the text of the letter, and valuation certificate on property interest of the Group as at
31 August 2007 prepared by LCH for the purpose of inclusion in this circular.
The readers are reminded that the report which follows has been prepared in accordance with the
guidelines set by the HKIS Valuation Standards on Properties, First Edition, 2005 (“HKIS Standards”)
published by the Hong Kong Institute of Surveyors (the “HKIS”) and entitles the valuer to make
assumptions which may on further investigation, for instance by the readers’ legal representative,
prove to be inaccurate. Any exception is clearly stated below. Headings are inserted for convenient
reference only and have no effect in limiting or extending the language of the paragraphs to which
they refer.
17th Floor
Champion Building
287-291 Des Voeux Road Central
Hong Kong
15 October 2007
Suites 5303-04, 53rd Floor
Central Plaza
18 Harbour Road
Wanchai
Hong Kong
Dear Sirs,
In accordance with your instructions to value a property held by Aurora Global Investment Holdings
Limited (hereinafter referred to as the “Company”) and its subsidiaries (hereinafter together with the
Company referred to as the “Group”) in Hui Zhou City (hereinafter referred to as the “Property”),
Guangdong Province of the People’s Republic of China (hereinafter referred to as the “PRC” or
“China”) for the Company’s internal management reference purpose, we confirm that we have made
relevant enquiries and obtained such further information as we consider necessary to support our
opinion of value of the Property as at 31 August 2007 (hereinafter referred to as the “Date of
Valuation”).
– 215 –
APPENDIX VI
PROPERTY VALUATION
We understand that the use of our work product (regardless of form of presentation) would form part
of the Company’s business due diligence to the Property and we have not been engaged to make
specific sale or purchase recommendations. We further understand that the use of our work product
will not supplant other due diligence which a rational investor should conduct in reaching business
decisions regarding the Property. Our findings and conclusion in this valuation are documented in a
valuation report and submitted to the Company at today’s date.
At the request of the management of the Company, we prepared this summary report (including this
letter and the valuation certificate) to summarise our findings and conclusion as documented in the
valuation report for the purpose of inclusion in this circular at today’s date for the Company’s
shareholders’ reference. Terms herein used without definition shall have the same meanings as in the
valuation report, and the assumptions and caveats adopted in the valuation report also apply to this
summary report.
BASIS OF VALUATION AND ASSUMPTIONS
According to the International Valuation Standards (hereinafter referred to as “IVS”), Eighth Edition,
2007 published by the International Valuation Standards Committee, which the HKIS Standards also
follows, there are two valuation bases, namely market value basis and valuation bases other than
market value. In this engagement, we are instructed to have our opinions of value of the Property on
the market value basis.
The term “Market Value” is defined as “the estimated amount for which a property should exchange
on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction
after proper marketing wherein the parties had each acted knowledgeably, prudently and without
compulsion”.
Our valuation has been made on the assumption, that
1.
the legally interested party in the Property sells the Property in the market in its existing state
without the benefit of a deferred terms contract, leaseback, joint venture, management agreement
or any other similar arrangement which would serve to increase the value of the Property;
2.
the legally interested party in the Property has free and uninterrupted rights to use or assign the
property interests for the whole of the unexpired terms as granted and any premiums payable
have already been fully paid; and
3.
the Property can be freely disposed and transferred free of all encumbrances at the Date of
Valuation for its existing or alternative uses in the market to both local and overseas purchasers
without payment of any premium to the government.
Should this not be the case, it will have adverse impact to the value as reported.
– 216 –
APPENDIX VI
PROPERTY VALUATION
There are three generally accepted approaches to value in arriving at the market value of a property
on an absolute title basis, namely the Market Approach, the Cost Approach and the Income Approach.
Having considered the general and inherent characteristics of the Property, we have adopted the
depreciated replacement cost approach which is an application of the Cost Approach in valuing
specialised properties like the Property. The use of this approach requires an estimate of the market
value of the land use rights for its existing use, and an estimate of the new replacement cost of the
buildings and other site works from which deductions are then made to allow for age, condition, and
functional obsolescence taken into account of the site formation cost and those public utilities
connection charges to the Property. The land use rights of the Property has been determined from
market-based evidences by analysing similar sales or offerings of comparable properties.
The valuation of the Property is on the assumption that the Property is subject to the test of adequate
potential profitability of the business having due regard to the value of the total assets employed and
the nature of the operation.
By using this approach, the land should be assumed to have the benefit of planning permission for the
replacement of the existing buildings and it is always necessary when valuing the land, to have regard
to the manner in which the land is developed by the existing buildings and site works, and the extent
to which these realise the full potential value of the land. When considering a notional replacement
site, it should normally be regarded as having the same physical and location characteristics as the
actual site, other than characteristics of the actual site which are not relevant, or are of no value, to the
existing use. In considering the buildings, the gross replacement cost of the buildings should take
into consideration everything which is necessary to complete the construction from a new green field
site to provide buildings as they are, at the date of valuation, fit for and capable of being occupied and
used for the current use. These costs to be estimated are not to erect buildings in the future but have
the buildings available for occupation at the date of valuation, the work having commenced at the
appropriate time.
We need to state that our opinion of value of the Property is not necessarily intended to represent the
amount that might be realised from disposition of land use rights or various buildings of the Property
on piece meal basis in the open market.
MATTERS THAT MIGHT AFFECT THE VALUE REPORTED
No allowance has been made in our valuation for any charges, mortgages, outstanding premium or
amounts owing on the Property. Unless otherwise stated, it is assumed that the Property is free from
all encumbrances, restrictions, and outgoings of an onerous nature which could affect its value.
As at the Latest Practicable Date of this circular, we are unable to identify any adverse news against
the Property which may affect the reported value in our work product. Thus, we are not in the position
to report and comment on its impact (if any) to the Property. However, should it be established
subsequently that such news did exist at the Date of Valuation, we reserve the right to adjust the value
reported herein.
– 217 –
APPENDIX VI
PROPERTY VALUATION
ESTABLISHMENT OF TITLES
Due to the market value basis of valuation, the management of the Company provided us the necessary
documents to support that the legally interested party in the Property, i.e. the Group has free and
uninterrupted rights to assign, to mortgage or to let the Property (in this instance, an absolute title)
free of all encumbrances and any premiums payable have already been paid in full or outstanding
procedures have been completed. However, our procedures to value as agreed with the management
of the Company did not require us to conduct legal due diligence on the legality and formality on the
way that the legally interested party obtained the Property from the relevant authorities.
For the sake of valuation, we have been provided with copies of the title documents regarding the
Property. However, we have not inspected the original documents to verify ownership or to verify any
amendment which may not appear on the copies handed to us. Due to inherent defects in the land
registration system of China, we are unable to inspect the original documents from the relevant land
registration departments to verify the existing titles of the property or any material encumbrances
that might be attached to the property. We are not legal professional and are unable to ascertain the
titles and to report on any encumbrances that may be registered against the property. No responsibility
and liability is assumed.
In our valuation, we have assumed that the legally interested party in the Property has obtained all the
approval and/or endorsement from the relevant authorities, and that there would have no legal
impediment (especially from the regulators) for the legally interested party to continue the ownership
of the Property. Should this not be the case, it will affect our conclusion in this report significantly.
The readers or party who has interest to the Property are reminded to have their own legal due diligence
work on such issues. No responsibility or liability is assumed.
INSPECTIONS AND INVESTIGATIONS OF THE PROPERTY IN ACCORDANCE WITH
VS4 OF THE HKIS STANDARDS
As part of the agreed-upon procedures, we made reference to our previous inspection records of the
Property in respect of which we have been provided with such information as we have requested for
the purpose of our valuation. We have not inspected those parts of the Property which were covered,
unexposed or inaccessible and such parts have been assumed to be in reasonable condition. We cannot
express an opinion about or advice upon the condition of the Property and our work product should
not be taken as making any implied representation or statement about the condition of the Property.
No structural survey, investigation or examination has been made, but in the course of our inspections,
we did not note any serious defects in the Property inspected. We are not, however, able to report that
the Property is free from rot, infestation or any other structural defects. No tests were carried out to
the utilities (if any) and we are unable to identify those utilities covered, unexposed or inaccessible.
– 218 –
APPENDIX VI
PROPERTY VALUATION
Our valuation has been made on the assumption that no unauthorised alteration, extension or addition
has been made in the Property, and that the inspection and the use of this report do not purport to be
a building survey of the Property. We have assumed that the Property is free of rot and inherent
danger or unsuitable materials and techniques.
No allowance has been made in our valuation for any charges, mortgages or amounts owing on the
Property. Unless otherwise stated, it is assumed that the Property is free from encumbrances,
restrictions, and outgoings of an onerous nature which could affect its value.
We have not carried out on-site measurements to verify the correctness of the areas of the Property,
but have assumed that the areas shown on the documents and handed to us are correct. All dimensions,
measurements and areas are approximations.
Our engagement and the agreed procedures to value the Property did not include an independent land
survey to verify the legal boundaries of the Property. We need to state that we are not in the land
survey profession, therefore, we are not in the position to verify or ascertain the correctness of the
legal boundaries of such Property that appeared on the documents handed to us. No responsibility
from our part is assumed. The management of the Company or interested party in the Property should
conduct their own legal boundaries due diligence work.
We have not arranged for any investigation to be carried out to determine whether or not any deleterious
or hazardous material has been used in the construction of the Property, or has since been incorporated,
and we are therefore unable to report that the Property is free from risk in this respect. For the
purpose of this valuation, we have assumed that such investigation would not disclose the presence of
any such material to any significant extent.
We are not aware of the content of any environmental audit or other environmental investigation or
soil survey which may have been carried out on the Property and which may draw attention to any
contamination or the possibility of any such contamination. In undertaking our work, we have been
instructed to assume that no contaminative or potentially contaminative uses have ever been carried
out in the Property. We have not carried out any investigation into past or present uses, either of the
Property or of any neighbouring land, to establish whether there is any contamination or potential for
contamination to the Property from these uses or sites, and have therefore assumed that none exists.
However, should it be established subsequently that contamination, seepage or pollution exists at the
Property or on any neighbouring land, or that the premises have been or are being put to a contaminative
use, this might reduce the value now reported.
SOURCES OF INFORMATION AND ITS VERIFICATION IN ACCORDANCE WITH VS5
OF THE HKIS STANDARDS
We have relied solely on the information provided by the management of the Company or its appointed
personnel without further verification and have fully accepted advice given to us on such matters as
planning approvals or statutory notices, locations, titles, easements, tenure, occupation, site and floor
areas and all other relevant matters.
– 219 –
APPENDIX VI
PROPERTY VALUATION
The scope of valuation has been determined by reference to the property list provided by the
management of the Company. The management of the Company has confirmed to us that it has no
property interests other than those specified on the list supplied to us.
Unless otherwise stated, we have not carried out any valuation on a redevelopment basis and the
study of possible alternative development options and the related economics do not come within the
scope of our work product.
Information furnished by others, upon which all or portions of our work product are based, is believed
to be reliable but has not been verified in all cases. Our procedures to value or work do not constitute
an audit, review, or compilation of the information provided. Thus, no warranty is made nor liability
assumed for the accuracy of any data, advice, opinions, or estimates identified as being furnished by
others which have been used in formulating our work product.
When we adopted the work products from other professions, external data providers and the
management of the Company in our valuation, the assumptions and caveats that adopted by them in
arriving at their figures also applied in our valuation. The procedures we have taken do not provide
all the evidence that would be required in an audit and, as we have not performed an audit, accordingly,
we do not express an audit opinion.
We are unable to accept any responsibility for the information that has not been supplied to us by the
management of the Company or its appointed personnel. Also, we have sought and received
confirmation from the management of the Company or its appointed personnel that no materials
factors have been omitted from the information supplied. Our analysis and valuation are based upon
full disclosure between us and the Company of material and latent facts that may affect the valuation.
Unless otherwise stated, all monetary amounts are in Renminbi Yuan (“RMB”)
LIMITING CONDITIONS OF THIS SUMMARY REPORT
Our opinion of value of the Property in this summary report is valid only for the stated purpose and
only for the Date of Valuation, and for the sole use of the named Company. We or our personnel shall
not be required to give testimony or attendance in court or to any government agency by reason of
this summary report, and the valuer accepts no responsibility whatsoever to any other person.
No responsibility is taken for changes in market conditions and local government policy and no
obligation is assumed to revise the attached valuation certificate to reflect events or conditions, which
occur or make known to us subsequent to the date hereof.
Neither the whole nor any part of this summary report or any reference made hereto may be included
in any published documents, circular or statement, or published in any way, without our written
approval of the form and context in which it may appear. Nonetheless, we consent to the publication
of this summary report in a circular to the Company’s shareholders.
– 220 –
APPENDIX VI
PROPERTY VALUATION
Our maximum liability relating to services rendered under this engagement (regardless of form of
action, whether in contract, negligence or otherwise) shall be limited to the charges paid to us for the
portion of its services or work products giving rise to liability. In no event shall we be liable for
consequential, special, incidental or punitive loss, damage or expense (including without limitation,
lost profits, opportunity costs, etc.), even if it has been advised of their possible existence.
The Company is required to indemnify and hold us and our personnel harmless from any claims,
liabilities, costs and expenses (including, without limitation, attorney’s fees and the time of our
personnel involved) brought against, paid or incurred by us at a time and in any way based on the
information made available in connection with our report except to the extent that any such loses,
expenses, damages or liabilities are ultimately determined to be the result of gross negligence of our
engagement team in conducting its work. This provision shall survive even after the termination of
this engagement for any reason.
STATEMENTS
The attached valuation certificate is prepared in line with the requirements contained in Chapter 5
and Practice Note No. 12 of the Rules Governing the Listing of Securities on The Stock Exchange of
Hong Kong Limited as well as the guidelines contained in the HKIS Standards. The valuation has
been undertaken by valuers, acting as external valuers, qualified for the purpose of the valuation.
We retain a copy of this summary report and the detailed valuation report together with the data from
which it was prepared, and these data and documents will, according to the Laws of Hong Kong, keep
for a period of 6 years from the date of this report and to be destroyed thereafter. We considered these
records confidential, and we do not permit access to them by anyone, with the exception for law
enforcement authorities or court order, without the Company’s authorisation and prior arrangement
made with us. Moreover, we will add the Company’s information into our client list for our future
reference.
– 221 –
APPENDIX VI
PROPERTY VALUATION
We hereby certify that the fee for this service is not contingent upon our conclusion of value and we
have no present nor prospective interest in the Property, the Company, the Group or the value reported.
The valuation certificate is attached.
Yours faithfully,
LCH (Asia-Pacific) Surveyors Limited
Elsa Ng Hung Mui
B.Sc. M.Sc. RPS (GP)
Associate Director
Ms. Elsa Ng Hung Mui is a Registered Professional Surveyor who has been conducting valuation of real estate properties
in Hong Kong since 1994 and has more than 8 years of experience in valuing properties in mainland China. She is a valuer
on the List of Property Valuers for Undertaking Valuation for Incorporation or Reference in Listing Particulars and Circulars
and Valuations in Connection with Takeovers and Mergers published by the HKIS.
– 222 –
APPENDIX VI
PROPERTY VALUATION
VALUATION CERTIFICATE
Property
Description and tenure
A factory complex
erected on a parcel of
land located at Wei Bu
Industrial District
Qiu Chang Town
Hui Yang District
Hui Zhou City
Guangdong Province
The People’s Republic
of China
The property comprises a parcel of
l a n d h av i n g a s i t e a r e a o f
approximately 23,914 sq.m. There
are 7 various buildings and
structures having a total gross floor
area of approximately 15,250.56
sq.m. erected thereon. The
buildings and structures are single
to 2-storey in height and were
completed 1993 (see Note 2 below).
Particulars of
occupancy
As confirmed by the
Company, the property
is currently occupied
by the Group for
production, warehouse
and ancillary office
purposes.
Amount of
valuation in existing
state attributable to
the Group as at
31 August 2007
RMB
27,500,000
(100% interest)
The property is subject to a right
to use the land for a term till 5
February 2046 for industrial
purpose.
Notes:
1.
The right to possess the land is held by the State and the right to use the land has been granted by the State and
transferred to య ή ̟ ‫ ׭‬ʿ Δ ಇ ́ ଐ τ ࠉ ʔ ̇ Hui Zhou Orient Manufacturing Co., Ltd., an indirectly
wholly-owned subsidiary of the Company via the following ways: (i) According to a real estate transfer agreement
dated 22 December 2003 and made between ૯Γɻ࣏එ྆ʔ̇ Shenzhen China Nuclear Company Group and
యඈԾௗṄΔಇτࠉʔ̇ Huiyang Xie Kai Cheng Carpet Co., Ltd (which was renewed to యή̟‫׭‬ʿΔಇ́
ଐτࠉʔ̇ Hui Zhou Orient Manufacturing Co., Ltd.), the Property was transferred to యඈԾௗṄΔಇτࠉʔ
̇ Huiyang Xie Kai Cheng Carpet Co., Ltd. at a consideration of HK$26,000,000. (ii) a State-owned Land Use
Rights Certificate known as Hui Yang Guo Yang (2004) Di 0500030 Hao and issued by the People’s Government
of Huiyang District of Hui Zhou City for a term till 5 February 2046. The land has a site area of approximately
23,914 sq. m. and is restricted for industrial purpose.
– 223 –
APPENDIX VI
2.
PROPERTY VALUATION
According to seven various Realty Title Certificates — Yue Fang Di Zheng Zi Di C1956101, C1956102, C1956103,
C1956104, C1956274, C1956275, and C1956276 Hao issued by the People’s Government of Huiyang District of
Hui Zhou City and all dated 27 January 2005, the legally interested party in the Property having a total gross floor
area of approximately 15,250.56 sq. m. was యή̟‫׭‬ʿΔಇ́ଐτࠉʔ̇ Hui Zhou Orient Carpet Manufacturing
Co., Ltd.. The area breakdowns for each of the buildings and structures covered by the Certificates are listed as
below:
Buildings/Structures
(i)
3.
a single storey warehouse
Year Built
Gross Floor Area (sq.m.)
1993
4,866.25
(ii)
a single storey workshop
1993
2,388.15
(iii)
a 2-storey carpet workshop
1993
7,161.30
(iv)
a single storey boiler room
1993
477.96
(v)
a single storey transformer room
1993
252.02
(vi)
a single storey store room
1993
50.02
(vii)
a single storey toilet
1993
54.86
యή̟‫׭‬ʿΔಇ́ଐτࠉʔ̇ Hui Zhou Orient Carpet Manufacturing Co., Ltd. is a wholly-owned foreign
enterprise with a valid Business Enterprise License for operation from 11 June 1993 to 10 June 2008.
– 224 –
APPENDIX VII
TECHNICAL REPORT
The following is the text of the technical assessment report in respect of the Target Mine prepared by
Watts, Griffis and McOuat Limited, for the purpose of inclusion in this circular.
AN INDEPENDENT
TECHNICAL ASSESSMENT ON THE
LITTLE RED MOUNTAIN
IRON-TITANIUM-VANADIUM DEPOSIT,
XIAO HONG SHAN, PEOPLE’S REPUBLIC OF CHINA
FOR
prepared by
Velasquez Spring, P.Eng.
Senior Geologist
and
Robert S. Didur, P.Eng.
Senior Associate Mining Engineer
15 October 2007
Toronto, Canada
Watts, Griffis and McOuat Limited
Consulting Geologists and Engineers
– 225 –
APPENDIX VII
TECHNICAL REPORT
TABLE OF CONTENTS
Page
1.
SUMMARY .........................................................................................................................
231
2.
INTRODUCTION, BACKGROUND AND SCOPE OF WORK .................................
244
2.1
2.2
INTRODUCTION ......................................................................................................
BACKGROUND AND SCOPE OF WORK .............................................................
244
244
OBJECTIVES AND WORK PROGRAM ......................................................................
245
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
PROGRAM OBJECTIVES .......................................................................................
PURPOSE OF THE REPORT ...................................................................................
REPORTING STANDARD .......................................................................................
WORK PROGRAM ...................................................................................................
PROJECT TEAM .......................................................................................................
STATEMENT OF WGM INDEPENDENCE ...........................................................
WGM EXPERIENCE ................................................................................................
FORWARD-LOOKING STATEMENTS ..................................................................
245
245
245
246
246
246
247
247
PROPERTY DESCRIPTION AND LOCATION ..........................................................
247
4.1
4.2
LOCATION ................................................................................................................
PROPERTY DESCRIPTION ....................................................................................
247
248
ACCESS, CLIMATE, LOCAL RESOURCES,
INFRASTRUCTURE AND PHYSIOGRAPHY ........................................................
250
5.1
5.2
5.3
5.4
5.5
ACCESS .....................................................................................................................
CLIMATE ...................................................................................................................
LOCAL RESOURCES ..............................................................................................
INFRASTRUCTURE .................................................................................................
PHYSIOGRAPHY .....................................................................................................
250
250
250
251
251
GEOLOGICAL SETTING ...............................................................................................
252
6.1
6.2
6.3
INTRODUCTION ......................................................................................................
REGIONAL GEOLOGY ...........................................................................................
PROPERTY GEOLOGY ...........................................................................................
252
253
257
7.
DEPOSIT TYPES ...............................................................................................................
260
8.
MINERALIZATION ..........................................................................................................
260
3.
4.
5.
6.
– 226 –
APPENDIX VII
TECHNICAL REPORT
TABLE OF CONTENTS
Page
9.
EXPLORATION .................................................................................................................
262
10.
DRILLING ..........................................................................................................................
263
11.
SAMPLING METHOD AND APPROACH ....................................................................
264
12.
SAMPLE PREPARATION, ANALYSES AND SECURITY ........................................
264
13.
DATA VERIFICATION .....................................................................................................
265
13.1 GENERAL .................................................................................................................
13.2 WGM SITE VISIT SAMPLING ...............................................................................
265
265
MINERAL RESOURCE AND MINERAL RESERVE ESTIMATES ........................
267
14.1
14.2
14.3
14.4
14.5
GENERAL .................................................................................................................
GENERAL MINERAL RESOURCE ESTIMATION PROCEDURES ..................
DATABASE ................................................................................................................
GEOLOGICAL MODELLING PROCEDURES .....................................................
DATABASE PREPARATION, STATISTICAL
ANALYSIS AND COMPOSITING ......................................................................
MINERAL RESOURCE BLOCK MODELLING ...................................................
MINERAL RESOURCE CLASSIFICATION AND TABULATION .....................
SINOREX MINERAL RESOURCE ESTIMATE ....................................................
ENFI MINERAL RESOURCE AND MINERAL RESERVE ESTIMATES..........
267
269
269
270
EXPLORATION POTENTIAL ........................................................................................
285
15.1 MINERAL RESOURCE POTENTIAL ....................................................................
15.2 MINERAL RESERVE POTENTIAL........................................................................
285
286
16.
ADJACENT PROPERTIES ..............................................................................................
288
17.
INTRODUCTION AND DESIGN ASSUMPTIONS .....................................................
288
18.
MINING ASSESSMENT ...................................................................................................
290
18.1
18.2
18.3
18.4
290
291
293
295
14.
14.6
14.7
14.8
14.9
15.
INTRODUCTION AND MINE DESCRIPTION .....................................................
MINE DESIGN ..........................................................................................................
FINAL PIT .................................................................................................................
MINE PRODUCTION ...............................................................................................
– 227 –
274
275
280
281
283
APPENDIX VII
TECHNICAL REPORT
TABLE OF CONTENTS
Page
19.
MINERAL PROCESSING AND METALLURGICAL TESTING .............................
295
19.1
19.2
19.3
19.4
19.5
INITIAL BENCH SCALE TESTS ...........................................................................
PILOT PLANT SCALE DRESSING TEST .............................................................
BULK SAMPLES ......................................................................................................
ADDITIONAL SAMPLES ........................................................................................
GRADE DISTRIBUTION OF BULK SAMPLE MATERIAL
(FROM HKFSS DATA) .........................................................................................
295
297
297
298
INFRASTRUCTURE .........................................................................................................
300
20.1
20.2
20.3
20.4
20.5
20.6
20.7
INFRASTRUCTURE ISSUES ..................................................................................
ROADS .......................................................................................................................
POWER ......................................................................................................................
WATER .......................................................................................................................
LAND .........................................................................................................................
MINE SITE LAYOUT ...............................................................................................
METALLURGICAL PLANT SITE ..........................................................................
300
300
300
300
301
301
301
21.
ENVIRONMENTAL ASSESSMENT (REF. ENFI) ......................................................
301
22.
CAPITAL COST SUMMARY ..........................................................................................
302
22.1
22.2
22.3
22.4
22.5
22.6
PRE-CONSTRUCTION ............................................................................................
INFRASTRUCTURE .................................................................................................
MINING .....................................................................................................................
ORE DRESSING PLANT .........................................................................................
METALLURGICAL PLANTS ..................................................................................
TOTAL PROJECT CAPITAL....................................................................................
302
302
302
303
303
304
OPERATING COSTS ........................................................................................................
305
23.1
23.2
23.3
23.4
23.5
23.6
MINING .....................................................................................................................
ORE DRESSING PLANT .........................................................................................
MINE MANAGEMENT ............................................................................................
RESOURCES TAX ....................................................................................................
CONCENTRATE TRANSPORT ..............................................................................
METALLURGICAL PLANTS ..................................................................................
305
306
306
306
307
307
CONCLUSIONS AND RECOMMENDATIONS ...........................................................
309
APPENDIX 1: EXPLORATION PERMIT .........................................................................
APPENDIX 2: CERTIFICATE OF ANALYSIS .................................................................
312
314
20.
23.
24.
– 228 –
299
APPENDIX VII
TECHNICAL REPORT
TABLE OF CONTENTS
Page
CERTIFICATES ...........................................................................................................................
319
REFERENCES ..............................................................................................................................
329
LIST OF TABLES
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
Geological events history of China .....................................................................................
Characteristics of the orebodies ..........................................................................................
Average chemical analysis for the different Existing LRM Mine ore types .....................
ALS analyses ........................................................................................................................
SGS analyses ........................................................................................................................
Existing LRM Mine Indicated and Inferred Mineral Resources prepared by WGM
(using a 15% TFe cutoff grade) .......................................................................................
Basic statistics of 6 ft composites .......................................................................................
Block model grid parameters ...............................................................................................
Existing LRM Mine Indicated Resources
(prepared by WGM at different cutoff grades) ...............................................................
Existing LRM Mine Indicated and Inferred Mineral Resources (prepared by WGM
using a 15% TFe cutoff grade) ........................................................................................
Sinorex resource estimates ..................................................................................................
Mineral resource summary ..................................................................................................
Price RMB/t ..........................................................................................................................
Concentrate forecast basis ...................................................................................................
Mineral reserves and stripping results ................................................................................
Capital cost estimate ............................................................................................................
Opex (direct reduction of iron concentrate)........................................................................
Opex (direct reduction of titanium concentrate) ................................................................
252
260
261
265
266
267
274
279
280
280
282
283
286
289
294
304
308
309
LIST OF FIGURES
1.
2.
3.
4.
5.
6.
7.
8.
9.
Location map ........................................................................................................................
Property concession map .....................................................................................................
Regional geology ..................................................................................................................
Exploration drillholes and trenches geology map ..............................................................
Cross section Line 15 ...........................................................................................................
Drillhole and trench plan .....................................................................................................
3-D Wireframes of the ore zones .........................................................................................
Normal Histogram for All Zone composites ......................................................................
Normal Histogram for Zone 101 composites .....................................................................
– 229 –
248
249
254
257
263
272
273
275
275
APPENDIX VII
TECHNICAL REPORT
TABLE OF CONTENTS
LIST OF FIGURES
Page
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Normal probability plot for All Zone composites ..............................................................
Normal probability plot for Zone 101 composites .............................................................
Block model — section line 15 ...........................................................................................
Design pit overlain onto magnetic contour map .................................................................
Planned product line .............................................................................................................
Pit design ..............................................................................................................................
Distribution of grade and weight .........................................................................................
– 230 –
276
276
277
277
278
278
281
281
289
293
299
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY
Watts, Griffis and McOuat Limited (“WGM”) was retained by Aurora Global Investment
Holdings Limited (“Company”) to review the current engineering studies being carried out by
China ENFI Engineering Corporation (“ENFI”) on the Xiao Hong Shan, Little Red Mountain,
Iron, Titanium, Vanadium property (“Existing LRM Mine”) located in Inner Mongolia
Autonomous Region, People’s Republic of China. Aurora Global is a company listed on the
Hong Kong Stock Exchange and is considering acquiring an interest in the Existing LRM
Mine from Hong Kong Forest Source Mining Industry Holding Company Limited (“Hong
Kong FSMI”). Aurora Global requires an independent technical assessment report on the
Existing LRM Mine for inclusion in a circular to be issued by Aurora Global to fulfil some
regulatory requirements in Hong Kong.
Velasquez Spring, P.Eng., WGM Senior Geologist and qualified person (“QP”) conducted an
initial site visit to Existing LRM Mine on October 14 and 15, 2005, and also visited the Chinese
sample preparation and analytical laboratory in the city of Jiuguan PRC. A second visit by V.
Spring to China between May 16 to 22, 2006 reviewed the exploration works being carried out
by Sinorex Resource and Environment Engineering (Beijing) Co. Ltd. “Characterization
samples” were collected by V. Spring on both visits and carried back to Canada and sent to an
assay laboratory.
During July 12 to 18, 2007, Robert Didur, P.Eng., WGM Senior Associate Mining Engineer,
and V. Spring travelled to Beijing, PRC and held numerous meetings and discussions with
ENFI and HKFS personnel to review the progress of the engineering studies being carried out
by ENFI and to prepare an independent technical assessment report.
The Little Red Mountain mineral concession is located 180 km north of the city of Jiayugan in
central-western PRC between latitudes 41˚25’00"N and 41˚27’00"N, and longitudes 97˚58’00"E
and 98˚01’00"E. The Existing LRM Mine comprises a single mineral exploration concession
covering 15.47 km2 granted to QFS and valid until November 25, 2008.
The Existing LRM Mine is readily accessible by vehicle some 150 km north on the paved
highway from Jiayuguan then west for about 60 km. The city of Jiayuguan is an important steel
producing commercial and industrial centre with a large workforce and all modern facilities,
banking, communications, transport, medical and housing.
The climate is a continental desert climate and is characteristically windy coming from the
west throughout almost the entire year. The annual precipitation is less than 60 mm and the
average annual temperature is approximately 6.8˚C. The project is located in the northern part
of central-western China in the western district of Inner Mongolia Autonomous Region, is
some 25 km from the border of Gansu Province. Topographically it is found in gentle, well
rounded, low-hilly land forms, in the eastern end of the Beishan Mountain Range, on the western
margin of the Bandanjilin Desert. The region is without any local resources and all goods,
equipment, food and supplies must be brought into the project. No nearby power source is
available and no water wells, or natural springs, occur in the concession area.
– 231 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
Initial exploration consisted of a magnetic survey of the area carried out from 1966 to 1967. In
1980, an aerial survey was carried out on the Xiaohong Mountain magnetic anomaly and
concluded that the magnetic anomalies were caused by the gabbros, and magnetite
mineralization. A total of 37 magnetic anomalies were outlined by a ground geophysical survey,
18 of which are exposed magnetite orebodies, 6 are blind orebodies and the remaining 13 are
caused by gabbros with magnetite mineralization. Seven separate titaniferous magnetite deposits
were detected requiring additional exploration.
In 2004, a preliminary geological map, trenches and shallow shafts and mapping of the iron
orebodies were completed, as well as a 1:2,000 scale topographic mapping of the 2 km2 Existing
LRM Mine (within the larger permit exploration area).
The Existing LRM Mine occurs within a sequence of early Proterozoic meta-sedimentary rocks
located along the northern margin of the North China platform. In the northern part of the
concession area, large areas of Jurassic, Cretaceous and Tertiary age rocks outcrop while in the
southern part, a wide range of Quaternary age rocks outcrop. In general, the deposit is made up
of two, broad, west to east geological belts: the middle belt, the Gong Po Quan-Hong Liu Da
Quan and the southern belt the structural zone of the south hill to the Tianshan Mountain.
Faulting in the region occurs mainly as thrust faults striking near E-W that were later crosscut
by NE, NW and NS faults. Complex fold structures were caused by fault movements,
accompanied by strong magmatic activity. The Existing LRM Mine has been subjected to
frequent magmatic activity from early Paleozoic through to Cretaceous times but a late Paleozoic
period experienced the most intense, wide spread, largest and different types of intrusives. The
late Paleozoic has been divided into three periods (early, mid and late). The early Devonian
intrusives are mainly plagioclase granites and quartz diorites in the form of stocks. The
Carboniferous includes batholiths of granites and granodiorites and are mainly in the southern
part of Existing LRM Mine while in Permian they are mainly ultramafic, gabbro diabase, biotiteplagioclase granites and diorite intrusives.
The Permian age gabbro is the principal intrusive at Existing LRM Mine occurring in an E-W
direction over 2 km and in a 1 km N-S direction. The vanadium-titanium-magnetite mineralized
bodies occur within the gabbros. Most of the ore mineralization is fine-grained. Major fold
structures were destroyed at Existing LRM Mine by the intrusion of the later Paleozoic gabbros.
Faults and fracturing however are well developed.
Apart from intrusive rocks two sedimentary lithological units are found at Existing LRM Mine,
the sediments of the Gutongjing Group of the Great Wall System of middle Proterozoic age,
and the unconsolidated sediments of the Quaternary.
– 232 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
The Existing LRM Mine type of deposit is described as a late stage magmatic segregation from
the parent gabbroic magma. The segregation, a vanadium bearing titaniferous magnetite, was
at a later time, due to tectonic movements, injected along layers of the gabbro. A total of eight
separate lenticular bodies of magnetite (numbered I to VIII make up the present mineral resource)
occur within the gabbro, concentrated in the western end of the detailed study area. The bodies
strike between 090˚ to 120˚ and dip south, or southwestward at angles of between 80˚ to 88˚.
The magnetite bodies vary in width, both along strike and down dip, with bodies I to IV of
relatively larger size. In general, according to Chinese classification, the magnetite bodies are
described as medium scale and ranging from simple to complex in shape but with a good
continuity of the bodies (i.e., few faults) and gradual changes in grades.
Iron mineralization, a primary metal of interest occurs mainly in minerals of titaniferous
magnetite, ilmenite, magnetite and some pyrrhotite occurring as disseminations and as discrete
lenticular masses within the gabbro. The mineralization has been classified in three categories:
1) oxidized (down to depths of 1.7 and 12.9 m); 2) compound (10 to less than 30 m depth); and,
3) primary (below 30 m depth).
The total iron content of the resource varies from 17.0% to 31.7% and is classified under the
Chinese categories as a medium grade iron-ore deposit requiring mineral dressing for
commercialisation. Secondary metals of interest are titanium and vanadium (intergrown with
the iron) with the percentages of TiO2 and V2O5 in the iron ores levels of commercial interest as
stipulated in People’s Republic of China. Also of interest is the P2O5 content of the ore.
In early 2006, SINOREX Resource and Environment Engineering (Beijing) Co., Ltd.
(“Sinorex”) was commissioned by Hong Kong FSMI to commence the first stage and second
stage exploration programs, as mandated by the Chinese requirements. Detailed exploration
during the first and second stage programs followed with drilling, trenching and sampling of
the orebodies with the data points spaced at approximately 40 to 60 m. Drilling was concentrated
in an area of about 0.7 km2 (i.e. Target Mine — First Portion) on the west side of the 2 km x 1
km area (i.e. Target Mine). Additional exploration will be required to evaluate the remaining
portion (east side) of the 2 km2 area.
The holes were drilled in a N28˚15’E direction, at angles near -50˚ along crosslines on a grid at
a spacing of 100 m. The location of the drillhole collars were controlled by GPS readings.
Surveying of the holes was by single shot down-the-hole readings, carried out at 50 m intervals.
The core was photographed, then geologically logged and the Rock Quality Designations
(“RQD”) determined and sawed in half at intervals of near 1.5 m. Each sample was separately
bagged, labelled and sealed for shipment to the assay laboratory.
Geological mapping was carried out in the trenches on one wall and on the bottom of the trench
at a scale of 1:100. Trench samples, about 6 kg to 7 kg, were collected at intervals of
approximately 1.5 m and all sample locations GPS controlled.
– 233 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
WGM visited the No 4 Laboratory, Gansu Bureau of Geology and Mineral Resources where
the complete sample preparation was reviewed; 5% of the total number of samples are repeated
as a duplicate samples, however no blank, or standard samples are routinely entered into the
sample flow. Various analytical methods are carried out to determine the metal contents. The
comparison of the data derived from Chinese laboratories and from Canadian laboratories show
good agreement. Future drilling programs should consider sample preparation on site to control
Quality Assurance/Quality Control as required by NI 43-101 regulations.
WGM’s field examination confirmed the geological setting of the diamond drillholes and
trenches. The audit of selected drill core verified the reported mineralized intervals, the sample
intervals, the core recovery and the reported RQD of the rocks. WGM feels confident that the
geology as represented on the property geological map fairly represents the geology as observed.
HKFS had engaged Golder Associates Consulting Ltd. (“Golder”) of Australia mid-way during
the SINOREX drilling program to estimate the Mineral Resources from a block model developed
from the drillholes completed at that time.
Mineral Resource
WGM prepared the following Mineral Resource estimates for the three main Existing LRM
Mine zones based on 3D wireframes interpreted by Golder. The estimates were prepared from
a block model using GEMCOM software and exclude all blocks grading less than 15% TFe.
The estimates were prepared in accordance with the provisions of NI 43-101 guidelines and
the Canadian Institute of Mining, Metallurgy and Petroleum (“CIM”) standards.
Existing LRM Mine Indicated and Inferred Mineral Resources
prepared by WGM (using a 15% TFe cutoff grade)
Tonnes
%TFe
%TiO2
%V2O5
6,821,539
7,326,882
2,058,591
20.13
19.34
17.68
4.03
3.84
3.40
0.04
0.03
0.03
16,207,012
19.46
3.86
0.03
Zone 103
259,689
17.69
3.25
0.02
Total Inferred
259,689
17.69
3.25
0.02
Zone
Zone 101
Zone 102
Zone 103
Total Indicated
Note: WGM has lowered the cutoff grade of the TFe from the 17% as stipulated in the China regulations for iron
deposits to 15% because of the increased recoverable values in the ore from TiO2 and V2O5.
– 234 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
SINOREX Mineral Resource estimated the Mineral Resource at Existing LRM Mine using
China’s traditional “geometrical method”.
According to the Chinese “Standards of Geological Exploration of Iron, Manganese and Chrome
Mines”, the Mineral Resources are divided into three categories: category (331); category (332);
and, category (333). The three categories approximate the CIM Mineral Resource categories of
Measured (331), Indicated (332) and Inferred (333), however, WGM reports the following
Mineral Resources for historical purposes only and because they are relevant, but has not
attempted to rationalize them to conform with the guidelines published by the CIM standards.
The author checked the methodology used for these Mineral Resources and has no reason to
dispute them. The total SINOREX estimated Mineral Resource is 29,513,786 tonnes @ 19.64%
TFe and 3.53% TiO2.
The sum of the Chinese Mineral Resource estimate for categories 331 and 332 at a 17% TFe
cutoff grade and the WGM block model Mineral Resource estimate at a 15% TFe cutoff grade
give almost the same figures. However, the Chinese category 333 allows the mineral resource
estimate to be projected downwards one quarter the length of the orebody, much of this tonnage
would not be included in the WGM block model estimate. Nonetheless, WGM believes there is
an excellent probability that with future exploration (diamond drilling) as recommended in
this report that these additional Chinese mineral resources will be confirmed.
The exploration programs carried out to-date within the 0.7 km2 area (i.e. Target Mine — First
Portion) of the 2 km2 (i.e. Target Mine) detailed exploration area have determined the geological
setting and the overall geometry of seven, separate, lenticular orebodies of titaniferous magnetite
that contain recoverable amounts of iron, titanium vanadium and phosphorus. Based on WGM’s
block model analysis and CIM standards, an Indicated Mineral Resource of 16.2 million tonnes
at 19.5% TFe and 3.86% TiO2 and 0.03% V2O5 has been estimated for the Target Mine — First
Portion. The remaining portion of the 2 km2 exploration area that has not yet been investigated
by diamond drilling, and the untested covered magnetic anomalies outside of the detailed
exploration area could contain similar titaniferous magnetite bodies that after confirmation
drilling, could increase the total estimated mineral resource.
The following Mineral Resource estimate was developed by ENFI using Datamine software
from the same database used by WGM.
Mineral Resource Summary
Classification
Millions Tonnes
Total %Fe
%TiO2
Measured
Indicated
Measured and Indicated
14.39
4.39
18.78
19.45
19.41
19.44
3.89
3.82
3.87
Inferred
11.68
19.75
3.21
– 235 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
WGM Indicated Mineral Resource estimate of 16.2 million tonnes @ 19.46% Fe and 3.86%
TiO2 compares favourably with ENFI Measured and Indicated Mineral Resources of 18.78
million tonnes at 19.44% Fe and 3.87% TiO2. WGM mineral resources were estimated only for
Zones I, II, and III. SINOREX estimated 1.7 Mt for Zones IV and V in classifications 331 and
332, equivalent to Measured and Indicated categories.
ENFI developed the Mineral Reserves for the project using pit optimization software in
Datamine. Optimization is based on Measured, Indicated and Inferred Mineral Resources from
the grade block model plus assumptions concerning product recovery, price, operating costs,
pit slope, dilution and mining losses. Mineral Reserves reflect a final design pit that incorporates
a haul road.
Costs used for pit optimization comprise operating costs required for concentrate production
and include mine and ore dressing cost centres.
Revenue for the pit optimization process is limited to the value of concentrates produced. Value
derived from downstream product upgrading is not included.
Mineral Reserves
Mine recoverable Mineral Reserves contained within the designed open pit total 12.0 million
tonnes @ 19.5% Fe and 4.2% TiO2.
WGM believe that ENFI have taken a conservative approach with respect to pit optimization
parameters. Potential exists to increase mineable reserves through changes to optimization
parameters including decreasing operating costs and increasing concentrate revenue.
Depreciation charges should be removed from Management cost centre since depreciation is
an Indirect cost and only direct costs should be used in pit optimization. Concentrate
transportation and community costs should be added as these are costs directly related to
production and delivery of concentrate to the downstream metallurgical plants. The net effect
should be lower operating costs.
ENFI has used significantly lower prices for concentrates as compared with the market prices
from the last 6 to 18 months; recent prices would generate 36% to 59% higher concentrate
revenue.
ENFI recently conducted a sensitivity analysis on the effect of increasing market price on
mineable reserves, results suggest that with a 20% price increase the mineable reserves are
increased by 29% to 15.5 Mt.
– 236 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
Operation Plan Overview
The proposed project is based on establishment of stand-alone northern operations including a
2.6 Mt/a Open Pit Mine and Ore Dressing Plant at Existing LRM Mine. Key support
infrastructure required for the operation includes shops and personnel accommodation facilities.
Development of a single infrastructure corridor between the northern and southern operation,
includes a new Road, Power and Water supply. Planning has been on the basis of achieving
potential ultimate capacity of 5.0 Mt/a mining and concentrating.
Preliminary metallurgical planning has been based on developing sufficient Mineral Resources/
Reserves to support a 2.6 Mt/a mining and concentrating operation.
The preliminary ore dressing flow sheet comprises:
•
Crushing and Grinding;
•
Weak Magnetic separation producing Iron Concentrate @ 56-57% Fe (contains 5% TiO2);
•
Strong Magnetic separation followed by Flotation producing:
—
Phosphate Concentrate @ 28-35% P2O5; and
—
Titanium Concentrate @ 43-48% TiO2.
Annual Concentrate production forecast is based on 2.6 Mt/a ore mined and processed.
Concentrate yield figures used by ENFI in their pit optimization assumptions are lower than
the following which are based on the metallurgical tests conducted by Changsha Research
Institute Mining and Metallurgy in October 2006.
Magnetic Separation
Flotation
Flotation
Iron Concentrate
Titanium Concentrate
Phosphorus Concentrate
12.6%
6.0%
4.8%
Concentrate will be trucked approximately 150 km to the new metallurgical complex at Qing
Shan (Yumen).
Downstream metallurgical plants will be constructed to produce upgraded and increased value
products including Direct Reduced Iron products (including high grade iron powder and
associated titanium oxide and vanadium oxide) and Direct Reduced Titanium products (including
high grade titanium oxide and iron concentrate).
– 237 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
Mining Plan
Open pit mining has been selected on the basis of proximity to surface of the orebodies and
their relatively simplicity. Open pit mining would utilize readily available equipment and
operations would follow a standard drill, blast, load and haul methodology.
Ore would be delivered to primary crushers (average 2 km one-way haul) and waste rock would
be hauled to waste dumps (1.5 km average one-way haul).
Pre-production stripping is estimated at 1.5 years to properly develop the mine for production.
Mine equipment selected by ENFI reflects typical mining equipment that should be readily
available in China and is based on the proposed annual production rate. The mine life based on
the current mineable resources is 5 years.
A larger pit/reserve will likely be required to support positive economics for a 2.6 Mt/a ore
dressing plant and related downstream metallurgical plants.
An optimized pit was developed by ENFI using NPV (net present value) software in Datamine
utilizing Measured and Indicated Resources only followed by practical design to incorporate a
final haul road.
The revenue component of the block model was based on concentrate equivalent value assuming
three concentrates: iron, titanium and phosphorus.
Concentrate product prices used are 55% Fe conc. — RMB480/t conc., 47% TiO2 conc —
RMB700/t conc., and 28% P2O5 conc — RMB280/t conc.
Operating costs used for ENFI pit optimization were Mining — RMB6.5/tonne mined, Ore
Dressing — RMB40.0/tonne, Management — RMB32.0/tonne, and Resource Tax — RMB5.6/
tonne
A discount rate of 8% was applied and pit slope angles were set at 47 degrees, and the following
criteria were used to establish the final pit design:
•
Bench height 12 m;
•
Bench face angle 60 degrees;
•
Final pit slope 47 degrees;
•
Haul road gradient 8%;
•
Haul road width 12 m; and
•
Dilution 3%; and Mining losses 3%.
– 238 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
Mining Plan (continued)
Design criteria are considered by WGM to be reasonable based on information provided for
this review.
The final design results in an open pit with an overall length of 760 m; maximum width of 320
m; and maximum depth of 144 m which WGM considers to be reasonable and should support
the scale of production proposed.
Mineral Reserves are 12.0 million tonnes averaging 19.5% Fe and 4.2% TiO2. The designed pit
contains waste rock totalling 20.2 million tonnes for an average stripping ratio of 1.68 with a
pre-production stripping period of 1.5 years. First year production is scheduled at 1.5 Mt ore.
Subsequent annual ore production is targeted at 2.6 Mt per year.
Infrastructure
Infrastructure planning has been on the basis of achieving potential capacity at a rate of 5.0 Mt/
a (mining and concentrating). Key infrastructure components that would be impacted by a
change in the production level are Water and Power supply.
The provision for Land and Infrastructure rebate is contingent on the project’s commitment to
the development of the metallurgical plant(s) near Yumen.
A 160 km, 30 cm water pipeline with 4 pumping stations will be constructed from the Chijinxia
Reservoir to service the northern operations. The Chijinxia Reservoir will provide water for
the metallurgical plants. It is estimated that 80-85% of the process water will be recycled.
Initial estimate of the land required is approximately 1,000 acres (Chinese mu) and ultimately
2,000 acres. Land purchased from the government is estimated at RMB80 million with
approximately 90% of the cost to be returned to support the development of the Infrastructure.
No site layout designs have yet been developed for the mine and metallurgical plant.
All proposed project sites have been visited and the data collected by ENFI Environmental
personnel. While the data is incomplete the sites are deemed to have minimal issues. There are
no concerns for the Road, Power and Pipeline corridor. Although Existing LRM Mine is located
within the Asian Biological Zone and a Military Zone, permission to proceed has already been
granted from the appropriate government agencies.
– 239 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
Capital Cost Estimate
Capital costs for the project were provided by Hong Kong FSMI and Central South University
(CSU). The HKFS Business Plan (May 2007) outlines costs for a proposed 5.0 Mt/a production
facility including pre-development costs, infrastructure, mining, ore dressing plant and
metallurgical plants. CSU have estimated capital costs for revised downstream metallurgical
processing plants based on recent bench scale testwork.
A detailed review of pre-development and infrastructure costs by WGM concludes that these
are reasonable costs. Following discussion with Hong Kong FSMI, and using a fixed/variable
cost approach, WGM have estimated various scaling factors to generate the possible cost for a
2.6 Mt/a project.
The overall cost estimate, developed principally from cost manuals and comparison to other
operations, is considered by WGM to be preliminary in nature. ENFI plan to develop a feasibility
level cost estimate later in 2007 based on finalized production schedules and flowsheets for ore
dressing and metallurgical processing.
The following table outlines the preliminary estimated RMB 1.13 billion CAPEX required for
construction of the Existing LRM Mine project.
CAPITAL COST ESTIMATE
Capital Expenditure
Production Rate
Pre-Development
Expenses
Infrastructure
Business Plan Adjust Factor
RMB M
% of total
Mt/a — Ore
5.0
0.52
2.6
Roads
Power
Water
Communications
Community
Land
61
162
154
114
9
83
0
1.0
0.60
0.90
0.90
1.00
0.66
61
97
139
103
9
55
8
5%
9%
12%
9%
1%
5%
1%
Subtotal
522
0.79
410
36%
RMB M
Forecast
RMB M
% of total
Capital Expenditure
Mining
Forecast
RMB M
Equipment
Pre-production strip
230
20
0.60
1.00
138
20
12%
2%
Subtotal
250
0.63
158
14%
– 240 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
Capital Cost Estimate (continued)
Capital Expenditure
RMB M
Forecast
RMB M
% of total
240
869
21%
77%
Total Changsha Input
174
90
264
15%
8%
23%
TOTAL INITIAL
PROJECT CAPEX
1,133
100%
Ore Dressing Plant
Total HKFS Input
Metallurgical Plants
400
1,233
Iron DRI
Titanium DRI
0.60
0.70
Operating Cost Estimate
Operating costs for the Existing LRM Mine project were obtained from three sources: a) Hong
Kong FSMI Business Plan (May 2007) plus discussion with HKFS project team; b) ENFI; and,
c) the Central South University. All operating costs are considered by WGM to be preliminary
nature.
The operating costs for Mining provided by HKFS is RMB15.5/t ore; this includes the mining
cost of waste rock. Based on ENFI pit strip ratio of 1.7 tonnes waste per tonne ore, the calculated
unit mining cost is therefore RMB5.8/t. WGM agrees that the proposed mining costs appear
reasonable.
Ore Dressing Plant operating cost per HKFS for the production of three concentrates, iron,
titanium and phosphate, and based on an average yield of 23.2%, is RMB48.8/t ore. WGM
agree that the proposed ore dressing plant costs appear reasonable.
An estimated Resources Tax of RMB 5.6/t ore was used by ENFI in the pit optimization is net
of rebate per government policy.
Costs of trucking concentrate from the ore dressing plant to the metallurgical plant were
estimated by Hong Kong FSMI at RMB80/t concentrate. WGM agree that this cost is reasonable
considering the haulage distance involved. Based on an average plant yield of 23.2%, concentrate
trucking cost is equivalent to RMB18.5/t ore mined.
– 241 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
Operating Cost Estimate (continued)
Operating cost for the Direct Reduction Iron metallurgical plant developed by Central South
University on the basis of 147 kt DRI annual production is RMB1,784/t DRI. The by-product
credits for titanium concentrate and powdered vanadium oxide are estimated at RMB828/t
DRI for a net cost of RMB956/t DRI. Similarly the operating costs for Direction Reduction
Titanium on the basis of 62 kt high grade TiO2 annual production is estimated at RMB1,343/t
with by-product credits at RMB1,012/t for a net cost of RMB956/t high grade TiO2. WGM
considers the operating cost estimates by Central South University to be preliminary and these
costs will need to be adjusted when the engineering studies are completed.
Conclusions and Recommendations
The following are the conclusions and recommendations by WGM from the technical review.
WGM recognize that considerable technical studies have been carried out on the deposit to
date and that additional studies are in progress however, the studies completed are insufficient
to support a full feasibility study.
Mineral Resource and Mineral Reserve estimates have been developed using acceptable industry
standards and procedures. The mineral deposit, however, has not been fully defined; potential
for increasing resources and reserves is considered to be good.
Sufficient Mineral Reserves have been identified to support the proposed 2.6 million tonne per
year Mining and Ore Dressing operation for only five years. Additions to mineral reserves
should be a high priority objective of project development.
Detailed studies of a feasibility level have been completed by ENFI. However, specific reports,
particularly those in support of mineral dressing and metallurgical assumptions, and specifically
the finalization of the flowsheets have not yet been received and therefore not reviewed for this
technical assessment. Recent metallurgical results, issued by Central South University, are
based only on bench scale testwork and comparison to similar operations.
Key assumptions for metallurgical recoveries are not yet confirmed. Significant differences
exist between concentrate yields currently projected by ENFI and Changsha.
The capital cost estimate for mine, ore dressing plant, infrastructure and iron and titanium direct
reduction plants is estimated to be RMB1.13 billion. Cost estimates for both Capex and Opex are
largely adapted from similar operations or developed from cost manuals and should be considered
preliminary (Ó35%) at best. Proposed Mining and Ore Dressing operating costs are considered
reasonable. All cost estimates for a feasibility study level must be developed in detail.
– 242 –
APPENDIX VII
1.
TECHNICAL REPORT
SUMMARY (continued)
Conclusions and Recommendations (continued)
In summary, most of the business projections appear to be based on preliminary studies and
cost estimates. The WGM technical assessment review therefore concludes that the Xiao Hong
Shan project is technically at a Scoping Study or Preliminary Assessment level.
WGM has concluded that the preliminary studies show that the Xiao Hong Shan deposit merits
ongoing exploration and could potentially support a viable project provided that sufficient
additional Mineral Resource/Reserves are developed.
WGM agrees with ENFI that additional Mineral Resources/Reserves are required and that
diamond drilling in both the proposed pit area and to the east over the untested magnetic
anomalies be continued to fully assess the potential of the site.
WGM recommends the sample preparation of the subsamples for analysis be prepared at an
independent laboratory prior to being sent for analysis and to include blind, standard, repeat
and blank samples to meet international quality assurance/quality control standards.
WGM recognizes that much of the ENFI feasibility study is based on the assumption of achieving
a 2.6 Mt/year production rate. Efforts should therefore be focussed on increasing mineral
resources/reserves through on-site exploration activities as well as re-assessment of potentially
recoverable mineral reserves through on-going pit optimization studies. Assessment of threshold
mineral reserves required to support minimum project investment is highly recommended both
to minimize financial exposure and to optimize project capacity and development timeline.
WGM recommends that full documentation of all technical studies, key assumptions, and cost
estimates become an on-going process as part of the project development plan and that a Project
Director assume full responsibility for organization and management of all aspects of project
development.
– 243 –
APPENDIX VII
2.
TECHNICAL REPORT
INTRODUCTION, BACKGROUND AND SCOPE OF WORK
2.1
INTRODUCTION
Aurora Global Investment Holdings Limited (“Aurora Global”) is a company listed
on the Stock Exchange of Hong Kong (under stock code 353). Aurora Global is
considering acquiring an interest in the Xiao Hong Shan, Little Red Mountain iron,
titanium, vanadium property located in Inner Mongolia Autonomous Region, People’s
Republic of China (“PRC”) from Hong Kong Forest Source Mining Industry Holding
Company Limited (“HKFS”). Aurora Global requires an independent technical
assessment report on the property for inclusion in a circular to be issued by Aurora
Global to fulfil some regulatory requirements in Hong Kong.
2.2
BACKGROUND AND SCOPE OF WORK
2.2.1 BACKGROUND OF THE PROJECT
In a July 2007 engagement letter, Aurora Global Investment Holdings Limited
(“Aurora Global”) contracted Watts, Griffis and McOuat Limited (“WGM”) to
review the current engineering studies being carried out by China ENFI
Engineering Corporation (“ENFI”) of Beijing, PRC for HKFS and to prepare an
independent technical assessment report of the project.
WGM has made site visits to the property in October 2005, and in May 2006,
completed a NI 43-101 compliant report by Velasquez Spring., P.Eng., Senior
Geologist, title “A Review of the Iron-Vanadium-Titanium Deposit, Little Red
Mountain, People’s Republic of China for Hong Kong Forest Source Mining
Industry Holding Company Limited” dated April 12, 2007. WGM met with ENFI
and HKFS personnel in Beijing, PRC during July 12 to 18, 2007. Since no additional
technical work has been conducted on the property since WGM’s last visit, it was
decided that a new site-visit was not required at this time.
2.2.2 SCOPE OF WORK
The scope of work comprised of a review of the current engineering studies being
carried out by China ENFI of Beijing, PRC for Aurora Global and preparation of
an independent technical assessment report of the project.
To complete the scope of work, WGM held numerous meetings and discussions
with various ENFI personnel in Beijing, PRC during July 12 to 18, 2007 and
reviewed the progress and results of the engineering studies presently being carried
out by ENFI as well as the additional studies programmed to be done.
WGM also held several meetings with HKFS to review HKFS’s latest Business
Plan for Project Development, Market and Product Development and Preliminary
Economic Analysis.
– 244 –
APPENDIX VII
2.
TECHNICAL REPORT
INTRODUCTION, BACKGROUND AND SCOPE OF WORK (continued)
2.2
BACKGROUND AND SCOPE OF WORK (continued)
2.2.2 SCOPE OF WORK (continued)
WGM reviewed prioritized and supplemented the HKFS proposed drillholes for
2007. The initial six drillholes (1,350 m) to begin drilling at the end of July are
designed to locate additional Mineral Resources/Reserves on the southwest and
eastern sides of the ENFI designed pit.
3.
OBJECTIVES AND WORK PROGRAM
3.1
PROGRAM OBJECTIVES
The objectives of the program were to complete the scope of work by reviewing the
available data and completing a draft independent technical assessment report by August
15, 2007. The final report is to be completed by August 29, 2007. Also, prior to completing
the draft report, a list of the technical data was to be provided to LCH, near the end of
July 2007, so that they could commence the valuation process.
3.2
PURPOSE OF THE REPORT
Aurora Global has entered into an arrangement with HKFS to acquire an interest in the
mineral property and requires the report for inclusion in a circular to be issued by Aurora
Global to fulfil some regulatory requirements in Hong Kong.
3.3
REPORTING STANDARD
This report has been prepared to comply with the guidelines of Canadian Securities
Administrators National Instrument 43-101 (“NI 43-101”) that governs all public
disclosure of scientific and technical information concerning mineral projects based on
information prepared by a Qualified Person (“QP”). A QP is an individual who is an
engineer or geoscientist with at least five years of experience in mineral exploration,
mine development or operation or mineral project assessment or any combination of
these; has experience relevant to the subject matter of the mineral project and the technical
report; and is a member on good standings of a professional association.
This report is not a Valuation Report and does not express an opinion as to the value of
mineral assets. Aspects reviewed in this report, do include product prices, socio-political
issues and environmental considerations, however, WGM does not express an opinion
regarding the specific value of the assets and tenements involved.
– 245 –
APPENDIX VII
3.
TECHNICAL REPORT
OBJECTIVES AND WORK PROGRAM (continued)
3.4
WORK PROGRAM
The work program included the following:
•
•
•
•
•
•
•
•
3.5
A review of all available data prior to departure to Beijing PRC;
Travel to Beijing, PRC;
Discussions with ENFI technical personnel in Beijing, PRC;
Discussions with HKFS personnel in Beijing, PRC;
Collection of data and documents;
Return to Canada and data review;
Preparation of a draft report to Aurora Global for comment; and
Completion of final Independent Technical Assessment Report.
PROJECT TEAM
The WGM project team and their duties are as follows:
Joe Hinzer, P.Geo., President and Senior Geologist
Velasquez Spring., P.Eng., Senior Geologist
Robert S. Didur, P.Eng.,
Team Leader
Principal Geologist Team Coordinator
Production and Costs
John Starkey, P.Eng., Senior Associate Metallurgist
Dorota El-Rassi, P.Eng., Geological Engineer
Peter Zhang, WGM Chief Representative,
Processing and Metallurgy
Resource Estimate
Translator
Beijing Office
3.6
STATEMENT OF WGM INDEPENDENCE
Neither WGM nor any of the authors of this report have any material present or contingent
interest in the outcome of this report, nor do they have any pecuniary or other interest
that could be reasonably regarded as being capable of affecting their independence or
that of WGM.
WGM has no prior association with Aurora Global in regard to the mineral assets that
are the subject of this Report. WGM has no beneficial interest in the outcome of the
technical assessment being capable of affecting its independence.
WGM’s fee for completing this Technical Assessment report is based on its normal
professional daily rates plus reimbursement of incidental expenses. The payment of that
professional fee is not contingent upon the outcome of the report.
– 246 –
APPENDIX VII
3.
TECHNICAL REPORT
OBJECTIVES AND WORK PROGRAM (continued)
3.7
WGM EXPERIENCE
Watts, Griffis and McOuat Limited is an independent firm of consulting geologists and
engineers. Since 1962, WGM has successfully completed projects for the international
mining community on precious, base and rare metals, industrial minerals and diamonds.
From offices in Toronto, Vancouver and Beijing, WGM provides consulting services to
mining and exploration companies, Canadian and international banks, financing agencies,
governments and law firms.
In addition to its permanent staff members, the firm is supported by a large group of
high-calibre associates specializing in all of the key aspects of exploration and mining.
This team of permanent and associate professionals gives WGM’s clients the assurance
that all of their specific geological and mining needs are met.
WGM’s proficiency in project management and its technical expertise have contributed
to the firm’s worldwide reputation of excellence and solid project execution.
3.8
FORWARD-LOOKING STATEMENTS
Estimates of mineral resources, ore reserves and mine and processing plant production
are inherently forward-looking statements, which being projections of future performance
will necessarily differ from the actual performance. The errors in such projections result
from the inherent uncertainties in the interpretation of geologic data, in variations in the
execution of mining and processing plans, in the ability to meet construction and
production schedules due to many factors including weather, availability of necessary
equipment and supplies, fluctuating prices and changes in regulations.
The possible sources of error in the forward-looking statements are addressed in more
detail in the appropriate sections of this report. Also provided in the report are comments
on the risks inherent in the different mining and processing operations.
4.
PROPERTY DESCRIPTION AND LOCATION
4.1
LOCATION
The Xiaohongshan (Little Red Mountain) vanadium mineral concession is located 180
km north of the city of Jiayugan, central-western PRC. The property’s geographic
coordinates lie between latitudes 41˚25’00"N and 41˚27’00"N, and longitudes 97˚58’00"E
and 98˚01’00"E, in Erjina Banner of Inner Mongolia Autonomous Region just east of
the Gansu Provincial border (Figure 1).
– 247 –
APPENDIX VII
4.
TECHNICAL REPORT
PROPERTY DESCRIPTION AND LOCATION (continued)
4.2
PROPERTY DESCRIPTION
The Existing LRM Mine comprises a single mineral exploration concession (Figure 2,
Appendix 1) licence number 0100000410104, covering 15.47 km2 that was granted to
QHF on November 25, 2004 and was valid until November 25, 2005. Subsequently the
concession was re-granted and the exploration rights are valid until November 25, 2008.
The mineral concession is located between Longitudes 97˚58’00”E and 98˚01’00”E and
Latitudes 41˚25’00”N and 41˚27’00”N.
The detailed exploration has been concentrated in a 2 km x 1 km rectangular area oriented
NW-SE with the following corner coordinates:
41˚26’44”N
41˚26’14”N
41˚25’45”N
41˚26’15”N
Figure 1.
97˚58’51”E
98˚00’07”E
97˚59’47”E
97˚58’31”E
Location map
– 248 –
APPENDIX VII
4.
TECHNICAL REPORT
PROPERTY DESCRIPTION AND LOCATION (continued)
4.2
PROPERTY DESCRIPTION (continued)
Figure 2.
Property concession map
– 249 –
APPENDIX VII
5.
TECHNICAL REPORT
AC C E S S , C L I M AT E , L O C A L R E S O U R C E S , I N F R A S T RU C T U R E A N D
PHYSIOGRAPHY
5.1
ACCESS
The Existing LRM Mine mineral concession is readily accessible by vehicle driving
north some 150 km on the paved highway from Jiuquan and Jiayuguan through Beishan
towards Yeh-ma-ching and the border of Mongolia, then west for about 60 km on gravel
road across the Bandanjilin desert. Total driving time is approximately 5 hours.
Jiuquan and Jiayuguan are connected by daily rail service from the capital city of Beijing.
Air China Northwest also provides daily flights to and from Beijing and to several other
Chinese cities.
5.2
CLIMATE
The climate is classified as a continental desert climate and is characteristically windy
with the winds coming from the west throughout almost the entire year. The annual
precipitation is less than 60 mm and the average annual temperature is approximately
6.8˚C. The maximum temperature occurs in July at near 40˚C with the minimum in
January at -36˚C. A high evaporation rate is present with the annual total at more than
3,000 mm.
5.3
LOCAL RESOURCES
The project is located in the Bandanjilin desert without any local resources. All goods,
equipment, food and supplies (including water) must be brought into the project from
the nearest cities, Jiuquan and Jiayuguan, or from the nearby Yumen Village.
No nearby power source is available and no water wells, or natural springs, occur in the
concession area. However, it is believed that a limited supply of probable poor quality
water, sufficient to meet the requirements during construction and mine production should
be available in the nearby Huangshan Basin but the basin will require the exploration by
the drilling of water-well holes. Vegetation is limited to a few grasses and thorny bushes
along the valleys of the dry arroyos. The area is uninhabited except for the occasional
nomadic Mongolian herdsman tending to their sheep and goats.
Wild camels are present in the area and wolves are reported.
– 250 –
APPENDIX VII
5.
TECHNICAL REPORT
AC C E S S , C L I M AT E , L O C A L R E S O U R C E S , I N F R A S T RU C T U R E A N D
PHYSIOGRAPHY (continued)
5.4
INFRASTRUCTURE
The project, located in the northern part of central-western China in the western district
of Inner Mongolia Autonomous Region, is some 25 km from the border of Gansu Province.
Gansu Province covers an area of approximately 450,000 km2 and has a population
estimated at near 25 million. It is a rugged, barren province that consists mainly of
mountains and deserts. It has played an important part in Chinese history as it lies along
the famed Silk Road, the ancient highway along which camel caravans carried goods in
and out of China. Traditionally the towns/cities of Gansu have been established at oases
along the caravan route particularly where agriculture was possible. Gansu is home to a
variety of minority people, including the Hui, Mongols, Tibetans and Kazaks. Although
the Chinese Han are now in the vast majority.
The city of Jiayuguan is an example of a city developed along the Silk Road and is now
an important steel producing commercial and industrial centre. A poorly paved road that
runs north, and provides part of the access to the Existing LRM Mine, is the main road
transporting iron ore from the Black Eagle Iron Mine some 270 km north from Jiayuguan.
Jiayuguan, and the nearby city of Jiuquan, contain all the infrastructure for industry and
commerce with a large work force and all modern facilities that include banking
communications, transport, medical, housing and the closest city to the Chinese Space
Craft Launch Centre.
5.5
PHYSIOGRAPHY
The concession is located in a gentle, well rounded, low-hilly land forms, in the eastern
end of the Beishan Mountain Range, on the western margin of the Bandanjilin Desert.
Elevations range from 1,470 m above sea level (“asl”) to 1,580 m asl with the difference
in elevation generally about 60 m.
– 251 –
APPENDIX VII
6.
TECHNICAL REPORT
GEOLOGICAL SETTING
6.1
INTRODUCTION
China is subdivided into a number of geological domains which reflect current modelling
of China’s evolution over time (Table 1). The model is largely based on continental
accretion with attendant tectonism and subduction. Movement by the Siberian Plate to
the north and the Pacific-Philippine plates to the east were major factors in China’s
evolution.
TABLE 1
GEOLOGICAL EVENTS HISTORY OF CHINA
Geological Time Scale
Era
Period
Geotectonics
Tectonic
Development
Ma.
Tectonic or
Magmatic Period
Quaternary
Cenozoic
Tertiary
Uplift of Qingzang Plateau.
Himalayan
2.48
66
Cretaceous
Intracontinental
Development
135
P
Mesozoic
H
A
N
E
R
O
Z
O
I
C
Jurassic
Yanshanian
205
Triassic
Indosinian
250
Permian
285
Carboniferous
Variscan
355
Devonian
Paleozoic
405
Silurian
435
Ordovician
Continental
Margin
Development
Caledonian
500
Cambrian
600
P
R
O
T
E
R
O
Z
O
I
C
A
R
C
H
E
A
N
Late
Proterozoic
Sinian
Sinian
800
Qingbaikouan
Jinningian
1000
Middle
Proterozoic
Early
Proterozoic
Jixianian
1400 Continental
Changchengian
Hutuoan
Major Geological Event
Sibaoan
Block
Development
1800
Convergence of Himalayan plate and
Xizang-Yunnan Plate.
South China Sea area rifting begins.
Intracontinental faulting begins in
circum-Pacific region and eastern
China.
Convergence of Xizang-Yunnan and
South China plates and South China
and Tarim-North China Plates.
Convergence of Tarim-North China
and Siberian Plates; Closure of
paleo-Tethys.
Rifting on western margin of
Yangtze Block.
Consolidation and accretion of SE
part of the Yangtze Block;
Formation of Paleo-Chinese
continent.
Development of Tianshan-Hinggan,
Kunlun-Qinling and Nanhua
continental margins.
Formation of primitive Chinese
continent including North China,
Tarim, Yangtze and Cathaysia
Blocks.
Formation of North China Block.
Luliangian
2500
Wutaian
Late Archean
Fupingian
Early to
Middle
Archean
2600
2900
Qianxiian
Development
of Continental
Nucleus
Fupingian
Qianxiian
Formation of North China nucleus
and western Sichuan, Jiamusi and
South Tarim micronuclei.
(after C. Yuki, 2000)
– 252 –
APPENDIX VII
6.
TECHNICAL REPORT
GEOLOGICAL SETTING (continued)
6.1
INTRODUCTION (continued)
The regional geological setting of the Existing LRM Mine is:
“within the Tianshan-Hinggan Domain along the northern border of China, stretching
across the Xinjiang Uygur Autonomous Region, Gansu Province, the Inner Mongolia
Autonomous Region, Jilin Province and Heilongjiang Province. The domain is bounded
by neighbouring countries including Mongolia, Russia, Kazakhstan, Kirghizia,
Tadzhikistan and Korea, and is adjacent mainly to Tarim North China domain on the
south.
“Tectonically, this domain occupies the continental-margin mobile belts on both sides of
the Palaeo-Asiatic ocean and the northern part of the Circum-Pacific continental-margin
mobile belt. Strata of all ages are developed in the domain and are mostly of mobile and
transitional types. Magmatic activity was intense, with paired magmatic rock belts
occurring orderly on the margins of palaeo-continents. The geology of this domain is
also characterized by the diversity of metamorphism, metamorphic facies and
metamorphic rock types. The earth’s crust within the limits of the Tianshan-Hinggan
domain has experienced three megastages of evolution i.e., the continental basement
formation and evolution megastage, the Paleo-Asiatic ocean’s marginal accretion and
the Circum-Pacific tectonics and intracontinental faulting megastage. The Palaeo-Asiatic
ocean’s marginal accretion and evolution megastage is the principal one characterized
by the drifting of the Junggar, Ili, Xilinhot and Jiamusi microblocks in the Paleo-Asiatic
ocean. These blocks and the old continents on both sides of the ocean accreted gradually
in the Caledonian and early Variscan and, finally, the south and north continents collided
and converged together in the late Variscan. Afterwards, the western part of the domain
tectonically underwent mainly fault-block uplifting and subsidence, while the eastern
part was involved in the Circum-Pacific continental-margin mobilization and was enrolled
as a part of the mobile zone with the NE-ENE-trending tectonomagmatic belts as the
product of intense tectonic activization and magmatic activities, superimposed on the
accretion margin of the Palaeo-Asiatic continent. From the Yanshanian on, the magmatic
activities shifted to both sides from Songliao Basin-western Liaoning area roughly as
the centre.”
6.2
REGIONAL GEOLOGY
The Existing LRM Mine is south of the Kangurtage-Hongshi Mountain domain, with the
2 km2 detailed exploration area in the Baluntai Hanshan Mountain Massif between the
domain of the South Tianshan Mountain-Kumishi-Hongliu River-Liujiaojing-Yueya
Mountain fold belt (Figure 3). The property is in the same regional geological setting
and at a similar latitude as the famous producing vanadium-titanium-iron mine in Damiao,
Hebei Province PRC.
– 253 –
APPENDIX VII
6.
TECHNICAL REPORT
6.2
REGIONAL GEOLOGY (continued)
Figure 3.
Regional geology
The Existing LRM Mine occurs within a sequence of early Proterozoic meta-sedimentary
rocks located along the northern margin of the North China platform. In the northern
part of the concession area, large areas of Jurassic, Cretaceous and Tertiary age rocks
outcrop while in the southern part, a wide range of Quaternary age rocks outcrop. In
general, the deposit is made up of two broad west to east geological belts: the middle
belt, the Gong Po Quan-Hong Liu Da Quan and the southern belt the structural zone of
the south hill to the Tianshan Mountain.
– 254 –
APPENDIX VII
6.
TECHNICAL REPORT
6.2
6.2.1 GUTONGJING GROUP
The oldest rocks in the concession area are those of the Gutongjing Group of the
Great Wall System mainly outcropping as linear belts in a NW-SE direction in the
Xiaohong Mountain. The outcrops consisting of a series of low-grade metamorphic
clastic rocks that can be divided into two units:
Lower unit consisting mainly of grey-green to yellow-brown, fine-grained sandy
slates, fine-grained shales, sandy slates, phyllites, crystalline limestone, marble
and almond coloured andesitic-basalts; and
upper unit, consisting of grey-green to yellow-green, schistose, fine-grained sandy
quartzites, grey-white quartzites, grey-blue sandy slates and calcareous fine-grained
phyllitic slates.
6.2.2 PINGTOU MOUNTAIN FORMATION
Limited outcroppings occur in the southern part of the Xiaohong Mountain area
conformably overlying the Gutongjing Group. The base consisting of a dark reddish
to purple coloured conglomerate, followed by middle and upper parts of thick
beds of dark grey siliceous slate thin beds of grey-black limestone and thick beds
of yellow-brown clastic, siliceous limestones.
6.2.3 BAISHANG MOUNTAIN FORMATION
The Baishang Mountain Formation of Carboniferous Age outcrops in the south
part of the Xiaohong Mountain and consists of grey, grey-green, dark-green to
purple coloured, schistose, intermediate to acidic, tuffs and crystal tuffs containing
lenses of limestone.
6.2.4 CHIJINBOA FORMATION
The rocks of the Chijinbao Formation (upper Jurassic Age) are the principal rocks
outcropping around Xiaohong Mountain and consist of a series of continental clastic
rocks of sandstones, mudstones and marlites.
6.2.5 QUATERNARY
The Quaternary, covering the older rocks, are composed of loose sands, gravels
and scree material and are mainly distributed along the valleys (arroyos).
– 255 –
APPENDIX VII
6.
TECHNICAL REPORT
6.2
6.2.6 REGIONAL TECTONICS
Faulting in the region occurs mainly as thrust faults striking near E-W that were
later crosscut by NE, NW and NS faults.
South of Existing LRM Mine, the Hongliu Daquanbei deep regional fault, formed
during the Late Proterozoic, controlled the emplacement of the ultramafic, basic
and acidic magmatic rocks and is a particularly important fault that controlled the
intrusion and distribution of the gabbro and related intrusions that contain the V/
T/Fe mineralization.
North of Existing LRM Mine, another deep regional fault, but of early Paleozoic
age, the Sandao Mingshu-Dakouzi fault (part of the Baiyun Mountain-Yueya
Mountain deep fault) also contains ultramafics and acid intrusives intruded as pods
(beads) along a linear magnetic anomaly and containing a well-developed ophiolite
suite of rocks.
Complex fold structures have been caused by fault movement, accompanied by
strong magmatic activity. The axes of early Caledonian (early Paleozoic) folds are
in NWW, W or E-W direction and are in the form of compact or reverse folds
while the folds of late Caledonia are relatively wide and gentle.
The axes of late Paleozic folds (Hercynian orogeny) are generally NW and
occasionally NWW. Due to the large scale intrusions associated with the Hercynian
orogeny, the fold structures are incompletely preserved.
The NE wide and gentle Yanshonian (Jurassic) folding overlaps earlier folding.
The fold and fault structures have no obvious relationship to the V/Ti magnetite
mineralization. The V/Ti Magnetite mineralization is associated with the Hercynian
(late Paleozoic) intrusions. These intrusions are mainly located along faults or at
the contact zone of fold structure.
The NE fault structures developed to the north of Existing LRM Mine, in the Xisha
Spring-Xiaohaung Mountain Sandao Minghui-Shibanjing areas, control the
distribution of the Jurassic basins.
– 256 –
APPENDIX VII
6.
TECHNICAL REPORT
6.2
6.2.7 INTRUSIVE ROCKS
The Existing LRM Mine has been subjected to frequent magmatic activity from
Caledonian (early Paleozoic) through to Cretaceous times but the Hercynian (late
Paleozoic) period experienced the most intense, wide spread, largest and different
types of intrusives. The Hercynian has been divided into three periods (early, mid
and late). The early period (Devonian) rocks are mainly plagioclase granites and
quartz diorites in the form of stocks. The mid period (carboniferous) rocks includes
batholiths of granites and granodiorites and are mainly in the south part of Existing
LRM Mine while the late period (Permian Age) are mainly ultramafics, gabbro
diabase, biotite-plagioclase granites and diorite. The gabbro intrusives have a close
relationship to the V-Ti-Magnetite mineralization.
6.3
PROPERTY GEOLOGY
6.3.1 LITHOLOGY
Apart from intrusive rocks two sedimentary lithological units are found at Existing
LRM Mine, the sediments of the Gutongjing Group of the Great Wall System of
middle Proterozoic age, and the unconsolidated sediments of the Quaternary (Figure
4).
Gutongying Group
The Gutongying Group can be divided into two units, the upper metamorphic
sandstones (Pt2gS) and the lower carbonate rocks (Pt2gD).
Figure 4.
Exploration drillholes and trenches geology map
– 257 –
APPENDIX VII
6.
TECHNICAL REPORT
6.3
PROPERTY GEOLOGY (continued)
6.3.1 LITHOLOGY (continued)
The carbonate rocks include grey-white, grey and pure white, “ophiolitized” marble,
garnitiferous marbles and pure white granular marbles. The marbles often exhibit
skarn “ophiolization” when in contact with the gabbros and granitic dykes. Also
they often exhibit “idomorphic” or “crystalloblastic” textures resulting from contact
metamorphism.
The upper (Pt 2gS) units consist of grey, grey-purple coloured, metamorphic
sandstone to pure quartz granular sandstones with minor amounts of feldspar,
muscovite, biotite and chlorite.
Quaternary
The unconsolidated sands consisting of loess and eroded fine-grained, wind-blown
fragments are found mainly in gullies or as “gobi” masses at the lower elevations.
6.3.2 MAGMATIC ROCKS
Various intrusives rocks are present at Existing LRM Mine, from ultramafic to
intermediate to acidic units, that include gabbro, granodiorites and granites and
occur in the form of batholiths, stocks and dykes as well as some granite porphyry,
pegmatite and quartz veins.
Gabbro is the principal intrusive occurring in an E-W direction over 2 km and in a
N-S direction 1 km; the outcrops increasing in number towards the west. The
intruded rocks occur as fragments or have been completely assimilated within the
gabbro. The gabbros are mainly medium grained but coarse and fine-grained
sections occur. The vanadium-titanium-magnetite mineralized bodies occur within
the gabbros. The gabbro’s main mineral composition is composed of 40% to 60%
pyroxene (hyperstene), 5% to 20% hornblende, 20% to 40% basic feldspars, 5%
to 15% vanadium-titanium-magnetite minerals, and secondary minerals of 5% to
10% apatite and 1% to 5% biotite. Alteration includes sericitization and
development of clays. The V, Ti, magnetite mineralization infills fissures or fractures
accompanied with some limonite. Apatite occurs as short, columnar, hexagonal
crystals between 0.1 to 1.0 mm in size. Most of the ore mineralization is finegrained.
– 258 –
APPENDIX VII
6.
TECHNICAL REPORT
6.3
PROPERTY GEOLOGY (continued)
6.3.3 STRUCTURAL GEOLOGY
Major fold structures were destroyed at Existing LRM Mine by the intrusion of
the later Hercynian gabbros and only small scale secondary folding can be observed.
Faults and fracturing however are well developed.
Three groups of faulting are observed at Existing LRM Mine and have been
numbered F-1, F-2 and F-3.
The F-1 fault is located in the NW part between lines 49 and 48 and exposed in six
exploratory engineering trenches. The fault zone is made up of gabbro and quartz
rock breccia and gouge and strikes 080˚ to 100˚ and dips north at 70˚. The fault
exhibits multiple fault movements.
The F-2 fault lies in the central and western part of the Existing LRM Mine (between
lines 26 and 66) and strikes 110˚ and is several metres wide. The angle and direction
of the dip of the fault is unknown but a gentle undulance of the faults is observed.
Intense gouge and schistose material are present along the fault.
The F-3 fault is found in the central area trending in a NNE direction and although
not observed on surface, it was intersected in drillhole ZK66-5. The clear linear
nature and dislocation of lithology and dykes can be clearly observed on remote
sensing satellite data. The western part of the fault shows low, hilly and cliff
landforms while the eastern part exhibits gentle, flat landforms. On the satellite
image, the extensive Pt2gS sandstones on the west side of the fault disappear on
the NE side. The gabbros on SW side of the fault extend in a near E-W direction
with the V-Ti-Magnetite mineralization also distributed in the same direction thus
this fault controls the distribution of the gabbro and mineralization and is worthy
of further study.
– 259 –
APPENDIX VII
7.
TECHNICAL REPORT
DEPOSIT TYPES
The Existing LRM Mine type of deposit is described as a late stage magmatic segregation from
the parent gabbroic magma. The segregation, a vanadium bearing titaniferous magnetite, was
at a later time due to tectonic movements injected along layers of the gabbro. A total of eight
separate lenticular bodies of magnetite occur within the gabbro, numbered from N to S (I to
VIII) and are concentrated in the western end of the detailed study area. The bodies strike
between 090˚ to 120˚ and the Chinese have described their outcrop pattern as looking like a
series of parallel flying geese formations with the nose of the flight lines occurring at line 17.
The bodies to the west of line 17 strike at or near 90˚ and those to the east strike at or near 120˚.
The bodies dip south, or southwestward at angles of between 80˚ to 88˚.
The magnetite bodies vary in width both along strike and down dip with bodies I to IV of
relatively larger size. In general, according to Chinese classification, the magnetite bodies are
described as medium scale and ranging from simple to complex in shape but with a good
continuity of the bodies (i.e., few faults) and gradual changes in grades.
TABLE 2
CHARACTERISTICS OF THE OREBODIES
Orebody
Number
I
II
III
IV
V
VI
VII
8.
Location
between lines
Length
L35 to L14
L49 to L14
L49 to L14
L43 to L24
L29 to L14
L29 to L14
L14 to L7
(m)
650
840
780
500
300
440
320
Maximum Maximum
width known depth Total Fe
(m)
~65
40
39
25-40
12-20
3.6-64.6
25
(m)
320
330
300
190
120
290
210
(%)
19.6
19.47
19.15
21.51
18.30
19.11
18.17
TiO2
Intersected by
(%)
3.75
3.64
3.60
3.40
2.73
3.12
3.12
No. of No. of
Trenches DDH
9
19
13
21
10
16
6
9
1
2
1
12
1
4
MINERALIZATION
Iron mineralization, a primary metal of interest, occurs mainly in minerals of titaniferous
magnetite, ilmenite, magnetite and some pyrrhotite. The mineral occurs, as disseminations
(xenomorphic to hypautomorphic granular texture) and as discrete lenticular masses within a
gabbro. The gabbro exhibiting medium to fine-grained, gabbroic texture is composed of gangue
minerals of pyroxene (40% to 60%) calcic feldspars (20% to 40%) and hornblende (5% to
20%). The mineralization, under the Chinese classification, is classified in three categories: 1)
oxidized (down to depths of 1.7 and 12.9 m); 2) compound (10 to less than 30 m depth); and, 3)
primary (below 30 m depth).
– 260 –
APPENDIX VII
8.
TECHNICAL REPORT
MINERALIZATION (continued)
The total iron content of the ores varies from 17.0% to 31.7% and the deposit is classified in
China as a medium grade iron-ore deposit requiring mineral dressing for commercialisation.
Secondary metals of interest are titanium and vanadium (intergrown with the iron) with the
percentages of TiO2 and V2O5 in the iron ores at industrial index levels as stipulated in People’s
Republic of China. Also of interest is the P2O 5 content. All P 2O5 values occur in apatite as
idiomorphic, columnar-granular crystal forms of uniform grain size (0.04 to 0.3 mm). Apatite
crystals, generally occur in the ores with high iron and titanium contents.
Thin and polished sections studies coupled with field observation show that the order of
mineralization to be first, titaniferous magnetite and ilmenite, followed by micro to fine
crystalline-titaniferous magnetite, followed by micro to fine crystalline pyrite, then finally the
oxidation of the titaniferous magnetite and the limonitic alteration.
Sulphur is the most deleterious element present in the ores but is at very low contents (0.01%
to 0.49%) and should be easily separated during the magnetic mineral dressing process.
TABLE 3
AVERAGE CHEMICAL ANALYSIS FOR THE DIFFERENT EXISTING LRM MINE
ORE TYPES
Type of Ore
Coarse grained
V-Ti magnetite
Fined grained
V-Ti magnetite
Medium grained
V-Ti magnetite
Disseminated
V-Ti magnetite
Gabbro
SiO2 Al3O2
TiO2 F32O3
FeO
MnO
MgO
CaO
Na2O
K2O
P 2O 5
LOI TFeO3
28.96
8.12 13.75 14.91
0.49
6.58 11.95
0.58
0.62
2.90
2.53 30.15
30.25 16.26
5.68
8.95 15.42
0.33
3.13 11.33
1.32
0.92
2.88
1.22 25.91
41.28 15.87
1.73
7.08 16.92
0.54
3.39
5.65
2.41
1.35
0.36
0.81 25.67
42.15 14.06
3.52
4.90 15.03
0.40
3.38
9.58
2.92
0.49
1.76
0.67 20.12
49.41 20.86
0.95
2.48
0.21
2.30
7.55
4.17
1.50
0.53
1.37 11.41
6.54
8.15
– 261 –
APPENDIX VII
9.
TECHNICAL REPORT
EXPLORATION
The exploration conducted on the Existing LRM Mine prior to November 2005, is outlined in
Section 6 History.
In early November 2005, a contract was signed by HKFS with SINOREX Resource and
Environment Engineering (Beijing) Co., Ltd. (“Sinorex”) for Sinorex to carry out the first
stage and second stage exploration programs, as mandated by the Chinese requirements. The
following table outlines the exploration works that were completed during the first stage and
second stage, starting with geological mapping, followed by trenching then by diamond drilling:
Description
Amount
Geological mapping at 1:2,000 scale
Geological profile mapping at 1:500 scale
Geological profile mapping at 1:1,000 scale
Trenching
Diamond drilling
Trench sampling
Diamond drill core samples
Hydrogeology drillhole monitoring
Groundwater level monitoring
Engineering, environmental and
hydrogeological mapping
Drill core logging
Hydrogeological logging of drill core
Standard assay sampling
Complete assaying
Surveying GPS
Samples (individual)
Polished and thin sections
2 km2
8 linear km
4 linear km
3,053.4 m3
7,510.24 m
2,614.6 m
6,921.33 m
26 dh
3 locations
2 km2
7,510.24 m (26 ddh)
11 ddh
31,617 samples
188 samples
105 stations
100
48
During the first stage exploration program the main orebodies (iron) within the detailed
exploration area were explored by a grid at an approximate 40 to 60 m spaced data points while
the general concession area is at 100 m spacing data points. The data points were also spaced at
approximately 40 to 60 m during the second stage exploration. All the diamond drilling has
been concentrated in an area of about 0.7 km2 on the west side of the 2 km x 1 km (2 km2) area
designated for the detailed exploration program. It is WGM’s understanding that additional
exploration will be carried out in the remaining portion (east side) of the 2 km2 area.
– 262 –
APPENDIX VII
10.
TECHNICAL REPORT
DRILLING
The diamond drilling at Existing LRM Mine was carried out by SINOREX in two stages, the
first stage during 2005 consisting of 13 drillholes (2,461.94 m) and the second stage also
consisting of 13 drillholes (5,048.30 m) during 2006. The holes were all drilled in a N28˚15’E
direction at angles near -50˚ along crosslines on a grid at a spacing of 100 m (Figure 5). The
location of the drillhole collars were controlled by GPS readings (Global Position System
Survey Standards-CH2001-92) and both the drillhole direction and the angle of the drillhole
were set and later confirmed by the site geologist. Japanese drill machines (Models NL-38 and
NL-55) were used throughout the drilling campaign and the drillhole diameter was predominantly
89 mm (H size core) with some at 75 mm (N size core). Core recoveries were excellent at near
100%.
Single shot down-the-hole readings for drillhole azimuth and dip angle, using a gyroscope type
instrument were carried out at 50 m intervals, following standard Chinese regulations. All
down-the-hole drillhole surveys reportedly showed virtually no variance in the hole direction
or in the dip angle of the hole.
Figure 5.
Cross section Line 15
– 263 –
APPENDIX VII
11.
TECHNICAL REPORT
SAMPLING METHOD AND APPROACH
The drill core at the drill site is placed in wooden core boxes, by the driller with the drill
advances clearly marked with felt tipped pens. The core in each core box is photographed then
geological logged and the Rock Quality Designations (“RQD”) determined and the sample
intervals marked. Geological logging is completed by qualified geologists under the Chinese
Logging Code that includes a description of the lithology, alteration, mineralization, structure
and sampled interval. Wooden covers are put on each core tray box and then the boxes delivered
to the core storage area where the core is diamond sawed in half at sampled intervals of near
1.5 m intervals (average sample length 1.34 m). Each sample is separately bagged, labelled and
sealed for shipment to the assay laboratory.
Trenches were machine excavated to fresh rock to an average depth of 1.0 to 3.0 m at widths
greater than 0.8 m. Geological mapping is carried out in the trenches on one wall and on the
bottom of the trench, similar to the drill core, mapping was carried out at a scale of 1:100.
Trench samples (about 6 kg to 7 kg) are similarly collected at intervals of approximately 1.5 m
from a channel cut in the floor along the trench, all sample locations are GPS controlled. The
co-ordinates (Eastern, Northern and elevation) of the trench are marked at each end on a wooden
peg determined (GPS), except when the channel slope changes where additional coordinates
are determined. Trench samples are similarly bagged, tagged and sent for sample preparation
to the assay laboratory. All the sampling procedures are supervised by the site geologists.
12.
SAMPLE PREPARATION, ANALYSES AND SECURITY
During the initial site visit to Existing LRM Mine, WGM visited the No.4 Laboratory, Gansu
Bureau of Geology and Mineral Resources where the Existing LRM Mine samples were prepared
(i.e., crushed, split and ground) and a subsample collected to be analyzed. The No.4 Laboratory
is located at 52 Liberation Rd., Jiuquan, Gansu. The complete sample preparation was reviewed
from the initial sample registry through to crushing, splitting and grinding. Although the
equipment is not the most modern, all the required safety steps are taken. The laboratory had a
Class A Chinese qualification certification displayed on the wall showing that it met the
requirements to be a certified government laboratory. It is WGM’s understanding that laboratories
are regulated by the government and therefore all laboratories are required to follow standard
procedures established by the Chinese government authorities (quality control specifications
for laboratory testing of geological minerals).
It was reported that 5% of the total number of samples are repeated as a duplicate samples.
However at the Jiuguan laboratory no blank, or standard samples are routinely entered into the
sample flow. Various analytical methods are carried out for the contents of TFe for: magnetic
iron, Si by volumetric methods, S by combustion methods, and P, TiO2, Co, and V 2O 5 by
X-Ray fluorescent spectrophotometry and by AA methods.
– 264 –
APPENDIX VII
12.
TECHNICAL REPORT
SAMPLE PREPARATION, ANALYSES AND SECURITY (continued)
WGM comparison data derived from Chinese laboratories and Canadian laboratories have in
the past shown good agreement. WGM is satisfied that the results as reported for the Existing
LRM Mine are reliable but recommend, that for quality assurance and quality control that
selected duplicate and blank samples in the future also be analyzed at a Canadian laboratory.
It may be justified for future drilling programs to consider some level of sample preparation on
site to reduce shipping costs and to control QA/AC by the inserting of repeat, blank and standard
samples into the sample stream prior to shipping the samples to the analytical laboratory.
Security has not been a concern to the Chinese geologists, as in the past, in a government
operation there was little advantage to be gained by the salting or altering of the samples.
13.
DATA VERIFICATION
13.1 GENERAL
WGM’s field examination of the concession confirmed the geological setting and verified
the existence of the diamond drillholes and of the well developed trenches both with
their clearly marked sample intervals. The audit of selected drill core verified the reported
mineralized intervals, the sample intervals, the core recovery and the reported RQD of
the rocks. WGM feels confident that the geology as represented on the property geological
map at a scale of 1:2,000 of the 2 km2 detailed study area fairly represents the geology as
observed in the field.
13.2 WGM SITE VISIT SAMPLING
WGM on the initial visit collected two chip channel samples from surface outcrops that
were prepared (crushed, ground and sub-sampled) and analyzed at ALS Chemex
Laboratory (“ALS”) in Mississauga, Ontario, and analyzed by ALS-XRF06 (whole rock)
and for V by ALS AA-62 (Table 4 and Appendix 2).
TABLE 4
ALS ANALYSES
Fe2O3(%)
TiO2 (%)
V (%)
55.04
49.23
12.02
6.91
0.16 (0.29% V2O5)
0.02 (0.04% V2O5)
– 265 –
APPENDIX VII
13.
TECHNICAL REPORT
DATA VERIFICATION (continued)
13.2 WGM SITE VISIT SAMPLING (continued)
On the second visit, the core of three drillholes were chip samples over short, selected
intervals and sent to SGS Mineral Services (“SGS”) laboratory in Toronto, Canada and
analyzed by SGS-XRF 762 (whole rock) and SGS-ICP90A for V (Table 5 and Appendix
2).
TABLE 5
SGS ANALYSES
DDH
ZK-25-1
ZK-4-1
ZK-66-5
Interval
(m)
164.9-165.9
282.1-282.9
176.7-178.7
SGS
Fe2O3 (%) TiO2 (%) V (ppm)
21.3
5.28
870
32.1
4.21
200
34.3
7.34
630
Chinese Laboratory
V 2O 5
(0.155)
(0.036)
(0.112)
TFe (%) TiO2 (%) V2O5 (%)
14.95
5.21
0.114
25.69
6.31
0.036
34.55
8.76
0.104
The samples were carried by WGM to Toronto and then shipped to the laboratories for
sample preparation.
The sample confirmed that TFe, V2O5 and TiO2 are present at Existing LRM Mine and in
quantities as indicated by the Chinese analyzed samples (see Table 5).
WGM believes that the analytical results of the samples analyzed at the Chinese
laboratories fairly represent the amounts present in the samples.
– 266 –
APPENDIX VII
14.
TECHNICAL REPORT
MINERAL RESOURCE AND MINERAL RESERVE ESTIMATES
14.1 GENERAL
WGM has prepared Mineral Resource estimates for the Existing LRM Mine three zones
based on 3D wireframes interpreted by Golder Associates Consulting Ltd. (“Golder”).
The estimates were prepared from a block model and exclude all blocks grading less
than 15% TFe. A summary of the estimates is provided in Table 6.
TABLE 6
EXISTING LRM MINE INDICATED AND INFERRED MINERAL
RESOURCES
Prepared by WGM (using a 15% TFe cutoff grade)
Tonnes
%TFe
%TiO2
%V2O5
6,821,539
7,326,882
2,058,591
20.13
19.34
17.68
4.03
3.84
3.40
0.04
0.03
0.03
16,207,012
19.46
3.86
0.03
Zone 103
259,689
17.69
3.25
0.02
Total Inferred
259,689
17.69
3.25
0.02
Zone
Zone 101
Zone 102
Zone 103
Total Indicated
Note: WGM has lowered the cutoff grade of the TFe from the 17% as stipulated in the China regulations
for iron deposits to 15% because of the increased recoverable values in the ore from TiO2 and V2O5.
The classification of mineral resources and mineral reserves used in this report conforms
with the definitions provided in the final version of National Instrument 43-101 (“NI 43101”), which came into effect on February 1, 2001, as revised on December 11, 2005.
We further confirm that, in arriving at our classification, we have followed the guidelines
adopted by the Council of the Canadian Institute of Mining Metallurgy and Petroleum
(the “CIM Standards”). The relevant definitions for the CIM Standards/NI 43-101 are as
follows:
A Mineral Resource is a concentration or occurrence of diamonds, natural, solid,
inorganic or fossilized organic material including base and precious metals, coal, and
industrial minerals in or on the Earth’s crust in such form and quantity and of such a
grade or quality that it has reasonable prospects for economic extraction. The location,
quantity, grade, geological characteristics and continuity of a Mineral Resource are known,
estimated or interpreted from specific geological evidence and knowledge.
– 267 –
APPENDIX VII
14.
TECHNICAL REPORT
MINERAL RESOURCE AND MINERAL RESERVE ESTIMATES (continued)
14.1 GENERAL (continued)
An Inferred Mineral Resource is that part of a Mineral Resource for which quantity
and grade or quality can be estimated on the basis of geological evidence and limited
sampling and reasonably assumed, but not verified, geological and grade continuity. The
estimate is based on limited information and sampling gathered through appropriate
techniques from locations such as outcrops, trenches, pits, workings and drill holes.
An Indicated Mineral Resource is that part of a Mineral Resource for which quantity,
grade or quality, densities, shape and physical characteristics, can be estimated with a
level of confidence sufficient to allow the appropriate application of technical and
economic parameters, to support mine planning and evaluation of the economic viability
of the deposit. The estimate is based on detailed and reliable exploration and testing
information gathered through appropriate techniques from locations such as outcrops,
trenches, pits, workings and drill holes that are spaced closely enough for geological and
grade continuity to be reasonably assumed.
A Measured Mineral Resource is that part of a Mineral Resource for which quantity,
grade or quality, densities, shape, physical characteristics are so well established that
they can be estimated with confidence sufficient to allow the appropriate application of
technical and economic parameters, to support production planning and evaluation of
the economic viability of the deposit. The estimate is based on detailed and reliable
exploration, sampling and testing information gathered through appropriate techniques
from locations such as outcrops, trenches, pits, workings and drill holes that are spaced
closely enough to confirm both geological and grade continuity.
A Mineral Reserve is the economically mineable part of a Measured or Indicated Mineral
Resource demonstrated by at least a Preliminary Feasibility Study. This Study must include
adequate information on mining, processing, metallurgical, economic and other relevant
factors that demonstrate, at the time of reporting, that economic extraction can be justified.
A Mineral Reserve includes diluting materials and allowances for losses that may occur
when the material is mined.
A Probable Mineral Reserve is the economically mineable part of an Indicated, and in
some circumstances a Measured Mineral Resource demonstrated by at least a Preliminary
Feasibility Study. This Study must include adequate information on mining, processing,
metallurgical, economic, and other relevant factors that demonstrate, at the time of
reporting, that economic extraction can be justified.
A Proven Mineral Reserve is the economically mineable part of a Measured Mineral
Resource demonstrated by at least a Preliminary Feasibility Study. This Study must include
adequate information on mining, processing, metallurgical, economic, and other relevant
factors that demonstrate, at the time of reporting, that economic extraction is justified.
– 268 –
APPENDIX VII
14.
TECHNICAL REPORT
14.2 GENERAL MINERAL RESOURCE ESTIMATION PROCEDURES
The Mineral Resource estimate procedures consisted of:
•
Database compilation and verification;
•
Development of 3-D wireframe models within major lithological units, using the
assays available for each drillhole sample interval; and
•
Generation of block models for Mineral Resource estimates for the three zones using
a geostatistical approach applying the Inverse Distance Squared (“ID2”) method.
14.3 DATABASE
14.3.1 GENERAL
Data used to generate the Mineral Resource estimates originated from Microsoft
Excel files containing collar, survey, and assay information for the drillholes. The
trench data contained the starting and ending points of the trenches as well as the
assay information. The Existing LRM Mine drillhole database consisted of 26
collar drillhole locations and 36 trench locations, and 6,863 multi-element assay
(TFe, V2O5, TiO2 and MFe) intervals. The data were provided to WGM in digital
form (via email from Golder). The 3D Wireframes representing six orebodies,
interpreted by Golder, were supplied as Drawing Interchange Files (DXF).
Additional information, including historical “mineral resource” estimates and
geological interpretations on sections were as Acrobat pdf files.
Thirteen northeast-southwest cross sections (with spacing varying between 50 and
100 m), were generated by WGM to coincide with the historical sections interpreted
by Golder.
14.3.2 DATA VALIDATION
Upon receipt of the data, WGM performed the following validation steps:
•
Checking minimum and maximum values for each quality value field and
confirming/modifying those outside of expected ranges; and
•
Checking for gaps, overlaps and out of sequence intervals for assays tables.
The files containing drillhole collar coordinates obtained directly from client had
mistakenly changed Northing into Easting and vice versa. To keep consistency in
the data WGM decided to use coordinates as defined in Golder Report. The data
was generally in good shape.
– 269 –
APPENDIX VII
14.
TECHNICAL REPORT
14.3 DATABASE (continued)
14.3.3DATABASE MANAGEMENT
The drillhole data were stored in a Gemcom’s GEMS © software multi-tabled
workspace specifically designed to manage collar and interval data. Other data,
like surface contours or cross sectional geological interpretations, were stored in
multi-tabled polyline workspaces. The project database also stored section and
level plan definitions, 3-D surfaces and solids, and the block models, such that all
data pertaining to the project are stored within the same project database.
14.4 GEOLOGICAL MODELLING PROCEDURES
14.4.1 GENERAL
In general, the modelling procedures were as follows:
•
Geological re-interpretation based on new information and digitizing of
lithological outlines;
•
3-D surface (TIN) and solid/wireframe creation;
•
Database manipulation and compositing;
•
Statistical analysis;
•
Block grade estimation; and
•
Classification and reporting of Mineral Resources.
14.4.2 GEOLOGICAL INTERPRETATION AND DIGITIZING
Section Definition
The vertical sections were defined by WGM to coincide with the historical Golder
vertical sections, which were oriented at 28˚ to the North. The sections had spacing
that varied from section to section, from 50 to 100 m.
In total, 13 northwest-looking vertical cross sections were defined for the three
main zones. Figure 6 shows the drillhole plan and the section locations.
– 270 –
APPENDIX VII
14.
TECHNICAL REPORT
14.4 GEOLOGICAL MODELLING PROCEDURES (continued)
14.4.2 GEOLOGICAL INTERPRETATION AND DIGITIZING (continued)
Geological Interpretation
The boundaries of the mineralized bodies were re-interpreted on 13 drill sections
ranging spatially from 50 to 100 m apart, orientated SW-NE. WGM relied heavily
on historical interpretations that served as a guideline for the present work. The
orebodies were defined based primarily on an assay cutoff of 15% TFe. Boundaries
were drawn halfway between drillholes, and if no holes existed to limit the
mineralization outlines, the boundaries were extended to a maximum of 25 m away
from the nearest hole. WGM has re-interpreted only those boundary that showed
new drillhole and trench information on the particular section.
Digitizing Geological Interpretations and Solid/3-D Wireframe Creation
The cross sectional interpretations of the mineralization were digitized into a
GEMS© polyline workspace. Each polyline was assigned an appropriate rock type
and stored with its section definition. Three types of polylines were created, each
representing the three orebodies.
In total, 13 sections have digitized sectional polylines. Digitized sectional
interpretations of geological polylines and drillhole information were analyzed
for verification and potential changes. Where necessary, the polylines were modified
to better represent the overall mineralization and to provide a base for valid 3-D
solid generation. All changes were digitally updated and stored in the GEMS©
polyline workspace.
The geological polylines digitized on the vertical cross sections were joined using
special polylines (tie lines) in order to produce separate 3-D solids/wireframes for
each zone, so individual volumes and tonnages could be reported. Six geological
wireframes were created, one for Ore Zone I and II and three for Ore Zone II
(Figure 7).
– 271 –
APPENDIX VII
14.
TECHNICAL REPORT
Topographic Surface
A topographic surface or triangulated irregular network (“TIN”) was created using
dxf file provided by Golder.
Figure 6.
Drillhole and trench plan
– 272 –
APPENDIX VII
14.
TECHNICAL REPORT
Topographic Surface (continued)
Figure 7.
3-D Wireframes of the ore zones
– 273 –
APPENDIX VII
14.
TECHNICAL REPORT
14.5 DATABASE PREPARATION, STATISTICAL ANALYSIS AND COMPOSITING
14.5.1 BACK-CODING OF ROCK CODE FIELD
The 3-D solids that represented the interpreted mineralized zones were used to
back-code a rock code field into the drillhole workspace. Each interval in the assay
table was assigned a new rock code value based on the rock type solid that the
interval midpoint fell within. The six geological solids were back-coded and
considered for the Mineral Resource estimate.
14.5.2 PREPARATION OF ASSAY COMPOSITES
In order to carry out the Mineral Resource block modelling, a set of equal length
composites of 3 m was generated from the raw drillhole intervals. Table 7
summarizes the statistics of the composites inside the mineralized envelope for all
three ore zones. The statistical distributions of TFe for the entire project area, as
well as the three ore zones, show normal distributions (Figures 8 to 15).
TABLE 7
BASIC STATISTICS OF 6 ft COMPOSITES
Sector
Number
Minimum
(% TFe)
Maximum
(% TFe)
Mean
(% TFe)
C.O.V.*
Zone 101
Zone 102
Zone 103
249
312
144
0
0
0
40.87
33.20
35.01
18.32
18.74
17.37
0.391
0.274
0.380
Total
705
0
40.87
18.31
0.341
* Coefficient of variation
– 274 –
APPENDIX VII
14.6 MINERAL RESOURCE BLOCK MODELLING
14.6.1 GENERAL
The Mineral Resources have been estimated using the Inverse Distance Squared
(“ID2”) estimation technique. ID2 belongs to a distance-weighted interpolation class
of methods, similar to Kriging, where the grade of a block is interpolated from
several composites within a defined distance range of that block.
Figure 8.
Normal Histogram for All Zone composites
Normal Hitogram - All Zones
111
Frequency Count
89
67
44
22
0
4.80
9.60
14.40
19.20
24.00
28.80
33.60
38.40
43.20
48.00
% TFe
Software By Gemcom
Figure 9.
Normal Histogram for Zone 101 composites
Normal Histogram - Zone 101
33
26
Frequency Count
14.
TECHNICAL REPORT
20
13
7
0
4.80
9.60
14.40
19.20
24.00
28.80
% TFe
Software By Gemcom
– 275 –
33.60
38.40
43.20
48.00
APPENDIX VII
14.6 MINERAL RESOURCE BLOCK MODELLING (continued)
14.6.1 GENERAL (continued)
Figure 10. Normal Histogram for Zone 102 composites
43
Frequency Count
34
26
17
9
0
4.80
9.60
14.40
19.20
24.00
28.80
33.60
38.40
43.20
48.00
% TFe
Software By Gemcom
Figure 11. Normal Histogram for Zone 103 composites
28
22
Frequency Count
14.
TECHNICAL REPORT
17
11
6
0
4.80
9.60
14.40
19.20
24.00
28.80
% TFe
Software By Gemcom
– 276 –
33.60
38.40
43.20
48.00
APPENDIX VII
Figure 12. Normal probability plot for All Zone composites
Normal Probability Plot - All Zones
100.00
99.74
Probability
91.28
50.00
8.72
0.26
0
4.00
8.00
12.00
16.00
20.00
24.00
28.00
32.00
36.00
40.00
% TFe
Software By Gemcom
Figure 13. Normal probability plot for Zone 101 composites
Normal Probability Plot - Zones 101
100.00
99.74
91.28
Probability
14.
TECHNICAL REPORT
50.00
8.72
0.26
0
4.00
8.00
12.00
16.00
20.00
% TFe
Software By Gemcom
– 277 –
24.00
28.00
32.00
36.00
40.00
APPENDIX VII
Normal Probability Plot - Zone 102
100.00
99.74
Probability
91.28
50.00
8.72
0.26
0
3.50
7.00
10.50
14.00
17.50
21.00
24.50
28.00
31.50
35.00
% TFe
Software By Gemcom
Normal Probability Plot - Zone 103
100.00
99.74
91.28
Probability
14.
TECHNICAL REPORT
50.00
8.72
0.26
0
3.50
7.00
10.50
14.00
17.50
% TFe
Software By Gemcom
– 278 –
21.00
24.50
28.00
31.50
35.00
APPENDIX VII
14.
TECHNICAL REPORT
14.6.2 BLOCK MODEL GRID PARAMETERS
The Mineral Resources have been estimated in a grid of regular blocks. The block
model grid covers the three ore zones and is shown in Table 8. The block model is
rotated 28˚ clockwise around the origin.
TABLE 8
BLOCK MODEL GRID PARAMETERS
Model Origin
X
Y
Z
Grid
414,500E
4,589,900N
1,600Z
Model Dimension
Rows
Columns
Levels
Orientation
65
93
40
28˚ clockwise
Block Dimension
Row width
Column width
Level height
10 m
10 m
10 m
14.6.3 GRADE INTERPOLATION
Inverse Distance Squared
All the Existing LRM Mine zones were interpolated using following search
parameters.
Search ellipsoid:
100 m in the East-West direction
100 m in the North-South direction
100 m in the Vertical direction
Minimum number of composites used to estimate a block: 1
Maximum number of composites coming from a single hole: 8
Ellipsoidal search strategy was used with rotation about Z,X,Z — 0˚, 0˚,0˚.
14.6.4 SPECIFIC GRAVITY
The specific gravity (“SG”) used to derive tonnes from the block volumes is constant
at 3.23. This SG was provided by HKFSS and WGM has accepted this specific
gravity as reasonable for this type of mineralization.
– 279 –
APPENDIX VII
14.
TECHNICAL REPORT
14.7 MINERAL RESOURCE CLASSIFICATION AND TABULATION
WGM has classified the Existing LRM Mine Mineral Resource estimate as Indicated
and Inferred.
WGM has lowered the cutoff grade of the TFe from the 17% as stipulated in the China
regulations for iron deposits to 15% because of the increased recoverable values in the
ore from TiO2 and V2O5. Each unit of TiO2 that is expected to be recovered from one
tonne of Existing LRM Mine ore is worth approximately ten times the value of an iron
unit and WGM believes that just on the basis of the increased value from the TiO2 alone,
that the lower 15% cutoff grade is justified.
Table 9 summarizes the Existing LRM Mine Mineral Resources constrained by 3-D
wireframes at different cutoff grades. Table 10 reports the resources for each zone at
cutoff of 15% TFe and exclude all the blocks that fall below this grade.
TABLE 9
EXISTING LRM MINE INDICATED RESOURCES
(prepared by WGM at different cutoff grades)
% TFe Cutoff
12
13
14
15
16
17
18
Tonnes
%TFe
%TiO2
%V2O5
17,129,803
16,991,233
16,780,110
16,207,012
14,866,698
13,154,685
11,188,171
19.17
19.22
19.30
19.46
19.82
20.25
20.72
3.80
3.81
3.83
3.86
3.92
4.00
4.09
0.03
0.03
0.03
0.04
0.03
0.03
0.03
TABLE 10
EXISTING LRM MINE INDICATED AND INFERRED MINERAL
RESOURCES
(prepared by WGM using a 15% TFe cutoff grade)
Tonnes
%TFe
%TiO2
%V2O5
6,821,539
7,326,882
2,058,591
20.13
19.34
17.68
4.03
3.84
3.40
0.04
0.03
0.03
16,207,012
19.46
3.86
0.03
Zone 103
259,689
17.69
3.25
0.02
Total Inferred
259,689
17.69
3.25
0.02
Zone
Zone 101
Zone 102
Zone 103
Total Indicated
The representation of the block model on the vertical sections and the level plans is
plotted in Figure 16.
– 280 –
APPENDIX VII
14.
TECHNICAL REPORT
14.8 SINOREX MINERAL RESOURCE ESTIMATE
The following outlines the methodology of the SINOREX Mineral Resource estimate at
Existing LRM Mine. Although the computer block modelling approach to estimate the
Mineral Resource/Mineral Reserves (“MR/MR”) figures is being implemented in China’s
geological exploration sector the traditional “geometrical method” for the estimation of
the Mineral Resources at Existing LRM Mine was used.
Figure 16. Block model — section line 15
The “geometrical method” is based on a sectional method where the average area of a
mineral body measured on two vertical cross sections, both at right angles to the strike of
the mineral body (m12+m22)/2 when multiplied by the distance (m) between the sections
gives a volume (m3), that when multiplied by the average SG of the body gives the
tonnage between the two cross sections. A weighted average of the assayed metal values
of all the samples (drillholes and trenches) along the two sections gives the average
metal values of the tonnage block. According to the “Standards of Geological Exploration
of Iron, Manganese and Chrome Mines”, the Mineral Resources are divided into three
categories: category (331) based on data at 50 m spacing; category (332) based on data
at 100 m spacing; and, category (333) data extrapolated laterally 12.5 m (a maximum of
one quarter of the 50 x 50 m drillhole grid. If the length of the orebody has been defined,
the maximum depth projection permitted is one quarter of the orebody’s defined length.
These three categories approximate the CIM Mineral Resource categories of Measured
(331), Indicated (332) and Inferred (333), however, WGM reports the following Mineral
Resources for historical purposes only and because they are relevant, but has not attempted
to rationalize them to conform with the guidelines published by the CIM standards. The
author checked the methodology used for these Mineral Resources and has no reason to
dispute them. Total Mineral Resource 29,513,786 tonnes @ 19.64% TFe and 3.53%
TiO2 distributed in the categories for each mineral body (Table 11).
– 281 –
APPENDIX VII
14.
TECHNICAL REPORT
14.8 SINOREX MINERAL RESOURCE ESTIMATE (continued)
TABLE 11
SINOREX RESOURCE ESTIMATES
No. of Body
I
II
III
IV
VI
Category
Tonnes
331
331
331
331
331
Total
I
II
III
IV
VI
332
332
332
332
332
Total
I
II
III
IV
V
VI
VII
333
333
333
333
333
333
333
Total
– 282 –
Average Grade
(TFe %)
(TiO2 %)
4,043,353
6,163,677
922,575
116,971
633,736
19.11
19.43
19.25
19.55
19.21
4.06
3.63
3.84
2.89
3.49
11,880,312
19.30
3.78
1,427,289
1,916,365
69,229
436,476
489,603
20.56
19.45
21.00
17.81
19.74
3.39
4.03
4.50
3.31
2.80
4,338,962
19.71
3.62
1,947,635
2,102,517
1,415,438
3,506,549
653,807
1,913,158
1,755,408
19.94
19.61
18.99
22.04
18.30
19.20
18.17
3.36
3.30
3.40
3.43
2.73
3.21
3.12
13,294,512
19.64
3.53
APPENDIX VII
14.
TECHNICAL REPORT
14.9 ENFI MINERAL RESOURCE AND MINERAL RESERVE ESTIMATES
14.9.1 RESOURCES
The following represents a summary of the process and criteria used by ENFI for
the feasibility study to determine the Mineral Resource/Mineral Reserve estimates
at Xiao Hong Shan (Little Red Mountain) Fe-Ti-V deposit.
Resource Definition
The database comprised 26 diamond drillholes and 36 trenches. Sample data from
trenches were used in a similar manner to drillhole data with samples typically 11.5 m in length.
A 3D grade block model was developed using Datamine, an accepted mineral
industry software that is used world-wide. The model consists of blocks 12 m x 12
m 12 m. Grade interpolation utilized inverse distance squared methodology.
Search ellipsoid dimensions were varied to establish different resource
classifications:
•
Measured: 100 m (strike) x 50 m (perpendicular to strike) x 60 m (dip);
•
Indicated: 200 m (strike) x 100 m (perpendicular to strike) x 120 m (dip);
and
•
Inferred: beyond Indicated.
Specific gravity used for determining Ore tonnage is 3.23 t/m3; and for Waste 2.8 t/m3.
Table 12 summarizes the defined Mineral Resources which form the basis for the
Mineral Reserve estimate.
TABLE 12
MINERAL RESOURCE SUMMARY
Classification
Millions Tonnes
Total %Fe
%TiO2
Measured
Indicated
14.39
4.39
19.45
19.41
3.89
3.82
Measured and Indicated
18.78
19.44
3.87
Inferred
11.68
19.75
3.21
– 283 –
APPENDIX VII
14.
TECHNICAL REPORT
14.9 ENFI MINERAL RESOURCE AND MINERAL RESERVE ESTIMATES (continued)
14.9.1 RESOURCES
Mineral Resource Potential
Current resources are defined within a limited area of 0.7 km2. WGM believes that
there is an excellent probability that additional diamond drilling may expand
resources potentially to the east and southwest of the present known mineral
resource. In addition, there is reasonable potential to the east of the current resources
as defined by broad magnetic anomaly.
WGM agrees with the conclusions by ENFI that additional drilling is required
immediately to increase the Mineral Resource/Reserve to produce a viable and
profitable operation. It is understood that additional drilling to the east and
southwest of the present known mineral resource was started at the beginning of
August.
Mineral Resource Issues
Sample Representation
Trench sampling has been used extensively to define the upper portions of the
mineralized zones. Trench samples and assays are treated essentially as horizontal
drillholes, thereby providing significant grade weighting to the upper portions of
the block model given the 60 m vertical component of the search ellipsoid. WGM
is not aware of any analysis that indicates that chip samples have the same degree
of sample representation as cored drillhole samples.
However the average of all the assay results of the 3 m composites used in the
WGM Mineral Resource estimate (starting 2 m below the surface) is 18.42% Fe
@ a 15% Fe cutoff grade, similarly the average for the trenches is 18.22% Fe also
at a 15% Fe cutoff grade.
Mineral Resource Comparison
The WGM Indicated Mineral Resource estimate at 16.2 million tonnes @ 19.46%
Fe and 3.86% TiO2 compares favourable with ENFI Measured and Indicated Mineral
Resources of 18.78 million tonnes at 19.44% Fe and 3.87% TiO2. WGM mineral
resources were estimated only for Zones I, II, and III. SINOREX estimated 1.7 Mt
for Zones IV and V in classifications 331 and 332, equivalent to Measured and
Indicated categories.
– 284 –
APPENDIX VII
14.
TECHNICAL REPORT
14.9 ENFI MINERAL RESOURCE AND MINERAL RESERVE ESTIMATES (continued)
14.9.2 MINERAL RESERVES
Mineral Reserve Basis
ENFI developed the Mineral Reserves for the project using pit optimization software
in Datamine. Optimization is based on Measured, Indicated and Inferred Mineral
Resources from the grade block model plus assumptions concerning product
recovery, price, operating costs, pit slope, dilution and mining losses. Mineral
Reserves reflect a final design pit that incorporates a haul road.
Costs used for pit optimization comprise operating costs required for concentrate
production and include mine and ore dressing cost centres.
Revenue for the pit optimization process is limited to the value of concentrates
produced. Value derived from downstream product upgrading is not included. WGM
agree with this approach.
Mineral Reserves
Mine recoverable Mineral Reserves contained within the designed open pit total
12.0 million tonnes @ 19.5% Fe and 4.2% TiO2.
15.
EXPLORATION POTENTIAL
15.1 MINERAL RESOURCE POTENTIAL
The Chinese category 333 allows the mineral resource estimate to be projected downwards
one quarter the length of the orebody, however, much of this tonnage is not included in
the WGM block model estimate. Nonetheless WGM believes there is an excellent
probability with future exploration (diamond drilling) that these additional Chinese
mineral resources will be confirmed.
The proposed initial diamond drilling program was reviewed and prioritized by WGM.
Drilling began in early August with two rigs on the south side of the present design pit
and a third rig arrived on August 8, 2007 to begin drilling the untested magnetic anomalies
to the east of the pit within the 2 km2 area.
– 285 –
APPENDIX VII
15.
TECHNICAL REPORT
EXPLORATION POTENTIAL (continued)
15.2 MINERAL RESERVE POTENTIAL
WGM believe that ENFI have taken a conservative approach with respect to pit
optimization parameters. Potential exists to increase mineable reserves through changes
to optimization parameters including decreasing operating costs and increasing
concentrate revenue.
Depreciation charges should be removed from Management cost centre since depreciation
is an Indirect cost and only direct costs should be used in pit optimization. Concentrate
transportation and community costs should be added as these are costs directly related to
production and delivery of concentrate to the downstream metallurgical plants. The net
effect should be lower operating costs.
ENFI has used significantly lower prices for concentrates as compared with the market
prices from the last 6 to 18 months (per details provided by HKFS). Recent prices would
generate 36% to 59% higher concentrate revenue than ENFI prices (Table 13).
TABLE 13
PRICE RMB/t
Concentrate
ENFI 18 mo. avg 12 mo. avg
Fe
TiO2
P2O 5
480
700
280
690
915
318
725
997
327
6 mo. avg
790
1,155
325
In addition, the base value of Fe concentrate produced could be increased by including
credit for contained TiO2.
WGM suggests that the net effect of higher block values, resulting from improvements
to concentrate value, plus reduced production costs should result in expansion of the pit
and subsequent increase in mineable reserves.
Additional Mineral Reserves could also result from expansion of the current Mineral
Resource base following additional diamond drilling below and lateral to the current
defined Mineral Resource/Reserve; and testing of the extensive magnetic anomalies on
the property.
– 286 –
APPENDIX VII
15.
TECHNICAL REPORT
EXPLORATION POTENTIAL (continued)
15.2 MINERAL RESERVE POTENTIAL (continued)
An illustration of the potential to increased Mineral Reserves/Resources in the immediate
mine area is presented in Figure 17.
Figure 17. Design pit overlain onto magnetic contour map
Designed Pit
Potential resource area defined
by magnetic contours
Potential resource
and pit expansion
Reserve Sensitivity Analysis
ENFI recently conducted a sensitivity analysis on the effect of increasing market price
on mineable reserve. Results suggest that a 20% increase in price, from that used in pit
optimization, increases mineable reserves by 29% to 15.5 Mt. A 44% increase in price
increases mineable reserves by 35% to 16.2 Mt.
WGM recommends that pit optimization be performed following revision to the block
model based on new drilling results. The process should incorporate revisions to costs
and prices to better reflect the proposed operation and market conditions.
– 287 –
APPENDIX VII
16.
TECHNICAL REPORT
ADJACENT PROPERTIES
There are no adjacent properties to the 15.47 km2 Existing LRM Mine concession. The Existing
LRM Mine deposit was discovered and the initial exploration and geological mapping was
carried out by local government geologists and at present is the only exploration concession in
the area. However, the property shows evidence of former illegal mining from shallow pits
where an estimated few hundred tonnes of titaniferous magnetite have been removed.
17.
INTRODUCTION AND DESIGN ASSUMPTIONS
The proposed project is based on establishment of stand-alone northern operations including a
2.6 Mt/a Open Pit Mine and Ore Dressing Plant at Xiao Hong Shan (Little Red Mountain). Key
support infrastructure required for the operation includes shops and personnel accommodation
facilities.
Development of a single infrastructure corridor between the northern and southern operation,
is to include a new Road and Power and Water supply. Infrastructure planning has been on the
basis of achieving potential ultimate capacity of 5.0 Mt/a mining and concentrating.
Preliminary metallurgical planning has been on the basis of achieving increased resources and
reserves to support a 2.6 Mt/a mining and concentrating operation.
Preliminary ore dressing flow sheet (per HKFS Business Plan) comprises:
•
Crushing and Grinding;
•
Weak Magnetic separation producing Iron Concentrate @ 56-57% Fe (contains 5% TiO2);
•
Strong Magnetic separation followed by Flotation producing:
—
Phosphate Concentrate @ 28-35% P2O5; and
—
Titanium Concentrate @ 43-48% TiO2.
Annual Concentrate production forecast is based on 2.6 Mt/a ore mined and processed.
Concentrate yield figures used by ENFI in their pit optimization assumptions are lower than
those based on the metallurgical tests conducted by Changsha Research Institute Mining and
Metallurgy in October 2006.
Revised figures reflecting the proposed final flowsheet are expected following completion of
recent testwork.
– 288 –
APPENDIX VII
17.
TECHNICAL REPORT
INTRODUCTION AND DESIGN ASSUMPTIONS (continued)
Table 14 presents concentrate forecast basis per Changsha Research:
TABLE 14
CONCENTRATE FORECAST BASIS
Process
Product
Yield
Magnetic Separation
Flotation
Flotation
Iron Concentrate
Phosphorus Concentrate
12.6%
6.0%
4.8%
Concentrate will be trucked approximately 150 km to the new metallurgical complex at Qing
Shan (Yumen).
Downstream metallurgical plants will be constructed to produce upgraded and increased value
products including Direct Reduced Iron products (including high grade iron powder and
associated titanium oxide and vanadium oxide) and Direct Reduced Titanium products (including
high grade titanium oxide and iron concentrate), Figure 18.
Figure 18. Planned product line
Ore
Iron Concentrate
(56-57%)
Phosphate Concentrate
(28-35%)
(43-48%)
Direct Reduction of Titanium
Pellet
Direct Reduction of Iron
Direct
Reduced
Iron
(TFe ≥ 90%)
V2O5 (99%)
Iron
Concentrate
(TFe ≥ 56%)
Iron Oxide
Red (Fe2O2)
TiO2 (≥ 36%)
High-end
Direct
Reduced
Iron Powder
(TFe ≥ 98%)
– 289 –
High grade
Titanium
Oxide
(90%)
APPENDIX VII
18.
TECHNICAL REPORT
MINING ASSESSMENT
18.1 INTRODUCTION AND MINE DESCRIPTION
Mining Method
Open pit mining has been selected on the basis of proximity to surface of the orebodies
and their relatively simplicity. Open pit mining would utilize readily available equipment
and operations would follow a standard drill, blast, load and haul methodology.
Ore would be delivered to primary crushers (average 2 km one-way haul) and waste rock
would be hauled to waste dumps (1.5 km average one-way haul).
Pre-production stripping is estimated at 1.5 years to properly develop the mine for
production.
Mine Equipment
The following equipment has been selected by ENFI based on the mineable reserve and
proposed annual production rate. Equipment choice reflects typical mining equipment
that should be readily available in China:
•
6 — Drills: 15 — 20 cm diameter down-the-hole (DTH) drills with air compressors;
•
6 — Shovels: 4 m3 electric shovels, or 6m3 hydraulic shovels;
•
32 — Trucks 25 t capacity; or
•
25 — Trucks 32 t capacity (preferred).
Equipment productivity calculations were not available for WGM to confirm projected
equipment numbers.
Production Rate
Target is 2.6 Mt/a ore; maximum annual total material mined is 7.8 million tonnes (ENFI).
Average annual total material movement is likely in the range of 5 to 6 Mt/a.
Explosives
Powder factor is estimated at 0.5 kg/t resulting in maximum annual explosives (ANFO
— ammonium nitrate fuel oil) consumption of 1,950 tonnes/a; and maximum blasting
cap consumption @ 140,000/a.
– 290 –
APPENDIX VII
18.
TECHNICAL REPORT
MINING ASSESSMENT (continued)
18.1 INTRODUCTION AND MINE DESCRIPTION (continued)
Mine Life
On the basis of current mineable reserves totalling 12 Mt, mine life at 2.6 Mt/a is 5
years. However, the potential for increasing mineable reserves, and mine life, through
revised pit optimization and additional drilling is considered by WGM to be highly
probable.
As noted in section 15.2, a recent pit optimization sensitivity analysis performed by
ENFI indicates that an increase in reserves of 35% to 16.2 Mt is possible by applying
concentrate prices that better reflect recent market prices.
The current 2007 drilling program is expected to increase Mineral Resources and Mineral
Reserves by upgrading resource classification and extending known mineralized zones.
Mining Issue
A larger pit/reserve will likely be required to support positive economics for a 2.6 Mt/a
ore dressing plant and related downstream metallurgical plants. As the pit is expanded to
incorporate a larger resource it will likely increase the stripping ratio and ultimately
result in increased daily mine production rate. If the mining rate is increased significantly
it will be necessary to review the mining equipment selection and potentially increase
equipment size and unit productivity to meet the higher demands of the operation.
18.2 MINE DESIGN
Pit Optimization
An optimized pit was developed by ENFI using NPV (net present value) software in
Datamine followed by practical design to incorporate a final haul road.
Pit optimization process followed standard industry protocol utilizing Measured and
Indicated Resources only. The 2007 drilling program could result in reclassification of
some Inferred Resources to a higher category and subsequently increase pit recoverable
resources.
The revenue component of the block model was based on concentrate equivalent value
assuming three concentrates: iron, titanium and phosphorus. Concentrate yields used by
ENFI are lower than yields suggested from Changsha Institute testwork; ENFI prices
used for concentrate value are lower than recent market prices.
– 291 –
APPENDIX VII
18.
TECHNICAL REPORT
18.2 MINE DESIGN (continued)
Pit Optimization (continued)
Concentrate product prices used for pit optimization are:
•
55% Fe conc. — RMB480/t conc.;
•
47% TiO2 conc — RMB700/t conc.; and
•
28% P2O5 conc — RMB280/t conc.
Operating costs used for ENFI pit optimization were:
•
Mining — RMB6.5/tonne mined;
•
Ore Dressing — RMB40.0/tonne;
•
Management — RMB32.0/tonne; and
•
Resource Tax — RMB5.6/tonne
To allow for time value of money a Discount Rate of 8% was applied. For the purposes
of the pit optimization process, Pit Slope angles were set at 47 degrees.
Overall the pit optimization criteria are considered to be reasonable, if not conservative,
and provide opportunity for potential pit expansion.
Final Pit Design Basis
Following the pit optimization process it is standard procedure to incorporate detailed
parameters that reflect the proposed mining equipment, and physical conditions.
The following criteria were used to establish the final pit design:
•
Bench height 12 m;
•
Bench face angle 60 degrees;
•
Final pit slope 47 degrees;
•
Haul road gradient 8%;
•
Haul road width 12 m; and
•
Dilution 3%; and Mining losses 3%.
Design criteria are considered to be reasonable based on information provided for this
review.
– 292 –
APPENDIX VII
18.
TECHNICAL REPORT
18.2 MINE DESIGN (continued)
Design Issue
Geological plans indicate the north wall of the pit is located in metamorphic sandstone
and that a major east-west fault passes through the north wall of the pit (Figure 19).
Surface exposure of the fault indicates that it is a sub-vertical feature that dips northward
into the pit wall. Geotechnical review of potential wall rock conditions is recommended.
18.3 FINAL PIT
The final design results in an open pit with an overall length of 760 m; maximum width
of 320 m; and maximum depth of 144 m.
Pit dimensions are considered by WGM to be reasonable and should support the scale of
production proposed.
Figure 19 presents the final pit design according to the parameters used.
N
Fault
Figure 19. Pit design
– 293 –
APPENDIX VII
18.
TECHNICAL REPORT
18.3 FINAL PIT (continued)
Pit Reserves
Mineral Reserves are 12.0 million tonnes averaging 19.5% Fe and 4.2% TiO 2. The
designed pit contains waste rock totalling 20.2 million tonnes for an average stripping
ratio of 1.68.
Ore grades for the final pit reserves are slightly higher in the upper benches of the pit
averaging 20% Fe and 4.8% TiO2. Average bench grades decline with depth in the pit to
18.5% Fe and 3.3% TiO2.
Details of Mineral Reserves and stripping by bench are provided in Table 15.
TABLE 15
MINERAL RESERVES AND STRIPPING RESULTS
Bench
1566
1554
1542
1530
1518
1506
1494
1482
1470
1458
1446
1434
1422
1410
1398
Ore kt
TFe%
TiO2%
2
123
941
1,477
1,647
1,612
1,525
1,410
1,199
926
628
315
139
79
20.2
20.2
19.8
20.2
20.2
19.7
19.2
19.0
18.8
18.8
19.0
18.8
18.4
17.9
TOTAL
12,023
19.5
– 294 –
Strip Ratio
5.4
5.2
4.7
4.7
4.6
4.4
4.3
4.1
3.7
3.5
3.4
3.3
3.2
3.2
Waste kt
80
239
1,527
1,863
3,580
3,266
2,872
2,227
1,661
1,184
834
545
222
48
16
4.2
20,164
1.7
132.0
12.4
2.0
2.4
2.0
1.8
1.5
1.2
1.0
0.9
0.9
0.7
0.3
0.2
APPENDIX VII
18.
TECHNICAL REPORT
18.4 MINE PRODUCTION
The plan is to prepare the pit for production with a pre-production stripping period of 1.5
years. First year production is scheduled at 1.5 Mt ore. Subsequent annual ore production
is targeted at 2.6 Mt per year.
Maximum material mined in a year is estimated to total 7.8 Mt (per ENFI).
No details of annual production rates were provided for this technical review. However,
WGM does not see any impediment to achievement of planned annual ore production
rates as the waste stripping ratio declines as haulage distances and truck cycle times
increase with depth.
19.
MINERAL PROCESSING AND METALLURGICAL TESTING
19.1 INITIAL BENCH SCALE TESTS
Initial bench scale metallurgical processing was carried out on the Existing LRM Mine
ores by the Technological Department of the Mineral Processing Plan at the Panzihua
Iron and Steel (Group) Company, an operating mining company, to determine the
feasibility of producing various commercial products and to determine the relative
processing methods prior to pilot plant tests. Initial testwork was done on individual
mineralized zones: I, II and III. Samples were composited from both diamond drillhole
and trench material to achieve expected grades as follows:
# DDH’s
# Trenches
DDH-kg
DDH-% Fe
Trench-kg
Trench-% Fe
Total Sample-kg
Average % Fe
Zone I
Zone II
Zone III
3
3
91.5
21.1
91.5
20.6
183.0
20.9
3
3
36.0
20.6
36.0
21.0
72.0
20.8
3
3
22.5
21.0
22.5
20.5
45.0
20.8
Total sample available for Bench scale testwork: 300 kg at average grade of 20.9% Fe.
Two samples were crushed and ground to -20 mm size as required for the tests. Assay
results of the two samples showed that 33.99% Fe and 8.87% of the TiO2 were liberated
and distributed in the following grain sizes 5.98% in the +12 mm grain size; 64.75% in
the +3 mm grain size; 25.42% in the 0.074 mm grain size and 4.75% in the <0.074 mm
grain size. It was concluded that the two samples were representative of the overall average
grade of the ore and when compared with other operating mines in China, it was concluded
that the Existing LRM Mine ores were “well worthy of exploitation” from the mineral
dressing point of view.
– 295 –
APPENDIX VII
19.
TECHNICAL REPORT
MINERAL PROCESSING AND METALLURGICAL TESTING (continued)
19.1 INITIAL BENCH SCALE TESTS (continued)
Various tests were carried out to determine the grain size composition, distribution and
uniformity of the various mineral components to determine the milling liberation limits
(to eliminate middling fractions) to obtain the best recovery rate and to maximize the
economic benefits of the mineral processing.
Several comparisons of the products were made with other operating mines for the degree
of liberation at various grind sizes. The tests showed that the Existing LRM Mine samples
were easy to grind and to liberate the various chemical components, i.e., TFe, TiO2,
V2O5, MnO, SiO2, Al2O3 and CaO.
The testing concluded that after processing:
•
The concentrate grades of Fe and TiO2 of the Existing LRM Mine ore at -200
mesh were 33.99% and 8.87% respectively and that the grindability of the ore was
better when compared to the Panzihua mine;
•
When the ore is ground to 90.87% -200 mesh (in one stage grinding) the Fe
concentrate is 54.86% and the TiO2 grade is 9.89%;
•
After two stage grinding (discarding of the coarse fraction) when the -200 mesh
attains 88.67% the total iron TFe grade is 55.0% and the TiO2 grade about 10% at
an iron recovery rate of 65.25%;
•
The Existing LRM Mine ore, when compared to the Panzihua mine’s ores, iron
concentrate has a better grindability but requires a higher percentage of -200 mesh
and more grinding time but with the dressed iron concentrate containing a higher
content of Fe, S and SiO2 and a lower content of vanadium and titanium;
•
In the magnetic processing of the tailings, the Fe grade is 6.44% higher than that
of Panzihua but lower in SiO2, Al2O3, S and Cu; and
•
The titanium processing test was only carried using a shaking table and the titanium
concentrate was only 26.28%.
It was recommended that although the single and two stage grinding produced an iron
concentrate of about 55% Fe it was recommended that two stage grinding be carried out
because of the small grain size required to liberate the minerals and the requirement of
90% -200 mesh together with the regrinding and reprocessing of the coarse grain
concentrate. It was also recommended that a scavenging process of the tailings be
considered to increase the recovery rate.
– 296 –
APPENDIX VII
19.
TECHNICAL REPORT
19.2 PILOT PLANT SCALE DRESSING TEST
A Pilot Plant test was conducted on two composited ore samples of the Existing LRM
Mine ores by Changsha Research Institute of Mining and Metallurgy.
Continuous process testing was performed using samples composited from diamond
drillholes, trenches and pits. Material was sourced only from Zones I, II and III which
are considered to be the principal ore zones. Testwork is complete and an interim report
is expected end of July 2007.
Final mixed samples for metallurgical testing (per ENFI) have following average grades:
NMD (average ore) :
NML (high grade) :
22.1% Fe, 5.6% TiO2
27.6% Fe, 7.3% TiO2
19.3 BULK SAMPLES
Two main bulk samples were prepared prior to Pilot Plant testwork to reflect expected
mineralization: 1) average grade, and 2) high grade. Individual ore zones were composited
separately within each sample.
Material for compositing of the bulk sample was sourced primarily from surface trenches
and pits and is detailed in the following table (compiled from HKFSS data):
Composite Description
NMD
Average Grade
NML
High Grade
Trench Sample
kg
% Fe
% TiO2
23,570
19.9
6.5
7,170
26.8
8.1
Pit Sample
kg
% Fe
% TiO2
1,000
27.0
8.7
9,200
31.5
9.6
kg
% Fe
% TiO2
24,570
20.2
6.6
16,400
29.4
8.9
Total Bulk Sample
– 297 –
APPENDIX VII
19.
TECHNICAL REPORT
19.4 ADDITIONAL SAMPLES
A total of 15 diamond drillholes provided 6,128 kg of assay reject material with an
average grade of 16.2% Fe, a lower grade than the deposit average. Apparently all the
higher grade samples had been used in previous testing (per HKFSS) as earlier thinking
was that the upper 30 m of the deposit was higher grade material, roughly 30% Fe.
Support for this concept possibly came from a 36m long hole drilled in November 2004
that averaged 31.6% Fe and 9.0% TiO2. However, as the hole was drilled vertically, it is
entirely possible that it followed a higher grade band within the mineralized zone and
therefore may not be representative of the entire upper portion of the zone.
In addition, there was available a number of samples from 10 trenches that provided
1,936 kg of material at an average grade of 16.7% Fe. The following list summarizes the
additional material available for compositing:
15 DDH
kg
% Fe
6,128
16.2
10 Trenches
kg
% Fe
1,936
16.7
Composites were prepared under the direction of the Mineral Institute. Actual details of
the composites have not been received but are expected to be included in the interim
report expected upon completion of the testwork end of July 2007.
The high grade NML sample is apparently used only as a ‘reference’ during testing.
Principal flowsheet development is based only on the NMD sample.
– 298 –
APPENDIX VII
19.5 GRADE DISTRIBUTION OF BULK SAMPLE MATERIAL (FROM HKFSS DATA)
Figure 20 present distribution of grade and weight for various samples. The first graph,
Trench and Pit samples, shows a skewed distribution to higher grades.
Figure 20. Distribution of grade and weight
WEIGHT CONTRIBUTION
LITTLE RED MOUNTAIN
IRON GRADE DISTRIBUTION FROM TRENCHES & PITS
- PRIMARY BASIS for NMD BULK SAMPLE 60%
Average Grade
20.2% TFe
50%
Total Sample
Weight 24.57 t
40%
30%
20%
10%
0%
< 9%
9 - 11%
11 - 13% 13 - 15% 15 - 17% 17 - 20% 20 - 25% 25 - 30%
> 20%
TOTAL IRON GRADE
WEIGHT CONTRIBUTION
LITTLE RED MOUNTAIN
IRON GRADE DISTRIBUTION FROM 15 DDH
- Samples Available for NMD BULK SAMPLE (Note: high grade samples removed)
30%
Total Sample
Weight 6135 kg
Average Grade
16.1% TFe
25%
20%
15%
10%
5%
0%
< 9%
9 - 11%
11 - 13% 13 - 15% 15 - 17% 17 - 20% 20 - 25% 25 - 30%
> 20%
TOTAL IRON GRADE
LITTLE RED MOUNTAIN
IRON GRADE DISTRIBUTION FROM 15 DDH
- Samples Available for NMD BULK SAMPLE (Note: high grade samples removed)
WEIGHT CONTRIBUTION
19.
TECHNICAL REPORT
30%
Total Sample
Weight 6135 kg
Average Grade
16.1% TFe
25%
20%
15%
10%
5%
0%
< 9%
9 - 11%
11 - 13% 13 - 15% 15 - 17% 17 - 20% 20 - 25% 25 - 30%
TOTAL IRON GRADE
– 299 –
> 20%
APPENDIX VII
20.
TECHNICAL REPORT
INFRASTRUCTURE
20.1 INFRASTRUCTURE ISSUES
Infrastructure planning has been on the basis of achieving potential capacity of 5.0 Mt/a
mining and concentrating. Key infrastructure components that would be impacted by a
change in production level are Water and Power supply. Potential capital cost reduction
may be realized if infrastructure is sized only for the proposed 2.6 Mt/a operation.
Provision of Land and infrastructure rebate is contingent on commitment to development
of metallurgical plant(s) near Yumen.
20.2 ROADS
Access to both the northern and southern operations will require construction of 150 km
of roads. Design is planned for 50 t (concentrate haul) trucks. Initial width will be 8 m.
Construction materials will be primarily granite that will be quarried and crushed near
Yumen and the mine site.
20.3 POWER
A 140 km power line, possibly 110 kV or 220 kV, will be constructed to the northern
operations. An additional 30 km line is required for the southern metallurgical complex.
Two transformer stations will be required.
Power will be drawn from the main grid and is expected to cost RMB0.28/kWh with a
maximum of RMB0.40/kWh.
20.4 WATER
A 160 km, 30 cm water pipeline will be constructed from the Chijinxia Reservoir (20 km
from Yumen) to service the northern operations. A total of 4 pumping stations will be
required due to the rolling terrain that must be traversed. The Chijinxia Reservoir will
also provide water for the metallurgical plants at Quingshan.
It is estimated that 80-85% of the process water will be recycled.
Water will be required for process water make-up, drilling, road watering, sewage and
potable water consumption.
– 300 –
APPENDIX VII
20.
TECHNICAL REPORT
INFRASTRUCTURE (continued)
20.5 LAND
Initial estimate is that approximately 1,000 acres (Chinese mu) of land are required.
Ultimately the project will require 2,000 acres.
Land cost (purchased from the government) is estimated to be RMB80 million.
Approximately 90% of the cost is expected to be returned to support development of
Infrastructure.
20.6 MINE SITE LAYOUT
No site layout design has yet been prepared for location of ore dressing plant, support
facilities, tailings pond, or waste rock dump.
20.7 METALLURGICAL PLANT SITE
No site layout design has yet been developed.
21.
ENVIRONMENTAL ASSESSMENT (REF. ENFI)
All proposed project sites have been visited and data collected by ENFI Environmental personnel.
Data is incomplete but sites are deemed to have minimal issues.
One Asian archaeological site was identified; operations are required to stay 500m away.
Little Red Mountain is located within the Asian Biological Zone and Military Zone. Permission
to proceed has already been granted from appropriate government agencies. Apparently the
Government has no specific regulations for the Xiao Hong Shan site.
Project development plan is to engage an environmental consultant to manage the environmental
assessment process including identification of potential pollutants and proposed treatment; the
environmental impact analysis; and overall supervision of the process. Four levels of government
will be involved in the approval process.
Specific plans for the mine site are to provide relocation compensation to the solitary “herdsman”
in the area and to minimize project impacts such as animal entry into mining area and water
flow.
There are no concerns for the Road, Power and Pipeline corridor.
The Government is to provide the route; the pipeline is buried; and the issues are minimal.
– 301 –
APPENDIX VII
22.
TECHNICAL REPORT
CAPITAL COST SUMMARY
Capital costs for this review were initially only from the HKFS Business Plan (May 2007).
ENFI intend to develop feasibility level costs once final metallurgical testing is completed.
Cost estimates for Direct Reduction of Iron and Titanium Concentrates were recently received
from Central South University (Changsha) following completion of bench scale testing of iron
pellet reduction. These cost estimates have been incorporated into the technical assessment.
22.1 PRE-CONSTRUCTION
Pre-construction costs are estimated at RMB61 million for drilling, surveys, metallurgical
testing, feasibility study, environmental report, administration and management fees.
Costs appear reasonable although the extent of drilling required to increase resource/
reserves to target levels may be significantly higher.
22.2 INFRASTRUCTURE
Capital cost estimate for Infrastructure is based on supporting ultimate production rate
of 5.0 Mt/a concentrate. Detailed costs were developed based on experience and standard
cost basis.
Road construction is estimated at RMB162 million and includes allowance for 10 cm
asphalt which could possibly be eliminated for significant cost saving (30-50%).
Power supply cost is estimated at RMB154.5 million.
Water supply, principally pipeline and pumping stations, is estimated at RMB114.5
million.
Communications are estimated at RMB8.5 million.
Community and Amenities cost is estimated at RMB35.6 million (reduced from published
number following review that identified double-count).
Land cost is estimated at RMB80 million (purchase from government). The company
expects to receive 90% rebate from the Government for infrastructure development.
22.3 MINING
Capital cost estimate for Mining for the 5.0 Mt/a scenario is RMB250 million and is
based on known equipment costs plus government-established target costs for preproduction stripping (per HKFS). No details were available for WGM’s review of the
costs allocated for mine equipment and mine development.
– 302 –
APPENDIX VII
22.
TECHNICAL REPORT
CAPITAL COST SUMMARY (continued)
22.3 MINING (continued)
WGM estimate that approximately 1.5 million tonnes of waste should be mined in the
pre-production phase to ensure adequate ore is available for start-up and possible blending.
Pioneering costs can be two to three times normal (RMB6.5/t mined per ENFI) production
costs due to uneven terrain, poor access, and resulting low equipment productivities.
Mine development costs would be in the range of RMB13 to 20 per tonne mined or
approximately RMB20 million. It is assumed that mine development costs are independent
of the planned production rate.
The cost of the required mining fleet and support equipment for the 2.6 Mt/a scenario is
estimated as RMB138 million or 60% of the cost of the equipment fleet required for the
5.0 Mt/a operation (basis: 20% fixed; 80% variable).
22.4 ORE DRESSING PLANT
Capital cost estimate for the Ore Dressing Plant is considered to be at a Scoping Study
basis (i.e., Ó35%) with costs developed from similar operations, experience, and manuals.
The HKFS Business Plan estimates RMB400 million total cost for a 5.0 Mt/a plant.
WGM and HKFS agree that some factors of scale be applied to estimate the cost of a 2.6
Mt/a plant as capital costs are not directly proportional to production rate.
Using a factor of 0.6 (basis: 20% fixed; 80% variable) the cost of a 2.6 Mt/a ore dressing
plant would be RMB240 million.
22.5 METALLURGICAL PLANTS
For the purpose of this technical assessment HKFS have suggested that the cost estimate
include metallurgical plants only for the production of Direct Reduced Iron and Direct
Reduced Titanium. Details supporting the preliminary cost estimate for both direct
reduction plants were prepared by Central South University. The estimates include
allowances for equipment and facilities; construction; design and installation; plus
contingency. Land costs estimated by Changsha are excluded as land cost is estimated
separately.
Estimated capital cost for a 260,000 tonne annual capacity Iron Concentrate processing
plant is RMB174 million.
Estimated capital cost for a 130,000 tonne annual capacity Titanium Concentrate
processing plant is RMB90 million.
– 303 –
APPENDIX VII
22.
TECHNICAL REPORT
CAPITAL COST SUMMARY (continued)
22.6 TOTAL PROJECT CAPITAL
Estimated Project capital costs are a combination of factored costs from the HKFS
Business Plan as well as preliminary capital cost estimate for metallurgical plants provided
by Central South University.
Total capital cost for the 2.6 Mt/a mine, ore dressing and DRI plants scenario is estimated
to be RMB1.13 billion.
Estimated costs are distributed among three principle areas: Infrastructure (36%), northern
Primary Operations (35%), and southern Metallurgical Complex (23%). Cost detail was
not available for several significant cost components for this technical review at this
stage. Therefore the reasonableness of the cost estimate and adjustment factors cannot
be assured. These costs, however, can be considered indicative of the magnitude required
to develop this project.
Finalization of process and metallurgical flowsheets are required prior to development
of final feasibility cost estimates by ENFI (Table 16).
TABLE 16
Capital Expenditure
Production Rate
RMB M
Mt/a — Ore
Mining
0.52
2.6
61
1.0
61
5%
Roads
Power
Water
Communications
Community
Land
Subtotal
162
154
114
9
83
0
522
0.60
0.90
0.90
1.00
0.66
0.79
97
139
103
9
55
8
410
9%
12%
9%
1%
5%
1%
36%
Equipment
Pre-production strip
Subtotal
230
20
250
0.60
1.00
0.63
138
20
158
12%
2%
14%
400
1,233
0.60
0.70
240
869
21%
77%
174
90
264
15%
8%
23%
1,133
100%
Ore Dressing Plant
Total HKFS Input
Metallurgical Plants
% of total
5.0
Pre-Development Expenses
Infrastructure
Forecast
RMB M
Iron DRI
Titanium DRI
Total Changsha Input
TOTAL INITIAL PROJECT CAPEX
– 304 –
APPENDIX VII
23.
TECHNICAL REPORT
OPERATING COSTS
Sources of operating costs available for this technical review include:
1.
2.
3.
HKFS Business Plan (May 2007).
ENFI.
Central South University.
HKFS Business Plan developed operating cost estimates for each business unit based on fairly
standard cost breakdown: wages and benefits, consumables, repair and maintenance,
management and administration. Separate cost centres for transportation of supplies and end
products are provided.
Unit costs developed through this process were verified for Mining and Ore Dressing and
found to be reasonable and comparable to preliminary costs used by ENFI in the pit optimization
process.
All costs presented by HKFS are of a preliminary or scoping study basis and developed largely
from research and comparison to similar operations.
The costs presented by ENFI are also of a preliminary basis although potentially founded on
the technical bases of the project.
23.1 MINING
HKFS Business Plan presents a Mining cost of RMB15.5 per tonne ore. Considering this
cost includes waste mining as well as ore, and assuming the average stripping ratio from
ENFI pit optimization, the calculated unit cost of mining is RMB5.8/tonne mined.
– 305 –
APPENDIX VII
23.
TECHNICAL REPORT
OPERATING COSTS (continued)
23.1 MINING (continued)
In comparison, ENFI have used a mining cost of RMB6.5/tonne mined for the pit
optimization studies. Mining costs were developed from similar operation comparison.
No cost breakdown was available for review.
Given the small scale of equipment proposed, the relatively low labour cost component,
and the fact that Management, Technical and Supervisor costs are not included in the
ENFI cost estimate, WGM agree that the proposed costs are reasonable.
23.2 ORE DRESSING PLANT
HKFS Business Plan presents estimates annual concentrate production and unit cost of
production for three concentrates: iron, titanium and phosphorus. Using calculated annual
costs and production plus the suggested average weight yield of 23.2%, the average Ore
Dressing cost of RMB48.8/tonne ore was determined.
In comparison, ENFI have used an Ore Dressing cost of RMB40.0/tonne ore. Costs were
developed from similar operation comparison. No cost breakdown was available for
review.
Given the scale of processing (approximately 7,500 t/d), the relatively low labour cost
component, and the fact that Management, Technical and Supervisor costs are not included
in ENFI cost estimate, WGM agree that the proposed costs appear reasonable.
23.3 MINE MANAGEMENT
ENFI have estimated Mine Management cost of RMB32.0/tonne ore for pit optimization
process. This cost centre includes Management/Supervision and Technical personnel
costs for the Mine and Ore Dressing Plant as well as other general personnel costs (i.e.,
Human Resources). Included in this cost centre is an allowance for Depreciation (value
unknown) which is considered an Indirect cost and should not be included in Direct
costs. Further details are required to assess this cost fully.
23.4 RESOURCES TAX
ENFI have estimated Resources Tax at RMB5.6/tonne ore for the purpose of the pit
optimization process. This amount is net of rebate per government policy.
– 306 –
APPENDIX VII
23.
TECHNICAL REPORT
23.5 CONCENTRATE TRANSPORT
Cost of trucking concentrate from the ore dressing plant to the metallurgical plant were
estimated by HKFS at RMB80/t concentrate. WGM agree that this cost is reasonable
considering the haulage distance involved. Based on an average plant yield of 23.2%,
concentrate trucking cost is equivalent to RMB18.5/t ore mined. No allowance was made
by ENFI in the pit optimization process for the cost of Concentrate Transport. This cost
is considered to be a cost of concentrate production.
23.6 METALLURGICAL PLANTS
Operating cost for Direct Reduction of Iron Concentrate plant was developed by Central
South University on the basis of 147 kt DRI annual production rate. Cost breakdown
includes raw materials, power and water, wages and benefits, depreciation and
maintenance, and management fee.
Total operating cost is estimated at RMB1,784/t DRI.
By-product credits for titanium concentrate and powdered vanadium oxide are estimated
at RMB828/t DRI for a net cost of RMB956/t DRI.
Operating cost for Direct Reduction of Titanium Concentrate plant was developed by
Central South University on the basis of 62 kt high grade titanium oxide annual production
rate. Cost breakdown includes raw materials, power and water, wages and benefits,
depreciation and maintenance, and management fee.
Total operating cost is estimated at RMB1343/t high grade titanium oxide.
By-product credits for hematite oxide and iron concentrate are estimated at RMB1,012/
t high grade titanium oxide for a net cost of RMB956/t high grade titanium oxide.
Operating costs in the Tables 17 and 18 were estimated by Central South University for
the direct reduction plants and should be considered preliminary in nature although costs
reflect similar operations.
– 307 –
APPENDIX VII
23.
TECHNICAL REPORT
23.6 METALLURGICAL PLANTS (continued)
TABLE 17
OPEX (DIRECT REDUCTION OF IRON CONCENTRATE)
Item
Raw materials
Iron concentrate
Reducing coal
Additive
Na2SO4
Unit
Consumption
(t/t DRI)
Unit Cost
(Yuan/t)
Cost
(Yuan/t DRI)
1.77
1.416
0.0354
0.0343
500
300
3000
500
885
424.8
106.2
17.15
Other reagent
Subtotal
Power and Water
Water (m3)
Power (wh)
Subtotal
2% of iron concentrate
20% of titanium and
vanadium oxide
50
1,483.15
30
100
1.5ʏ/m3
0.4ʏ/kwh
Wages and Benefits
45
40
85
29.35
Depreciation and
Maintenance
10%
126.59
Management Fee
Value added tax
3.5%
0%
60.34
0.00
By-products
Titanium concentrate
Powdered V2O5
Subtotal
Remarks
0.3
0.00616
400
115000
TOTAL COST
(120)
(708.4)
(828.4)
956.03
– 308 –
200 workers, wages: 18,000
yuan per worker per year,
Benefit: 20% of wages
base on 188,670,000
investment, pay back period
is 5 years
base on 2,380 yuan per tonne
of DRI, minus cost for
purchasing raw materials
APPENDIX VII
23.
TECHNICAL REPORT
23.6 METALLURGICAL PLANTS (continued)
TABLE 18
OPEX (DIRECT REDUCTION OF TITANIUM CONCENTRATE)
Items
Raw materials
Titanium concentrate
Reducing coal
Additive
Other Reagent
Subtotal
Power and water
Water(m3)
Power(kwh)
Subtotal
Unit Consumption
(t/t High
Grade Ti oxide)
Unit cost
(Yuan/t)
Cost
(Yuan/t High
Grade Ti oxide)
2.096
2.096
0.06288
100
300
3000
209.60
628.8
188.64
20
1,027.04
10
150
1.5yuan/m3
0.4yaun/kwh
15
60
75
Wages and benefits
34.83
Depreciation and maintenance
10%
161.35
Management fee
Value added tax
3.5%
0%
45.44
0.00
By-products
Hematite oxide
Iron concentrate
Subtotal
0.118
1.01
Total cost
24.
4300
500
Remarks
3% of titanium concentrate
100 workers, wages: 18,000 yuan
per worker per year, Benefit:
20% of wages
base on 102,690,000 investment,
pay back period is 5 years
base on 5,500 yuan per tonne of
DRI, minus cost for purchasing
raw materials
(507.4)
(505)
(1,012.4)
331.26
CONCLUSIONS AND RECOMMENDATIONS
The following are the conclusions and recommendations by WGM from the technical review
during July 12 to 18, 2007 of the Xiao Hong Shan Iron-Titanium-Vanadium deposit in Inner
Mongolia Autonomous Region, People Republic of China for Aurora Global.
– 309 –
APPENDIX VII
24.
TECHNICAL REPORT
CONCLUSIONS AND RECOMMENDATIONS (continued)
WGM recognize that considerable technical studies have been carried out on the deposit to
date and that additional studies are in progress however, the studies completed are insufficient
to support a full feasibility study.
Mineral Resource and Mineral Reserve estimates have been developed using acceptable industry
standards and procedures. The mineral deposit, however, has not been fully defined; potential
for increasing resources and reserves is considered to be good.
Sufficient Mineral Reserves have been identified to support the proposed 2.6 million tonne per
year Mining and Ore Dressing operation for only five years. Additions to mineral reserves
should be a high priority objective of project development.
Detailed studies of a feasibility level have been completed by ENFI. However, specific reports,
particularly those in support of mineral dressing and metallurgical assumptions, and specifically
the finalization of the flowsheets have not yet been received and therefore not reviewed for this
technical assessment. Recent metallurgical results, issued by Central South University, are
based only on bench scale testwork and comparison to similar operations.
Key assumptions for metallurgical recoveries are not yet confirmed. Significant differences
exist between concentrate yields currently projected by ENFI and Changsha.
The capital cost estimate for mine, ore dressing plant, infrastructure and iron and titanium
direct reduction plants is estimates to be RMB1.13 billion. Cost estimates for both Capex and
Opex are largely adapted from similar operations or developed from cost manuals and should
be considered preliminary (Ó35%) at best. Proposed Mining and Ore Dressing operating costs
are considered reasonable. All cost estimates for a feasibility study level must be developed in
detail.
In summary, most of the business projections appear to be based on preliminary studies and
cost estimates. The WGM technical assessment review therefore concludes that the Xiao Hong
Shan project is technically at a Scoping Study or Preliminary Assessment level.
WGM has concluded that the preliminary studies show that the Xiao Hong Shan deposit merits
ongoing exploration and could potentially support a viable project provided that sufficient
additional Mineral Resource/Reserves are developed.
WGM agrees with ENFI that additional Mineral Resources/Reserves are required and that
diamond drilling in both the proposed pit area and to the east over the untested magnetic
anomalies be continued to fully assess the potential of the site.
WGM recommends the sample preparation of the subsamples for analysis be prepared at an
independent laboratory prior to being sent for analysis and to include blind, standard, repeat
and blank samples to meet international quality assurance/quality control standards.
– 310 –
APPENDIX VII
24.
TECHNICAL REPORT
CONCLUSIONS AND RECOMMENDATIONS (continued)
WGM recognizes that much of the ENFI feasibility study is based on the assumption of achieving
a 2.6 Mt/year production rate. Efforts should therefore be focussed on increasing mineral
resources/reserves through on-site exploration activities as well as re-assessment of potentially
recoverable mineral reserves through on-going pit optimization studies. Assessment of threshold
mineral reserves required to support minimum project investment is highly recommended both
to minimize financial exposure and to optimize project capacity and development timeline.
WGM recommends that full documentation of all technical studies, key assumptions, and cost
estimates become an on-going process as part of the project development plan and that a Project
Director assume full responsibility for organization and management of all aspects of project
development.
– 311 –
APPENDIX VII
TECHNICAL REPORT
Watts, Griffis and McOuat
APPENDIX 1:
EXPLORATION PERMIT
– 312 –
APPENDIX VII
TECHNICAL REPORT
– 313 –
APPENDIX VII
TECHNICAL REPORT
APPENDIX 2:
CERTIFICATE OF ANALYSES
– 314 –
APPENDIX VII
TECHNICAL REPORT
– 315 –
APPENDIX VII
TECHNICAL REPORT
– 316 –
APPENDIX VII
TECHNICAL REPORT
– 317 –
APPENDIX VII
TECHNICAL REPORT
– 318 –
APPENDIX VII
TECHNICAL REPORT
CERTIFICATE
To Accompany the Report titled
“An Independent Technical Assessment on the Little Red Mountain,
Iron-Vanadium-Titanium Deposit, Xiao Hong Shan, People’s Republic of China for
Aurora Global Investment Holdings Limited”
dated 15 October, 2007
I, Velasquez Spring, do hereby certify that:
1.
I reside at 1020 Walden Circle, Unit 17, Mississauga, Ontario, Canada, L5J 4J9.
2.
I am a graduate from the University of Toronto, Toronto, Ontario with a B.A.Sc. Degree in
Applied Geology (1957), and I have practised my profession continuously since that time.
3.
I am a registered Professional Engineer with Association of Professional Engineers Ontario
(Membership Number 43927011).
4.
I am a Senior Geologist with Watts Griffis and McOuat Limited, a firm of consulting geologists
and engineers, which has been authorized to practice professional engineering by Professional
Engineers Ontario since 1969, and professional geoscience by the Association of Professional
Geoscientists of Ontario.
5.
I am a qualified person for the purpose of NI 43-101 with regard to epithermal mineral deposits
and resource and reserve audits.
6.
I visited the property on October 14 and 15, 2005 and on May 17 and 19, 2006, and I visited
Beijing during July 12 to 18, 2007 and met with the technical personnel of ENFI Engineering
Corporation and Hong Kong Forest Source Mining Industry Holding Company Limited.
7.
I am the co-author of this report.
8.
I have no personal knowledge as of the date of this certificate of any material fact or change,
which is not reflected in this report.
9.
Neither I, nor any affiliated entity of mine, is at present, under an agreement, arrangement or
understanding or expects to become, an insider, associate, affiliated entity or employee of Aurora
Global Investment Holdings Limited or any associated or affiliated entities.
10.
Neither I, nor any affiliated entity of mine own, directly or indirectly, nor expect to receive, any
interest in the properties or securities of Aurora Global Investment Holdings Limited or any
associated or affiliated companies.
11.
Neither I, nor any affiliated entity of mine, have earned the majority of our income during the
preceding three years from Aurora Global Investment Holdings Limited or any associated or
affiliated companies.
– 319 –
APPENDIX VII
12.
TECHNICAL REPORT
I have read NI 43-101 and Form 43-101F1 and have prepared the technical report in compliance
with NI 43-101 and Form 43-101F1; and have prepared the report in conformity with generally
accepted Canadian mining industry practice, and as of the date of the certificate, to the best of
my knowledge, information and belief, the technical report contains all scientific and technical
information that is required to be disclosed to make the technical report not misleading.
Velasquez Spring, P.Eng., B.A.Sc.
15 October, 2007
– 320 –
APPENDIX VII
TECHNICAL REPORT
VELASQUEZ SPRING, P. Eng.
Senior Geologist
Velasquez Spring has 50 years of experience in the mineral industry with a solid
background in the planning and managing of exploration programs, due diligence,
feasibility studies, and valuations of both large and small deposits, and operating mines.
The experience has been worldwide dealing with governments at all levels, diplomatic
offices and institutional organizations and covering deposits of precious and base metals,
iron, nickel, uranium, manganese and a suite of industrial minerals including dimension
stones. During his career, Mr. Spring has investigated hundreds of mineral deposits with
particular experience in tropical weathered laterite/saprolitic type deposits in Africa,
Brazil, Cuba, Columbia, Dominican Republic, Guatemala, and Puerto Rico.
EDUCATION
The New Manager (Management Program) — University of Colorado (1971)
Graduate Studies (Economic Geology) — University of Toronto, Canada (1958 — 1961)
B.A.Sc. (Applied Geology) — University of Toronto, Canada (1957)
PROFESSIONAL EXPERIENCE
Watts, Griffis and McOuat Limited (since 1986)
•
In the past 16 years, Mr. Spring has worked worldwide on a broad range of metallic and industrial
minerals projects, producing specialized property and company evaluations, and feasibility
and due diligence type studies, as well as recommendations for exploration programs, and has
provided independent ore reserve estimates. Recent assignments have included preparation of
a NI-43-101 report on the silver/gold mines of Luismin SA in Mexico for Wheaton River
Minerals Ltd., a NI-43-101 report on the lateritic nickel deposits held by Canico in Brazil, and
the lateritic nickel deposits of Jaguar Nickel Inc. in Guatemala. Mr Spring has special experience
and knowledge of epithermal gold silver deposits in Latin America, Asia and Nevada. Other
commodities have included lateritic deposits, placer deposits for gold, gemstones, diamonds
and heavy mineral deposits and dimension stones.
Eluma S.A. Industria e Comercio (1985)
•
As Director of Geology, Mr. Spring was responsible for the company’s mineral programs
throughout Brazil. These programs were primarily for “jungle-type” placer gold deposits but
also included evaluation of copper, tin, diamonds and primary gold deposits. The placer gold
program covered 50,000 km2 and involved exploration, development and exploitation phases.
Special evaluation and processing considerations were also developed to handle the particular
characteristics of “jungle type” placer deposits (including eluvial and alluvial phases).
– 321 –
APPENDIX VII
TECHNICAL REPORT
Noranda Exploration Co. Ltd. (1973 — 1984)
•
As Exploration Manager for South America, Mr. Spring administered Noranda’s district offices
in Chile, Brazil, Argentina and Peru, comprising some 30 geologists and other professional
staff. Feasibility studies were carried out on the Chapada (Cu-Au “porphyry”) deposit, Brazil,
and the Andacollo (porphyry Cu) deposit in Chile. Exploration resulted in the discovery of a
volcanic massive sulphide belt in the extreme south of Chile and Mississippi type Pb-Zn deposits
in both Peru and Brazil.
•
Through the period 1973-1984, hundreds of South American mineral deposits were examined
under Mr. Spring’s direction. These include among many others: Camaqua, Salobo, Caraiba,
Pedra Verde, Nova Lima, Rio das Velhas Greenstone Belt, Morro Agudo, Niquelandia, and
Santa Teresinha de Goias in Brazil; The Bambas, Cerro Verde, Pashpap, Antamina in Peru;
Quebrada Blanca, Collahausi, El Toqui and El Teniente and Chile; and Cerro Pintada, Los
Gigantes, Cerro Castillo and Fatima in Argentina.
Texasgulf Inc. (1970 — 1973) / Texasgulf Sulphur (1967 — 1970)
•
Mr. Spring served as Senior Staff Geologist responsible for the United States east of the Rocky
Mountains. Activity was directed mainly in the search for VMS and Mississippi lead-zinc
deposits. Extensive airborne magnetic and electromagnetic surveys coupled with ground
geophysics and diamond drilling led to the discovery of massive sulphide deposits in Wisconsin
and a buried iron deposit in western Minnesota. As Exploration Manager for Texasgulf Sulphur,
Mr. Spring was responsible for the administration and technical work on programs throughout
Mexico (volcanic massive sulphides, porphyry copper and epithermal precious metal deposits.
Earlier Experience (prior to 1967)
•
As a consultant in 1967, Mr. Spring carried out independent geological investigations for clients
in Puerto Rico, Dominican Republic and Central America. In the previous year, he developed
a preliminary manganese exploration program for Union Carbide Corporation over extensive
areas of unmapped, virgin Amazon that led to the discovery of a new manganese belt and to the
Carajas iron deposits. Mr. Spring served as Exploration Manager for Amax Exploration in
1965, responsible for the phosphate programs of Florida, South Georgia and South Carolina.
As Exploration Geologist for Ponce Mining Co. (1961 — 1965), Mr. Spring assisted in the
evaluation of the Rio Vivi Porphyry Cu-Au deposit of central Puerto Rico.
– 322 –
APPENDIX VII
TECHNICAL REPORT
PROFESSIONAL AFFILIATIONS
Member, CSA Mining Technical Advisory and Monitoring Committee.
Member, Professional Engineers Ontario.
Member, Prospectors and Developers Association of Canada.
Member, Canadian Institute of Mining and Metallurgy.
Past Affiliations
Member, the Canada committee of the TSE and the Ontario Securities Commission on joint
recommendations for “Exploration Guidelines and Reporting Standards”.
Reviewer, the CIMM Standards on Mineral Resource/Mineral Reserve Definitions and Guidelines.
Member, the Halton Association of Geoscientists on the Ontario Professional Geoscientists Act.
Member, the Committee of Association of Geoscientists of Ontario (AGO), the forerunner of the
Association of Professional Geoscientist of Ontario (APGO).
Public Appointee Council Member, the Transitional and Elected Council of the APGO.
Member, the CIMM group on Standards for Estimation of Mineral Resource/Reserve and
Classifications and Best Practice Guideline for laterite deposits, placer diamonds, alluvial deposits,
and heavy mineral deposits.
LANGUAGES
Portuguese, Spanish and French.
– 323 –
APPENDIX VII
TECHNICAL REPORT
CERTIFICATE
To Accompany the Report titled
“An Independent Technical Assessment on the Little Red Mountain,
Iron-Vanadium-Titanium Deposit, Xiao Hong Shan, People’s Republic of China for
Aurora Global Investment Holdings Limited”
dated 15 October, 2007
I, Robert Didur, do hereby certify that:
1.
I reside at 75 Prominence View SW, Calgary, AB T3H 3M8.
2.
I am a graduate from the University of Toronto, Toronto, Ontario with a B.A.Sc. Degree in
Geological Engineering (1972), and I have practised my profession since that time.
3.
I am a registered Professional Engineer with the Association of Professional Engineers,
Geologists and Geophysicists of Alberta (Membership Number 31648).
4.
I am a Senior Associate Mining Engineer with Watts Griffis and McOuat Limited, a firm of
consulting geologists and engineers, which has been authorized to practice professional
engineering by Professional Engineers Ontario since 1969, and professional geoscience by the
Association of Professional Geoscientists of Ontario.
5.
I am a qualified person for the purpose of NI 43-101.
6.
I have never visited the property but I visited the offices of ENFI Engineering Corporation and
Hong Kong Forest Source Mining Industry Holding Company Limited, and met with their
technical personnel during July 12 to 18, 2007.
7.
I am the co-author of this report.
8.
I have no personal knowledge as of the date of this certificate of any material fact or change,
which is not reflected in this report.
9.
Neither I, nor any affiliated entity of mine, is at present, under an agreement, arrangement or
understanding or expects to become, an insider, associate, affiliated entity or employee of Aurora
Global Investment Holdings Limited or any associated or affiliated entities.
10.
Neither I, nor any affiliated entity of mine own, directly or indirectly, nor expect to receive, any
interest in the properties or securities of Aurora Global Investment Holdings Limited or any
associated or affiliated companies.
11.
Neither I, nor any affiliated entity of mine, have earned the majority of our income during the
preceding three years from Aurora Global Investment Holdings Limited or any associated or
affiliated companies.
– 324 –
APPENDIX VII
12.
TECHNICAL REPORT
I have read NI 43-101 and Form 43-101F1 and have prepared the technical report in compliance
with NI 43-101 and Form 43-101F1; and have prepared the report in conformity with generally
accepted Canadian mining industry practice, and as of the date of the certificate, to the best of
my knowledge, information and belief, the technical report contains all scientific and technical
information that is required to be disclosed to make the technical report not misleading.
Robert Didur, P.Eng., B.A.Sc.
15 October, 2007
– 325 –
APPENDIX VII
TECHNICAL REPORT
ROBERT DIDUR, P.Eng.
Robert Didur is a Professional Engineer with over 34 years experience in mine
engineering, planning and development, project planning and evaluation, civil construction
and open pit mining in Arctic and northern environments. Mr. Didur is familiar with project
study and evaluation requirements of world-class organizations, including the Canadian
diamond mining industry.
EDUCATION
B.A.Sc. (Geological Engineering) University of Toronto, Toronto, ON (1972)
PROFESSIONAL EXPERIENCE
Independent Consultant, Calgary, AB (since February 2007)
Nuna Logistics, Edmonton, AB (2005 — 2007)
•
As Project Manager at the Jericho Diamond Mine, Nunavut, Mr. Didur provided operational
analysis and direction regarding improvements to the planning and mine development process.
From June 2006 to January 2007, Mr. Didur was Project Manager for Comaplex Minerals’
Meliadine West Gold Project, Nunavut, and was responsible for re-focus of the project and
preparation of a conceptual development plan as a basis for a Scoping/Pre-feasibility Study.
From January 2005 to May 2006, Mr. Didur was Project Manager Site Preparation at De Beers’
Snap Lake Diamond Project (value $45 million), responsible for a team of 80 on-site personnel
engaged in first stage surface construction activities, including quarrying, crushing, excavation,
and construction of all site infrastructure including airstrip extension, tailings impoundment,
fuel tank pads, roads, fresh water inlet, treated water outlet, conveyor portal, camp pad and
laydown areas.
BHP Billiton Diamonds Inc., Yellowknife, NT (2001 — 2004)
•
As Surface Mine and Infrastructure Project Manager, Mr. Didur created a leading-edge Resource
Development Plan for the Ekati Diamond Mine, incorporating detailed cost and operational
analyses, and utilizing sophisticated software, resulting in major shifts in the mine development
plan and a significant project NPV increase. He coordinated and delivered: surface mine
infrastructure development projects achieving time, quality and budget targets; a Feasibility
Study for timely power house expansion; and fuel storage and accommodation requirements
for expanded operations. Mr. Didur coordinated preparation of a Pre-Feasibility Study that
examined Plant expansion alternatives based on progressive de-bottlenecking of the Ekati
diamond processing plant, integrated with strategic mine development options, to maximize
project NPV. He also provided independent early stage project assessment to Scoping level for
BHPB’s international Business Development and World Exploration groups.
– 326 –
APPENDIX VII
TECHNICAL REPORT
Iron Ore Company of Canada, Labrador City, NL (1994 — 2001)
•
From 1996 to 2001, Mr. Didur was Superintendent Technical Services at the massive, multi-pit
iron ore operation. He coordinated a multi-discipline team responsible for mine planning,
geology, grade control, survey and blast design and was responsible for the development of a
modern 25-year mine plan that supported cost reduction, production expansion, mining
efficiencies, and increased project value. Mr. Didur directed exploration, project evaluation,
environmental studies, and government interface, resulting in approval for a phased mine
approach, and fast-track development, of the new billion tonne, surface-mineable Luce iron
ore deposit. Mr. Didur coordinated mine development and contractors to achieve production,
only 20 months from drilling of the ‘discovery’ hole. The Luce Mine has evolved, as planned,
into IOC’s keystone operation. He also managed the evolution of mine planning and quality
control processes to accurately predict operating costs and ore quality, and supported mine
optimization, product development and reduced product variability during a period of significant
ore quality transition and product diversification.
•
From 1994 to 1996, Mr. Didur was Senior Mine Planning Engineer and developed detailed
planning processes to manage active Mineral Reserves, mine sequencing and crude ore blending
to achieve process objectives. Mr. Didur managed contractors and a $7 million budget to achieve
on-time and on-budget development and start-up of two new pits.
Fernie, BC and Calgary, AB (1991 — 1994)
•
Examined various entrepreneurial opportunities.
Esso Resources, Coal Mountain Mine, Sparwood, BC (1985 — 1990)
•
Mr. Didur was Assistant General Manager during 1988 to 1990, and was influential in coal
quality improvements and acquisition and development of an adjacent property to expand
reserves at the open pit thermal coal mine. He guided technological and organizational change
through innovative techniques in a flattened organization to achieve efficiency improvements
and cost reduction. As Plant Superintendent during 1986 to 1987, Mr. Didur was responsible
for start-up and operation of a new $50 million heavy media coal preparation plant, including
maintenance, quality control, engineering and shipping. From 1985 to 1986, Mr. Didur was
Engineering Manager responsible for improvements to mine planning, surveying, geology,
exploration and environment. He implemented a new mine plan and restructuring to achieve
reduced costs and improved effectiveness.
Esso Minerals Canada, Calgary, AB (1978 — 1984)
•
As Senior Mining Engineer, Mr. Didur coordinated redesign of the Coal Mountain Mine open
pit mining sequence and operating philosophy to achieve a positive Feasibility Study supporting
plant and mine expansion. He managed a comprehensive 3-year Pre-feasibility Study of the
Kutcho Creek, BC, 20 Mt Cu/Zn massive sulphide deposit project, including all geology, mining
(O/P and U/G components), metallurgical, environmental and economic issues.
– 327 –
APPENDIX VII
TECHNICAL REPORT
Patino Mines Quebec, Chibougamau, PQ (1972 — 1978)
•
Mr. Didur was a Geologist responsible for exploration, ore definition, grade control and reserves
at the underground Cu/Au and Cu/Zn/Ag/Au operations (Copper Rand, Portage, Lemoine). He
prepared structural analysis and interpretation of new gold zone controls.
International Nickel Company (INCO) Limited (1967 — 1971)
•
Summer employment: Mr. Didur has two seasons of exploration experience employing
geophysics and field mapping techniques and two seasons of stope mining at the Levack Mine.
PROFESSIONAL ASSOCIATIONS
Member, Association of Professional Engineers, Geologists, and Geophysicists of Alberta.
Member, Association of Professional Engineers, Geologists and Geophysicists of the Northwest
Territories.
Member, Canadian Institute of Mining, Metallurgy and Petroleum.
LANGUAGES
English and French
– 328 –
APPENDIX VII
TECHNICAL REPORT
REFERENCES
Central South University (Changsha) (Professor Guo Yu Feung)
Aug. 2007
Cost Estimate for Reduction of Iron and Titanium Concentrate.
pp 1-11 (translation Chinese to English)
Changsha Research Institute of Mining and Metallurgy
Oct. 2006
Ore Dressing Test Report on the Vanadium-Titanium-Magnetite Mine in
Xiaohong Mountain, Ejina Banner of Inner Mongolia Autonomous Region.
Large scale dressing. pp. 1-106.
Mar. 2006
March Proving Test Research of Sub-Marginal Ores Dressing of the VanadiumTitanium-Magnetite Mine in Xiaohong Mountain, Ejina Banner of Inner
Mongolia Autonomous Region. pp. 1-37.
Chendu Cartographic Publishing House
2005
Map of the People Republic of China.
China ENFI Engineering Corp.
Jul. 2007
Open Pit Design Parameters And Assumptions Provided During Technical
Meeting. 3 p.
Geological and Mineral Resources Bureau
Jan. 2006
Gansu Province Central Laboratory Assay Report — Official Results for
Quinghai Senyuan Mining Co. Ltd., 61 p.
Borehole logs, 26ZK. Core logging information (English translation of core
log geology). pp. 1-92
Geological Publishing House, China
2000
Concise Regional Geology of China. Chief Editor, Cheng Yugi. 430 p.
Golder Associates
Apr. 2006
Report on Resource Modelling and Estimation Study for the Xiaohongshan
Iron-Vanadium-Titanium-Ilmenite Project, Inner Mongolia, China. pp. 1-28.
Oct. 2005
Report on Geological Site Visit Xiaohongshan Iron-Vanadium-TitaniumIlmenite Project Inner Mongolia, China. pp. 1-23.
– 329 –
APPENDIX VII
TECHNICAL REPORT
Hong Kong Forest Source Mining Industry Holding Company Limited
May 2007
Iron-Titanium-Vanadium-Ilmenite Mine in XiaoHongShan, Business Plan
(prepared by Danield Brothers Limited). pp. 1-124.
Undated
Ejina Banner of Inner Mongolia Autonomous Region Vanadium-TitaniumMagnetite Exploration and Development in Xiaohong Mountain, Business Plan.
pp. 1-148.
Schandl, Eva S.
Nov. 2005
Detailed Petrographic and Mineralogical Study.
Science Press Beijing China
2002
Mineral Facts of China. Editor-in-Chief, Zhu Xun. pp. 305-315.
SINOREX Resource and Environment Engineering (Beijing) Co. Ltd.
Oct. 2006
Average Grade Calculation Table of Drilling Project of the Vanadium-TitaniumMagnetite Mine in Xiaohong Mountain, Ejina Banner of Inner Mongolia
Autonomous Region. pp. 1-59.
Oct. 2006
Average Grade Calculation Table of Single (Appendix 2) Engineering of
Vanadium-Titanium-Magnetite Mine in Xiaohong Mountain, Ejina Banner of
Inner Mongolia Autonomous Region. pp. 1-35.
Oct. 2006
Picture Gallery of Laminas and Polished Section of the Vanadium-TitaniumMagnetite Mine in Xiaohong Mountain, Ejina Banner of Inner Mongolia
Autonomous Region. pp. 1-37.
Oct. 2006
Resource Calculation Table of the Vanadium (Appendix 1) Titanium-Magnetite
Mine in Xiaohong Mountain, Ejina Banner of Inner Mongolia Autonomous
Region. pp. 1-73.
Oct. 2006
The First Stage Exploration Report of Vanadium-Titanium-Magnetite Mine in
Xiaohong Mountain, Ejina Banner of Inner Mongolia Autonomous Region.
pp. 1-121.
Undated
Various geological cross sections and geological surface maps.
Technology Department of the Mineral Processing Plant, Panzihua Iron and Steel (Group) Company
Undated
Small-scale Mineral Processing Feasibility Test Report of Xiaohong Mountain
Mine of Qinghai Province Comprehensive Analysis.
– 330 –
APPENDIX VIII
1.
GENERAL INFORMATION
RESPONSIBILITY STATEMENT
This circular includes particulars given in compliance with the Listing Rules for the purpose of
giving information with regard to the Company. The Directors collectively and individually
accept full responsibility for the accuracy of the information contained in this circular and
confirm, having made all reasonable enquiries, that to the best of their knowledge and belief,
there are no other facts the omission of which would make any statement herein misleading.
2.
SHARE CAPITAL
The authorised and issued share capital of the Company as at the Latest Practicable Date were,
and immediately following issue of the Consideration Shares and the Conversion Shares will
be, as follows:
As at the Latest Practicable Date
Authorised share capital:
20,000,000,000
HK$
Shares
200,000,000
Issued and fully paid share capital or credited as fully paid:
952,720,000
Shares
9,527,200
Upon allotment and issue of the Consideration Shares and the Conversion Shares
Issued and fully paid share capital or credited as fully paid:
952,720,000
Shares
9,527,200
270,000,000
Consideration Shares
2,700,000
1,275,000,000
Conversion Shares (Note)
12,750,000
2,497,720,000
Shares of HK$0.01 each
24,977,200
Note: This represent the maximum number of the Conversion Shares to be issued upon the exercise of the
conversion rights attached to the Convertible Bonds in full.
All the issued shares in the capital of the Company rank pari passu with each other in all
respects including the rights as to voting, dividends and return of capital. The Consideration
Shares and Conversion Shares to be allotted and issued will, when issued and fully paid, rank
pari passu in all respects with the then existing Shares in issue on the date of their allotment.
The Company had no debt securities in issue as at the Latest Practicable Date.
– 331 –
APPENDIX VIII
GENERAL INFORMATION
Save as disclosed in this circular, the Company did not have any other options, warrants and
other convertible securities or rights affecting the Shares and no capital of any member of the
Group is under option, or agreed conditionally or unconditionally to be put under option as at
the Latest Practicable Date.
3.
DIRECTORS’ INTERESTS
(a)
As at the Latest Practicable Date, the interests and short positions of each Director in the
shares or underlying shares and debentures of the Company and its associated corporations
(within the meaning of Part XV of the SFO) which were required to be notified to the
Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO
(including interests and short positions in which he was deemed or taken to have under
such provisions of the SFO), or which were required, pursuant to section 352 of the
SFO, to be entered in the register maintained by the Company referred to therein, or
which were required, pursuant to the Model Code for Securities Transactions by Directors
of Listed Companies set out in Appendix 10 to the Listing Rules, to be notified to the
Company and the Stock Exchange were as follows:
Interests in the Shares of the Company
Number and
class of securities
Approximate
percentage of interest
120,000,000 Shares
12.60%
Beneficial owner
3,000,000 Shares
0.31%
Beneficial owner
500,000 Shares
0.05%
Name
Capacity
Tsao Ke Wen Calvin
Interest of a
controlled
corporation (Note)
Law Fei Shing
Ma Chung Wo Cameron
Note: These Shares are held by L & L Holdings Limited, the entire issued share capital of which is
beneficially owned by Mr. Tsao Ke Wen Calvin.
– 332 –
APPENDIX VIII
4.
GENERAL INFORMATION
(b)
Save as disclosed in this circular, as at the Latest Practicable Date, none of the Directors
or chief executive of the Company had any interest and short positions in the shares,
underlying shares and debentures of the Company or any associated corporations (within
the meaning of Part XV of the SFO) which were required to be notified to the Company
and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including
the interests and short positions in which they were deemed or taken to have under such
provisions of the SFO), or which are required, pursuant to section 352 of the SFO, to be
entered in the register maintained by the Company referred to therein, or which were
required, pursuant to the Model Code for Securities Transactions by Directors of Listed
Companies set out in Appendix 10 to the Listing Rules, to be notified to the Company
and the Stock Exchange.
(c)
As at the Latest Practicable Date, none of the Directors had any direct or indirect interest
in any asset which had been acquired, or disposed of by, or leased to any member of the
Enlarged Group, or was proposed to be acquired, or disposed of by, or leased to any
member of the Enlarged Group since 31 December 2006, the date to which the latest
published audited financial statements of the Group were made up.
(d)
As at the Latest Practicable Date, none of the Directors was materially interested, directly
or indirectly, in any contract or arrangement entered into by any member of the Enlarged
Group which was subsisting as at the date of this circular.
(e)
As at the Latest Practicable Date, none of the Directors or their respective associates was
interested in any business apart from the business of the Group, which competed or was
likely to compete, either directly or indirectly, with that of the Group.
SUBSTANTIAL SHAREHOLDERS’ INTERESTS
As at the Latest Practicable Date, so far as is known to the Directors, the following persons,
other than a Director or chief executive of the Company, had an interest or short position in the
shares and underlying shares of the Company which would fall to be disclosed to the Company
under the provisions of Divisions 2 and 3 of Part XV of the SFO, or were directly or indirectly,
interested in 10% or more of the nominal value of any class of share capital carrying rights to
vote in all circumstances at general meetings of the members of the Enlarged Group:
(a)
Interests in the Shares of the Company
Name of Shareholder
Number and class
of securities
L & L Holdings Limited
120,000,000 Shares
Interest of
a controlled
corporation (Note)
12.60%
Leung Lai Ching, Margaret
270,000,000 Shares
Beneficial owner
28.34%
– 333 –
Capacity
Approximate
APPENDIX VIII
GENERAL INFORMATION
Note: L & L Holdings Limited is an investment holding company incorporated in the Republic of the
Marshall Islands, the entire issued share capital of which is wholly and beneficially owned by
Mr. Tsao Ke Wen Calvin, an executive Director and the chief executive officer of the Company.
(b)
Interests in underlying Shares of the Company
Name of Shareholder
Number and class
of securities
Leung Lai Ching, Margaret 1,275,000,000 Shares
Capacity
Beneficial owner
Approximate
133.83%
Save as disclosed in this circular, so far as is known to the Directors, there is no other
person (other than a Director or chief executive of the Company) who had an interest or
short position in the shares and underlying shares of the Company which would fall to be
disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the
SFO, or, had a direct or indirect interests amounting to 10% or more of the nominal
value of any class of share capital carrying rights to vote in all circumstances at general
meetings of any members of the Enlarged Group.
5.
MATERIAL CONTRACTS
Within the two years immediately preceding the date of this circular, the following agreements,
being contracts not entered into in the ordinary course of business, have been entered into by
members of the Enlarged Group and is or may be material:
(a)
acquisition agreement dated 20 October 2005 entered into between CMST Guangzhou
China National Materials Storage and Transportation Guangzhou Corp. (“CMST”) as
vendor and Aurora Logistic Finance (Hong Kong) Limited, an indirectly wholly owned
subsidiary of the Company, as purchaser in relation to the acquisition of 70% equity
interests in Guangzhou Haoyida Software Development Limited for a total consideration
of HK$10,000,000. The consideration shall be satisfied (i) as to HK7,000,000 by issuing
the convertible note to CMST at its full face value on completion and (ii) as to
HK3,000,000 by paying cash but which had become null and void on 30 November 2005
for non-fulfilment of condition precedent. Please refer to the Company’s announcements
dated 21 October 2005 and 1 December 2005 and circular dated 18 November 2005 for
further details;
(b)
placing and subscription agreement dated 20 October 2005 entered into between Prime
Orient International Limited (“POIL”) as subscriber and the Company as issuer in relation
to the placing of up to 41,700,000 shares at the placing price of HK$0.79 per placing
share on behalf of POIL to not less than six individual investors who were third parties
independent of the Company and its connected persons on a best effort basis. Please
refer to the Company’s announcement dated 20 October 2005 for further details;
– 334 –
APPENDIX VIII
GENERAL INFORMATION
(c)
acquisition agreement dated 3 December 2005 entered into between CMST as vendor
and Aurora Logistic Software Development Limited, an indirectly wholly owned
subsidiary of the Company, as purchaser in relation to the acquisition of the Logistic and
Financial Management System at a total consideration RMB6,000,000. The consideration
shall be satisfied (i) as to RMB3,500,000 by issuing of 10,516,827 shares of the Company,
and (ii) as to RMB2,500,000 by paying cash. However, an agreement dated 24 November
2006 entered into between CMST, the Company and Aurora Logistic Software
Development Limited pursuant to which both parties has agreed to terminate the
acquisition agreement and the Company has agreed under the agreement to purchase
from CMST the Logistic and Financial Management System for a total consideration of
HK$3,000,000. Please refer to the Company’s announcements dated 3 January 2006 and
27 November 2006 for further details;
(d)
subscription agreement dated 30 May 2006 entered into between GP Capital Limited as
subscriber and the Company as issuer in relation to the placing of the convertible notes
in an aggregate principal amount of HK$40,000,000 maximum. The convertible notes
will carry a right to convert into new shares at the conversion price of HK$0.40 per
shares of the Company. However, as GP Capital Limited failed to comply with the
subscription agreement, a legal proceeding was brought by the Company and based on
the court order issued on 12 February 2007, GP Capital Limited is required to pay to the
Company the sum of HK$35,000,000, interest on the sum of HK$35,000,000 at judgment
rate from 1 August 2006 until date of payment and costs of the action in gross sum of
HK$25,000. Please refer to the Company’s announcements dated 23 and 25 May 2006, 1
and 12 June 2006, 27 and 28 September 2006 and 27 November 2006 for further details;
(e)
acquisition agreement dated 3 October 2006 entered into between Summer Lake
International Ent. Corp and Meta Vision Medicals (WUHU) Co., Ltd. collectively as
vendor and Wise Mount Management Limited (“Wise Mount”), an indirect wholly owned
subsidiary of the Company as purchaser in relation to the acquisition of 70% equity
interest in Eye Good Medical (Zhuhai) Co. Ltd. for a total consideration of HK$26,600,000
satisfied by the allotment and issue by the Company of 60,454,545 consideration shares
at HK$0.44 per share but which had become null and void on 8 November 2006 for
non-fulfilment of condition precedent. Please refer to the Company’s announcements
dated 20 October 2006 and 8 November 2006 for further details;
(f)
sale and purchase agreement dated 8 December 2006 entered into between Sheng De
Cruz Li as vendor and Wise Mount Management Limited, an indirect wholly owned
subsidiary of the Company, as purchaser in relation to the acquisition of 70% equity
interest in Win Alliance Development Limited for a total consideration of HK$14,000,000.
The consideration shall be satisfied (i) as to HK$9,000,000 by procuring the Company
to allot and issue a total of 18,000,000 consideration shares at HK$0.50 per share and
(ii) as to HK$5,000,000 by paying cash. Please refer to the Company’s announcement
dated 14 December 2006 and the circular dated 2 January 2007 for further details;
– 335 –
APPENDIX VIII
6.
GENERAL INFORMATION
(g)
placing agreement dated 5 March 2007 entered into between Enlighten Securities Limited
as placing agent and the Company, pursuant to which an aggregate of 87,000,000 new
shares of the Company were placed by the placing agent on behalf of the Company, on a
fully underwritten basis at the price of HK$0.308 per placing share with at least six
independent investors. Please refer to the Company’s announcement dated 5 March 2007
for further details;
(h)
the agreement dated 27 March 2007 entered into between Aurora Logistic Capital
Assurance Limited, Liaohai International Investments Limited and Hebei Da Sheng
Warranty Company Limited for the investment into a Chinese-foreign equity joint venture
company in Zhangjiakou, Hebei Province, PRC for logistic, investment and project
guarantee business as amended by a supplemental agreement dated 20 April 2007 entered
into between the same parties;
(i)
placing agreement dated 11 June 2007 entered into between Enlighten Securities Limited
as placing agent and the Company, pursuant to which an aggregate of 135,000,000 new
shares of the Company were placed by the placing agent on behalf of the Company, on a
fully underwritten basis at the price of HK$0.50 per placing share with at least six
independent investors. Please refer to the Company’s announcement dated 11 June 2007
for further details;
(j)
the placing agreement dated 18 July 2007 entered between the Company and Guotai
Junan Securities (Hong Kong) Limited as placing agent, pursuant to which 135,000,000
new shares of the Company were placed by the placing agent, on a fully underwritten
basis at the price of HK$0.69 per share. Please refer to the Company’s announcement
dated 20 July 2007 for further details; and
(k)
the Share Transfer Agreement.
LITIGATION
(i)
As disclosed in the 2006 interim report of the Company, a wholly-owned subsidiary of
the Company, namely యඈԾௗṄΔಇτࠉʔ̇ transliterated as Hui Yang Xie Kai
Cheng Carpet Co. Ltd. (now known as యή̟‫׭‬ʿΔಇ́ଐτࠉʔ̇ transliterated
as Hui Zhou Orient Carpet Manufacturing Co., Ltd. (“HZOCM”)) has been made
defendant of proceedings in the PRC. The proceedings were brought by ૯Γജጙ‫ۺ‬உ
τࠉʔ̇transliterated as Shenzhen Hua Xing Development Co. Ltd. (“SHXD”) against
HZOCM at the People’s Court of the Hui Yang District, Hui Zhou City, Guangdong
Province in respect of installation cost due and interest payable. The amount claimed
under this set of proceedings was HK$1,520,000 (RMB1,520,000), interest payable and
other costs for the sum of HK$1,288,269 (RMB1,288,269). HZOCM was ordered to pay
the installation cost and interest to SHXD by the PRC’s court judgment. HZOCM is
seeking legal advice for the judgment, and the Company had provided HK$1,520,000 in
financial statement and the interest were provided in year 2006.
– 336 –
APPENDIX VIII
(ii)
GENERAL INFORMATION
On 27 November 2006, the Company announced that it had issued a writ of summons
against GP Capital Limited in relation to the two dishonored cheques totaling
HK$35,000,000 drawn by GP Capital Limited. On 12 February 2007, a judgment was
handed down against GP Capital Limited to pay to the Company the sum of
HK$35,000,000, the interests thereon from 1 August 2006 until the date of payment and
costs of the said application assessed in a gross sum at HK$25,000.
Save as disclosed herein, as at the Latest Practicable Date, none of the members of the Enlarged
Group was engaged in any litigation or arbitration of material importance and no litigation or
claim of material importance is known to the Directors to be pending or threatened by or against
any member of the Enlarged Group. As at the Latest Practicable Date, there was no claim in
relation to exploration rights made or notified either by third parties against the Company.
7.
DIRECTORS’ SERVICE CONTRACTS
As at the Latest Practicable Date, none of the Directors had a service contract with the Company
which is not determinable by the Company within one year without payment of compensation
other than statutory compensation.
8.
EXPERT AND CONSENT
(a)
The following are the qualifications of the expert who has given its opinions and advice
which are included in this circular:
Name
Qualification
(“Macquarie”)
a corporation licensed to carry on 6
(advising on corporate finance) regulated activity
under the SFO
Veda Capital
a corporation licensed to carry on 6
(advising on corporate finance) regulated activity
under the SFO
Grant Thornton
LCH
Chartered surveyors
Limited (“WGM”)
Independent technical advisers
Jingtian & Gongcheng
PRC lawyers
(b)
None of Macquarie, Veda Capital, Grant Thornton, LCH, Jingtian & Gongcheng and
WGM has any shareholding, directly or indirectly, in any member of the Group or any
right (whether legally enforceable or not) to subscribe for or to nominate persons to
subscribe for securities in any member of the Group.
(c)
Each of Macquarie, Veda Capital, Grant Thornton, LCH, Jingtian & Gongcheng and
WGM has given and has not withdrawn its written consent to the issue of this circular,
with the inclusion of the references to its name and/or its opinion in the form and context
in which they are included.
– 337 –
APPENDIX VIII
9.
10.
GENERAL INFORMATION
(d)
None of Macquarie, Veda Capital, Grant Thornton, LCH, Jingtian & Gongcheng and
WGM had any direct or indirect interest in any asset which had been acquired, or disposed
of by, or leased to any member of the Enlarged Group, or was proposed to be acquired,
or disposed of by, or leased to any member of the Enlarged Group since 31 December
2006, the date to which the latest published audited financial statements of the Group
were made up.
(e)
Neither WGM nor any Directors are interested in the promotion of, or in any assets
which have been within the two years immediately preceding the issue of this circular,
acquired or disposed of by or leased to the Group or any of its subsidiaries.
MISCELLANEOUS
(a)
The registered office of the Company is located at Cricket Squares Hutchins Drive, P.O.
Box 2682, Grand Cayman KY1-1111, Cayman Islands.
(b)
The head office and principal place of business of the Company in Hong Kong is at
Suites 5303-4, 53rd Floor, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.
(c)
The Company secretary and qualified accountant of the Company is Mr. Law Fei Shing,
Mr. Law is a practicing Certified Public Accountant in Hong Kong. He is also a member
of American Institute of Certified Public Accountants (AICPA), USA and associate
member of the Hong Kong Institute of Certified Public Accountants (HKICPA).
(d)
The branch share registrar and transfer office of the Company is Tricor Tengis Limited at
26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong.
(e)
In the event of inconsistency, the English text of this circular shall prevail over the Chinese
text.
DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents are available for inspection during normal business hours
at the head office and principal place of business of the Company in Hong Kong, Suites
5303-4, 53rd Floor, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, up to and including
the date of the EGM:
(a)
the memorandum and articles of association of the Company;
(b)
the letter from the Independent Board Committee containing the recommendation to the
Independent Shareholders regarding the Refreshed Issue Mandate;
(c)
the letter from Veda Capital to the Independent Board Committee and the Independent
Shareholders regarding the Refreshed Issue Mandate;
(d)
the consolidated audited financial statements of the Group for the two years ended
31 December 2006;
– 338 –
APPENDIX VIII
GENERAL INFORMATION
(e)
the accountants’ report of the Group, the text of which is set out in Appendix I to this
circular;
(f)
the accountants’ report of the Target Group, the text of which is set out in Appendix IIA
to this circular;
(g)
the letter from Grant Thornton in respect of the pro forma financial information of the
Enlarged Group, the text of which is set out in Appendix III to this circular;
(h)
the summary valuation report on the Target Mine — First Portion as at 31 August 2007
prepared by LCH, the text of which is set out in Appendix IV to this circular;
(i)
the report from Grant Thornton in connection with the cash flow forecasts underlying
the asset valuation on the Target Mine — First Portion as at 31 August 2007, the text of
which is set out in part (A) of Appendix V to this circular;
(j)
the report from Macquarie in connection with the cash flow forecasts underlying the
asset valuation on the Target Mine — First Portion as at 31 August 2007, the text of
which is set out in part (B) of Appendix V to this circular;
(k)
the letter and valuation certificate on property interest of the Group as at 31 August 2007
prepared by LCH, the text of which is set out in Appendix VI to this circular;
(l)
the technical report prepared by WGM, the text of which is set out in Appendix VII to
this circular;
(m)
the PRC legal opinion issued by Jingtian & Gongcheng;
(n)
the letters of consent referred to under the paragraph headed “Expert and Consent” in
this appendix;
(o)
a copy of each of the material contracts referred to in the paragraph headed “Material
contracts” in this appendix; and
(p)
a copy of the Company’s circulars dated 2 January 2007 and 28 May 2007 respectively.
– 339 –
NOTICE OF EGM
(Stock code: 353)
NOTICE IS HEREBY GIVEN that an extraordinary general meeting (“EGM”) of Aurora Global
Investment Holdings Limited (the “Company”) will be held on 31 October 2007 at 10:30 a.m. at
Suites 5303-5304, 53rd Floor, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong for the purpose
of considering and, if thought fit, passing the following resolutions as ordinary resolutions of the
Company:
ORDINARY RESOLUTIONS
1.
“THAT
(a)
the share transfer agreement (the “Share Transfer Agreement”) (copy of which has
been produced to the meeting marked “A” and signed by the chairman of the meeting for
the purpose of identification) and made between Smooth Way International Limited, a
wholly owned subsidiary of the Company and Leung Lai Ching, Margaret and the
Company in relation to acquisition of 51% equity interests in Kanson Development
Limited as set out in the circular (the “Circular”) of the Company dated 15 October
2007 (copy of which has been produced to the meeting marked as “B” and signed by the
Chairman of the meeting for purpose of identification) and all the transactions
contemplated thereby be and they are hereby approved;
(b)
the issue of the Consideration Shares (as defined in the Circular), on and subject to the
terms of the Share Transfer Agreement, be and it is hereby approved;
(c)
the creation and issue of the Convertible Bonds (as defined in the Circular), on and
subject to the terms of the Share Transfer Agreement, be and it is hereby approved;
(d)
the directors of the Company (the “Directors”) be and they are hereby authorised to
allot and issue of the Conversion Shares (as defined in the Circular); and
(e)
the Directors be and they are hereby authorised to do all such acts and things, to sign and
execute all such further documents and to take such steps as the Directors may consider
necessary, appropriate, desirable or expedient to give effect to or in connection with the
Share Transfer Agreement, the issue of the Consideration Shares and the issue of the
Convertible Bonds, the issue of the Conversion Shares or any of the transactions
contemplated under the Share Transfer Agreement (including but not limited to the
execution of the CB Instrument (as defined in the Circular), the entering into the
Shareholders’ Agreement (as defined in the Circular)) and the amendments to the Share
Transfer Agreement (to the extent such amendments are not material in the context of
the entire transaction as a whole).”
– 340 –
NOTICE OF EGM
2.
“THAT
(a)
the Existing General Mandate (as defined in the Circular), to the extent not already
exercised, be and is hereby revoked (without prejudice to any valid exercise of such
Existing General Mandate prior to the passing of this resolution);
(b)
subject to paragraph (d) below, pursuant to the Rules Governing the Listing of Securities
on The Stock Exchange of Hong Kong Limited, the exercise by the Directors during the
Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue
and deal with the unissued shares in the share capital of the Company and to make or
grant offers, agreements and options, including warrants to subscribe for Shares, which
might require the exercise of such powers be and the same is hereby generally and
unconditionally approved;
(c)
the approval in paragraph (b) above shall be in addition to any other authorisations given
to the Directors and shall authorise the Directors during the Relevant Period to make or
grant offers, agreements and options which would or might require the exercise of such
powers after the end of the Relevant Period;
(d)
the aggregate nominal amount of the share capital allotted or agreed conditionally or
unconditionally to be allotted (whether pursuant to options or otherwise), issued or dealt
with by the Directors pursuant to the approval in paragraph (b) above, otherwise than
pursuant to (i) a Rights Issue (as hereinafter defined); or (ii) the exercise of any options
granted under the share option scheme of the Company; or (iii) any scrip dividend or
similar arrangements providing for the allotment and issue of shares of the Company in
lieu of the whole or part of dividend on shares of the Company in accordance with the
articles of association of the Company in force from time to time; or (iv) any issue of
shares of the Company upon the exercise of rights of subscription or conversion under
the terms of any warrants of the Company or any securities which are convertible into
shares of the Company, shall not exceed the aggregate of :
(i)
20 per cent. of the aggregate nominal amount of the share capital of the Company
in issue on the date of the passing of this resolution; and
(ii)
(if the Directors are so authorised by a separate ordinary resolution of the
shareholders of the Company) the nominal amount of any share capital of the
Company repurchased by the Company subsequent to the passing of this resolution
(up to a maximum equivalent to 10 per cent. of the aggregate nominal amount of
the share capital of the Company in issue on the date of the AGM (as defined in
the Circular)),
and the authority pursuant to paragraph (b) of this resolution shall be limited accordingly;
and
– 341 –
NOTICE OF EGM
(e)
for the purpose of this resolution:
“Relevant Period” means the period from the date of the passing of this resolution until
whichever is the earliest of:
(i)
the conclusion of the next annual general meeting of the Company;
(ii)
the expiration of the period within which the next annual general meeting of the
Company is required by the articles of association of the Company, the Companies
Law, Cap 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands
or any other applicable law of the Cayman Islands to be held; and
(iii)
the passing of an ordinary resolution by the shareholders of the Company in general
meeting revoking or varying the authority given to the Directors by this resolution.
“Right Issue” means an offer of shares of the Company, or offer or issue of warrants,
options or other securities giving rights to subscribe for shares of the Company open for
a period fixed by the Directors to holders of shares of the Company on the register on a
fixed record date in proportion to their then holdings of shares of the Company (subject
to such exclusion or other arrangements as the Directors may deem necessary or expedient
in relation to fractional entitlements, or having regard to any restrictions or obligations
under the laws of, or the requirements of, or the expense or delay which may be involved
in determining the existence or extent of any restrictions or obligations under the laws
of, or the requirements of, any jurisdiction outside Hong Kong or any recognized
regulatory body or any stock exchange outside Hong Kong).”
3.
“THAT conditional upon the passing of resolution no. 2 above, the mandate granted to the
Directors at the AGM to extend the Existing General Mandate to allot and issue shares of the
Company to shares of the Company repurchased by the Company be and is hereby revoked and
THAT the general mandate granted to the Directors pursuant to paragraph (b) of resolution no.
2 above be and is hereby extended by the addition to the aggregate nominal amount of the
shares of the Company which may be allotted and issued by the Directors pursuant to or in
accordance with such general mandate of an amount representing the aggregate nominal amount
of the share capital of the Company repurchased after the passing of this resolution by the
Company pursuant to or in accordance with the authority granted and approved by the
shareholders of the Company at the AGM.”
4.
“THAT subject to and conditional upon the Listing Committee of The Stock Exchange of
Hong Kong Limited granting approval of the listing of, and permission to deal in, any Shares
(as defined in the Circular) to be issued pursuant to the exercise of options which may be
granted under the Refreshed General Mandate Scheme Limit (as defined below), the existing
limit on the grant of options under the share option scheme adopted by the Company on 6 June
2002 (the “Share Option Scheme”) and refreshed pursuant to the resolution passed at the
extraordinary general meeting of the Company held on 16 March 2006 be and is hereby refreshed
so that the total number of Shares to be allotted and issued upon exercise of any options to be
– 342 –
NOTICE OF EGM
granted under the Share Option Scheme shall not exceed 10% of the total number of shares in
issue as at the date of the passing of this resolution (the “Refreshed General Scheme Limit”)
and the Directors be and are hereby authorised to do such acts and execute such documents to
effect the Refreshed General Scheme Limit and to exercise all powers of the Company to allot,
issue and deal with the Shares pursuant to the exercise of such options.”
Yours faithfully,
For and on behalf of the Board
Law Fei Shing
Executive Director
Hong Kong, 15 October 2007
Notes:
(1)
A member entitled to attend and vote at the EGM may appoint a proxy to attend and, on a poll vote on his behalf
and such proxy need not be a member of the Company.
(2)
In order to be valid, the form of proxy, together with any power of attorney or authority under which it is signed or
a notarially certified copy of that power of attorney or authority, must be deposited at the Company’s branch share
registrar in Hong Kong, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai,
Hong Kong not less than 48 hours before the time appointed for holding the EGM or any adjournment thereof.
(3)
Completion and return of the form of proxy will not preclude a shareholder of the Company from attending and
voting in person at the EGM or any adjournment thereof and in such event, the authority of the proxy shall be
deemed to be revoked.
As at the date hereof, the executive Directors are Mr. Owen Tam, Mr. Tsao Ke Wen Calvin,
Mr. Law Fei Shing, Mr. So Chi Keung, Mr. Fok Po Tin, Mr. Leung Kai Hung and Mr. Delon Yeung; the
non-executive Director is Dr. Ma Chung Wo, Cameron and the independent non-executive Directors
are Mr. Lum Pak Sum, Mr. Wan Hon Keung and Mr. Sun Tak Keung.
– 343 –

Very Substantial Acquisition

Transcription

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