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Exhibit 10.3
[Chinese to English translation]

Lingshi Xinghai Magnesium Industry Co., Ltd.
Equity Transfer Contract

Entered by
Taiyuan Ruiming Yiwei Magnesium Industry Co., Ltd
(Party A)
And
Taiyuan Yiwei Magnesium Industry Co., Ltd.
 (Party B)
And
Lingshi Xinghai Magnesium Industry Co. Ltd.
(Target Company)
China Direct Industries, Inc.
And
CDI China, Inc.
And
Pine Capital Enterprises, Inc.
And
Yuwei Huang
August 30, 2011

 
 

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Table of Contents

   
Preface
    3     1.  
Definitions and Interpretation
    3     2.  
Parties in the Contract
    3     3.  
Transaction Target
    5     4.  
Transaction Price, Payment and Closing
    6     5.  
Transaction Process and Delivery
    9     6.  
Mutual Covenants of Parties after Transaction
    11     7.  
Business Operations
    12     8  
Non-Competition
    12     9  
Labor Management
    13     10  
Taxes and Insurance
    13     11  
Representations, Warranties and Indemnification
    14     12  
Breach of Contract
    15     13  
Duties of Confidentiality
    16     14  
Force Majeure
    17     15  
Disputes Resolutions
    17     16  
Miscellaneous Provisions
    18  
Exhibit II
 
Definition and Interpretation
    23  
Exhibit II
 
Investment Letter
    25  

 
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Equity Transfer Contract

This contract (the “Contract”) was entered by and between the following parties
at Taiyuan China, on August 30, 2011: Taiyuan Ruiming Yiwei Magnesium Industry
Co. Ltd., a limited liability company established and existing under the laws of
China with its registered address at Shagou Village, Yangqu County, Taiyuan,
Shanxi Province, China (hereinafter referred to as “Party A” or “Ruiming”);
Taiyuan Yiwei Magnesium Industry Co., Ltd., a limited liability company formed
and existing under the laws of China with its registered address at Yangqu
County, Nitun Town, Fujiayao Village, the office address is 910, 9th Floor, MeGa
Mall Business Center, 10 YiFen Street, Taiyuan City, ShanXi Province, China
(hereinafter referred to as “Party B” or “Yiwei Magnesium” ); Lingshi Xinghai
Magnesium Industry Co. Ltd., a limited liability company established and
existing under the laws of China with its registered address at Zhijia Zhuang
Village, Duanchun Town, Lingshi County, Jin Zhong City, Shanxi Province, China
(hereinafter referred to as the “Target Company” or “Lingshi Xinghai”); China
Direct Industries, Inc., a Florida corporation with its registered address at
431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441 (“CDII”); CDI
China, Inc., a Florida corporation with its registered address at 431 Fairway
Drive, Suite 200, Deerfield Beach, Florida 33441 (“CDII China”); and Pine
Capital Enterprises, Inc., a limited liability company formed and existing under
the laws of the Cayman Islands with its registered address at 51, 5th Fl,
Britannia House, Jalan Cator BS8811, BSB Brunei Darassalam and Yuwei Huang.

Preface

After friendly consultations conducted in accordance with the principles of
equality and mutual benefit, the Parties have agreed to enter into this Contract
in accordance with the Law of the People’s Republic of China on Chinese-Foreign
Equity Joint Ventures, Regulations for the Implementation of the Law of the
People's Republic of China on Joint Ventures Using Chinese and Foreign
Investment, Company Law of the People's Republic of China, Contract Law of the
People’s Republic of China and other applicable laws and provisions of this
Contract.

Now the Parties hereby agree as follows:

1.
Definitions and Interpretation

Unless the terms or context of this Contract otherwise provide, this Contract
shall be interpreted in accordance with, and each of the terms used herein shall
have the meaning ascribed to it in Exhibit I.

2.
Parties in the Contract

 
2.1
Profiles of Parties in the Contract

Parties in the Contract are as follows:
(a) Party A: Taiyuan Ruiming Yiwei Magnesium Industry Co. Ltd., a limited
liability company formed and existing under the laws of China with registered
address at Shagou Village, Yangqu County, Taiyuan, Shanxi Province, China.

 
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Authorized Representative of Party A:
Name:  Yuejian Wang
Title：Chairman
Nationality: U.S. Citizen

(b) Party B: Taiyuan Yiwei Magnesium Industry Co., Ltd, a limited liability
company formed and existing under the laws of China with registered address at
Yangqu County, Nitun Town, Fujiayao Village, the office address is 910, 9th
Floor, MeGa Mall Business Center, 10 YiFen Street, Taiyuan City, ShanXi
Province, China.
Authorized Representative of Party B:
Name: Yuwei Huang
Title: Chairman
Nationality: China

(c)
Target Company: Lingshi Xinghai Magnesium Industry Co., Ltd., a limited
liability company formed and existing under the laws of the China with
registered address at ZhijiaZhuang Village, Duanchun Town, Lingshi County,
JinZhong City, Shanxi Province, China

Authorized Representative of the Target Company: Xiangyun Zhai
Title：Chairman
Nationality: China

(d)
CDII: China Direct Industries, Inc., a Florida corporation with its registered
address at 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441

Authorized Representative of CDII: Yuejian Wang
Title：Chief Executive Officer
Nationality: U.S.

(e)
CDI China, Inc., a Florida corporation with its registered address at 431
Fairway Drive, Suite 200, Deerfield Beach, Florida 33441 (“CDI China”);

Authorized Representative of CDI China: Yuejian Wang
Title：Chief Executive Officer
Nationality: U.S.

(f)
Pine Capital: Pine Capital Enterprises, Inc., a limited liability company formed
and existing under the laws of the Cayman Islands with its registered address at
51, 5th Fl, Britannia House, Jalan Cator BS8811, BSB Brunei Darassalam.

 
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Name: Xiaorui Su
Title: Executive Director
Nationality: China

(g) Yuwei Huang
Nationality: China

 
2.2
Replacement of Authorized Representatives of Parties

Each Party has the right to replace its own legal person or authorized
representative. If the replacement occurs, the Party shall notice the other two
Parties the name, title, and nationality of its new legal person or authorized
representative in a timely manner.

3.
Transaction Target

 
3.1
Target Company Name

The name of the Target Company is Lingshi Xinghai Magnesium Industry Co., Ltd.,

 
3.2
Target company of the Transaction

The Target Company of the transaction is a limited liability company established
and existing under the Laws of the People’s Republic of China on Chinese-Foreign
Equity Joint Ventures, Regulations for the Implementation of the Law of the
People's Republic of China on Joint Ventures Using Chinese and Foreign
Investment, and other applicable laws and provisions of this Contract. Each
Party acknowledges that the final controller of the Target Company is Mr. Yuwei
Huang of this Contract.

 
3.3
Registered Address of the Target Company

The registered address of the Target Company is ZhijiaZhuang Village, Duanchun
Town, Lingshi County, JinZhong City, Shanxi Province, China.

 
3.4
Registration Information of the Target Company

The registered capital of the Target Company is RMB 10,000,000. The business
license number is 140729170000295. Except the above information, the Target
Company doesn’t have any other options, warranties, and other Contract, plan,
and commitment regarding shares. Target Company does not have any contractual
obligations regarding shares repurchase, shares re-subscription and other debt,
loan and interment etc. Target Company does not have any subsidiaries and
branches.

Party B is the only shareholder of the Target Company, and Party B legally holds
100% of its shares which have been issued, granted and paid.

The following is the list of the current owners of 100% of the ownership
interests in the Target Company:

Name
Ownership Interest
Taiyuan Yiwei Magnesium Industry Co., Ltd,
100%

 
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Except as set forth above, there are no options, subscriptions or other rights,
agreements, arrangements or commitments (contingent or otherwise) of any
character issued or authorized by the Target Company relating to ownership of an
equity interest in the Target Company to issue or sell any ownership interest or
options, warrants, convertible securities, subscriptions or other equity
interests in the Target Company. There are no outstanding contractual
obligations of the Target Company to repurchase, redeem or otherwise acquire any
ownership interest in the Target Company or make any other distribution in
respect thereof or to provide funds to, or make any investments (in the form of
a loan, capital contribution or otherwise). The Target Company does not have any
subsidiaries.

The Ownership Interests listed in the table above is duly authorized, validly
issued, fully paid and nonassessable and each such interest owned by the person
or entity listed above is free and clear of all security interests, liens,
claims, pledges, options, rights of first refusal, agreements, limitations on
the Target Company or such other Subsidiary’s voting rights, charges and other
encumbrances of any nature whatsoever.

 
3.5
Limited Liability Company

The Target Company is formed as a limited liability company. Any Party is liable
only up to its contributed portion of its registered capital in the Target
Company. The Target Company shall assume all liabilities to its creditors
against its assets.

 
3.6
Applicable Chinese Laws

The Target Company is a separate legal entity under Chinese laws. The Target
Company is under both the jurisdiction and protection of applicable Chinese
laws. The conduct of the Target Company shall abide by applicable Chinese laws.

 
3.7
Party A will acquire one hundred (100) percent interest in the Target Company (
the “Acquired Interest”). CDI China owns an 80% of interest in Ruiming and Pine
Capital owns a 20% interest in Ruiming. Once completed, the ownership interests
in the Target Company will be as follows:

Name
 
Ownership Interest
 
Taiyuan Ruiming Yiwei Magnesium Industry Co. Ltd.
    100 %

4.
Transaction Price, Payment and Closing

4.1 Party A shall acquire 100% of Party B’s interest in the Target Company on
the Closing Date as hereinafter defined. The purchase price for the Acquired
Interest shall be RMB 112,000,000 (the “Purchase Price”) and is be based on 100%
of Lingshi net shareholder equity as set forth in its Financial Statements,
subject to adjustment as provided for in Section 4.5. The Purchase Price is
payable as set forth in Section 4.2 below. In this Agreement, the stock price
shall be based on the closing price on the

 
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signing date, the exchange rate shall equal to the U.S. dollar to Renminbi
exchange rates on the average of the official rates announced by the People’s
Bank of China on midnight of the signing date (the exchange rate of August 29,
2011 is 6.3883). The CDII stock price for purposes of computing the number of
shares of CDII common stock to be issued as partial payment for the Purchase
Price shall be the average closing price of CDII’s common stock ($0.946) on the
Nasdaq Stock Market during the 10 trading days from August 15, 2011 to August
26, 2011.

 
4.2
Payment

The Purchase Price will be paid by Party A’s two shareholders (CDI China and
Pine Capital) as follows:

4.2.1 Pine Capital shall wire RMB 22,400,000 to Party B’s designated bank
account within 15 business days after the Closing Date; and
4.2.2 CDI China shall pay Party B RMB 29,800,000 as follows::
(1) CDI China shall wire RMB 15,680,000 to Party B’s designated bank account
within 15 business days after the Closing Date or utilizing the cash proceeds
from repayment of an intercompany loan between CDII and its subsidiary upon
repayment of such loan.
(2) Within 15 business days after the completion of the conditions set forth in
Section 5, CDI China shall deliver to Party B cash in US dollars or CDII common
stock equal to RMB 14,120,000.
4.2.3 CDI China shall deliver to Party B shares of CDII common stock equal to
the U.S. dollar equivalent of RMB 29,800,000 (the “Stock Consideration”) in two
separate payments, as follows:
 
1)
within 15 business days after the Closing Date, CDI China shall deliver to Party
B 2,465,527 shares of CDII common stock equal to the U.S. dollar equivalent of
RMB 14,900,000; and

 
2)
CDI China shall deliver to Party B 2,465,527 shares of CDII’s common stock equal
to the U.S. dollar equivalent of RMB 14,900,000 within 15 days after the
completion of the conditions set forth on Section 5.

Number of CDII shares = RMB 14,900,000divided by Exchange Rate (6.3883）divided
by the Average Closing Price of CDII’s Common Stock ($0.946) During the 10
Trading Days From August 15, 2011 to August 26, 2011.

 
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4.2.4 Within 15 business days upon the completion of the conditions set forth in
Section 5, CDI China shall transfer to Party B all of CDI China’s beneficial
ownership interest in Excel Rise Technology Co., Ltd. (the “Excel Rise Rights”)
valued at $4,657,411.98 USD.  The Parties hereby agree that CDI China’s
beneficial ownership interest in Excel Rise Technology Co., Ltd. is valued at
RMB 30,000,000.

4.3 Closing

4.3.1 Closing.  The date of closing (“Closing Date”) of the transactions
contemplated by this Contract shall occur following completion of the conditions
set forth in Section 4.4, and upon delivery of the Purchase Price as described
in Section 4.2 herein. The Closing shall take place at a mutually agreeable time
and place but in no event later than December 31, 2011.

4.3.2 Closing Events.  At the Closing, Party A and Party B shall execute,
acknowledge, and deliver (or shall ensure to be executed, acknowledged, and
delivered), any and all certificates, opinions, financial statements, schedules,
agreements, resolutions, rulings or other instruments required by this Contract
to be so delivered at or prior to the Closing Date, together with such other
items as may be reasonably requested by the parties hereto and their respective
legal counsel in order to effectuate or evidence the transactions contemplated
hereby.

4.3.3 Termination.  This Contract may be terminated by the Board of Directors of
CDII or Party A only in the event that Party B or Target Company do not meet the
conditions precedent set forth in Section 4.4. If this Contract is terminated
pursuant to this section, this Contract shall be of no further force or effect,
and no obligation, right or liability shall arise hereunder.

 
4.3
Conditions to Close

4.4.1 The obligations of Party A and CDII under this Contract are subject to the
satisfaction, at or before the Closing Date, of the following conditions:

4.4.2 Accuracy of Representations and Performance of Covenants.  The
representations and warranties made by Party B and Target Company in this
Contract were true when made and shall be true at the Closing Date with the same
force and effect as if such representations and warranties were made at and as
of the Closing Date (except for changes therein permitted by this
Contract).  Party B and Target Company shall have performed or complied with all
covenants and conditions required by this Contract to be performed or complied
with by Party B and Target Company prior to or at the Closing Date.

4.4.3 Approval by CDII’s Shareholders.  This Contract shall have been approved
by CDII’s shareholders as provided for in CDII’s by-laws and as required by
Applicable Laws and the applicable NASDAQ Market Place Rules and Regulations.

 
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4.4.4 No Governmental Prohibition.  No order, statute, rule, regulation,
executive order, injunction, stay, decree, judgment or restraining order shall
have been enacted, entered, promulgated or enforced by any court or governmental
or regulatory authority or instrumentality which prohibits the consummation of
the transactions contemplated hereby.

4.5 Post Closing Adjustments.

The Purchase Price after closing shall be adjusted based on the difference
between the Stockholder’s Equity set forth on the Target Company’s Balance Sheet
as of the end of the month prior to the Closing Date (the “Closing Acquisition
Balance Sheet”) and the Stockholder’s Equity set forth the balance sheet of the
Target Company as of June 30, 2011 (the “Acquisition Balance Sheet”). Party B
shall deliver to Party A and Pine Capital the Closing Acquisition Balance Sheet
within 30 days after the Closing Date (with supporting documentation including
detailed schedules of each item included on such balance sheet). The Closing
Acquisition Balance Sheet shall be prepared in accordance with generally
accepted accounting principles in the United States, including being based on
the fiscal year ended September 30, 2010 audited financial statements of the
Target Company (the “2010 Audited Financial Statements”) and the Acquisition
Balance Sheet. If the Purchase Price after adjustment is lower than the agreed
purchase price, Party B shall promptly pay the difference to Party A and Pine
Capital in proportion to the amounts they paid towards the Purchase Price. If
the Purchase Price after adjustment is higher than the agreed purchase price,
Party A and Pine Capital shall promptly pay the difference to Party B in
proportion to the amounts they paid towards the Purchase Price.

For example, if the Closing Date is September 15, 2011, then the Closing
Acquisition Balance Sheet means the balance sheet as of August 31, 2011.

5.
Transaction Process and Delivery

5.1 Initial Payment
All Parties agree that the Purchase Price shall be paid according to section 4.2
of this Contract.

5.2 Title Transfer
When Party B receives the initial payment, Party B shall complete the title
transfer of the Acquired Interest within 60 business days and formally provide
the relevant certificate of equity ownership to Party A. The certificate of
equity ownership and title transfer process referred to herein includes but is
not limited to the Stock Rights Record certificate, registration of Equity
Ownership Change for Foreign-invested Joint Venture, transfer of the Land Use
Right and Party B’s other obligations under this Contract (the “Post Closing
Title Transfers”). The Target Company is responsible for all the cost associated
with the Post Closing Title Transfers. In addition, Party A shall cooperate with
Party B in Party B’s efforts to complete a valid transfer of the Acquired
Interest.

5.3 Delivery at Closing and Post Closing Obligations

 
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5.3.1 Party A’s purchase of the Acquired Interest is based on the net equity as
set forth in the Financial Statements, as hereinafter defined. The assets shall
be transferred in accordance with the audited results on the assets and the
condition of operations of the Target Company that are determined by the
auditing firm Sherb & Co., LLP; both Party A and B shall send staff to verify
the relevant assets and equipment of the Target Company, and compile
reconciliation schedules. The authorized representatives of both parties shall
duly sign to confirm the completion of transfer in assets and equipments, and
record the book accordingly. Party B represents and warrants that

Since the June 30, 2011 date of the Financial Statements, there has not been:

(a)           any sale, lease or other disposition of any of the Target
company’s assets, other than in the ordinary course of business;

(b)           any damage, destruction, loss or other change (whether or not
insured) materially and adversely affecting the Target company’s assets;

(c)           any loans or advances or charges, which in any way create a lien
on the Target company’s assets that are not included in the Financial
Statements; or

(d)           any write offs of any debt, contingency or other reserve against
the Target company’s accounts receivables included in the Financial Statements;
or

5.3.2 Delivery of Engineering Project Information: Besides Certificate of the
Use of State-owned Land, Land Use Planning Permit, Construction Engineering
Planning Permit, Party B shall deliver the original copy of all the documents
and technological information of the Target Company to Party A, including but
not limited to:

 
1)
The documents related to the founding of engineering projects and any changes;

 
2)
Contracts for engineering design and blue prints;

 
3)
Construction contracts;

 
4)
Contracts to purchase and install equipment and materials; documents related to
equipment such as certificate of fitness, installation and user manual,
after-sales service contracts, maintenance contracts, technology criteria
description, manufacturers’ information, specifications and models, purchase
date, operational status, repair and maintenance records, compatibilities of
equipment with procedures, etc; and

 
5)
Project Supervision Contract.

5.3.3 Accounting Information Delivery:

 
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1)
Accounting information shall be transferred in accordance with the audited
results on the assets and the condition of operations of the Target Company as
of the Closing Date as determined by the auditing firm Sherb & Co., LLP and the
date of the Financial Statements, including detailed schedules and aging reports
of all assets and liabilities;

 
2)
Party B shall provide: evidence for tax payments in Fiscal 2010 until the
Closing Date, provided by the State and Local Tax Bureau; evidence of full
amount payments for electricity, water, and sanitation services in Fiscal 2010
until the Closing Date, provided by the suppliers of power, water, and
sanitation services.

 
3)
Party B shall deliver the accounting book to Party A for safekeeping, including
but not limited to the purchase contracts and original invoices for the assets
(valued at RMB 200,000 or more).

5.3.4 Delivery of Incorporation Documents
Upon change of equity ownership and legal person of the Target Company at Shanxi
Administration for Industry and Commerce and issuance of new business license
(including original and copy), Party B shall deliver the new business license to
Party A; Party A and B shall turn in all the corporate seals of the Target
Company that are held by either party to the management jointly designated by
both parties.

5.4 Within 15 business days after completion of all of the above mentioned
deliveries, Party A shall pay the following to Party B:
 
a)
Cash in US dollar or CDII common stock amount equals to RMB 14,120,000, See
section 4.2.2 (2);

 
b)
CDII’s common stock equal to the U.S. dollar equivalent of RMB 14,900,000, See
section 4.2.3 (2);

 
c)
The Excel Rise Rights provided for in   Section 4.2.4.

6.
Mutual Covenants of Parties after Transaction

6.1 Covenants of Party A
Besides the obligations stipulated in other sections of this Contract, Party A
is obliged to perform the items as follows:
(a)
Party A shall make payment for the transaction in accordance with the provisions
of this Contract;

(b)
After the new business license is issued, Party A shall sign off and execute the
supplementary contracts in which it is one of engaging parties (if there is
any), and facilitate its related parties to sign off and execute the
supplementary contracts in which its related party is one of engaging parties
(if there is any);

(c)
Party A shall handle other matters requested by the Target Company in accordance
with other written provisions of this Contract.

     6.2 Covenants of Party B
Besides the obligations stipulated in other sections of this Contract, Party B
is obliged to perform the items as follows:
 
(a)

 
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Party B shall file applications and registration with government agencies to
obtain the applicable approvals and related official documentation, and provide
Party A and the Target Company with the official documents issued by government
agencies and other documents related to the business or joint operations of the
Target Company;
(b)
Party B shall assist the Target Company in obtaining the revised or updated
approvals concerning its business operations;

(c)
After the business license is issued, Party B shall sign off and execute the
contracts in which Party B is one of engaging parties (if there is any), and
facilitate each of its related parties to sign off and execute the contracts in
which it related party is one of engaging parties (if there is any);

(d)
Party B shall handle other matters requested by the Target Company in accordance
with other provisions of this Contracts; and

7.
Business Operations

 The operations of the Target Company shall be conducted in accordance with the
Management Contract signed by both parties on the Closing Date.

8
Non-Competition

 
8.1
Restriction

 
(a) Exclusive of any “Approved Company”, as hereinafter defined and unless
having received prior approval from Party A in writing, Party B or Yuwei Huang
shall not individually or jointly, or through any person (or on behalf of any
person), directly or indirectly, perform the following actions regarding
magnesium powder:

(i)      Carry out or engage or participate in activities (or manufacture or
distribute Target Company products and / or provide Target Company services (or
in which it has any interest);
(ii) Attempt to conduct the following competitive behaviors against Target
Company with anyone who is or used to be the client of Target Company during the
term of this contract:
(1) Place orders
(2) Make transactions; or
(3) encourage anyone, directly or indirectly, to place orders or make
transactions;
(iii) In order to employ such personnel by any party other than the Target
Company, encourage or contact the following persons: current employees, officers
or managers of the Target Company, or the employees, management, or department
manager who worked with the Target Company in the past two years. The exception
is the employees who were temporarily transferred from either party to the
Target Company and have returned at the expiration of the term.

 
8.2
Treatment of Invalid Provisions

(a)
Each of the restrictive provisions of section 8.1 is severable and independently
applicable, and the invalidity or no force of certain restrictive provisions
does not have effect on other restrictive provisions.

 
(b)

 
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Each party confirms that the restrictive provision of section 8.1 is reasonable
and necessary to protect the interests of the Target Company. If any part of the
restricted provisions is invalid but turns effective after having removed or
reduced the scope of implication, the section shall be revised as mentioned
above to make it valid and enforceable.
 
8.3
Duration

The restrictive provisions in section 8.1 have effect on Party B and Yuwei Huang
and shall remain in effect for the term of the Management Agreement and for a
period of two years thereafter.

The restrictive provisions in section 8.1 have effect on Party B and shall
remain in effect for the term of the Management Agreement and for a period of
two years thereafter and, see “Management Agreement”.

9
Labor Management

 
9.1
Employees of the Target Company

Party B will assist in terminating the employment of all current employees of
the Target Company. The costs associated with employment termination are the
responsibility of Party B unless such costs are reserved for and set forth in
the Closing Acquisition Balance Sheet. If labor disputes occur due to this
equity transfer, Party B is responsible for dealing with any labor disputes and
staff recruitment, hiring, dismissal, resignation, wages, benefits and other
related issues that are not set forth in the Closing Acquisition Balance Sheet.

9.2               Upon the closing of the equity transfer of the Target Company,
all employees of the Target Company who return to work shall have Party B’s
assistance. The labor management such as wages shall be conducted in accordance
with the applicable provisions of the Management Contract.

9.3 Party B promises to assist the Target Company with fore-mentioned employee
and labor issues of the Target Company. If labor issues occur among the
employees of the Target Company, Party B and the Target Company shall share
responsibilities to handle the issues other than payment of any costs or
expenses provided for in Section 9.1 above.

 
 
10
Taxes and Insurance

10.1
Income tax, customs duties and other taxes

 
(a)
The Target Company should pay taxes in accordance with relevant Chinese tax
laws.

 
(b)
After the business license is issued (or the Target Company obtains the
appropriate qualifications in accordance with applicable laws), the Target
Company shall apply to government agencies for tax incentives in connection with
relevant laws as soon as possible.

 
(c)

 
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The Chinese and foreign employees of the Target Company should pay personal
income taxes according to the relevant provisions of Chinese tax laws.
 
(d)
Party B shall be responsible for the payment of any taxes, fines, penalties or
late charges due as a result of taxes due by the Target Company prior to the
Closing Date unless such amounts are reserved for and set forth in the Closing
Acquisition Balance Sheet.

10.2
Insurance

 
(a)
If required by the Board of Directors, the Target Company shall at all times
purchase the full and sufficient insurance policies at its own expenses from the
insurance companies established in China. The coverage shall include fire and
other policies generally applicable to the industry.

 
(b)
The insurance policies to protect from the risks for properties, vehicles and
other factors shall be purchased in RMB or foreign currency (subject to the
circumstances). The types, scopes, and amounts of insurance policies are
determined by the Board of Directors in accordance with relevant laws.

11
Representations, Warranties and Indemnification

11.1
Party B represents and warrants to Party A that the Target Company is in
compliance with, all permits, licenses and government authorizations and have
filed all notices and paid all fees and taxes that are required under all
applicable governmental regulation in the Peoples Republic of China relating to
protection of the environment, pollution control, production of magnesium, the
operation of Target Company’s magnesium production facility and hazardous
materials (the “Governmental Regulations”) applicable to the Target Company, and
the Target Company is in compliance with all applicable limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in those laws or contained in any law,
regulation, code, plan, order, decree, judgment, notice, permit or demand letter
issued, entered, promulgated or approved thereunder.

As used in this Contract, the term “hazardous materials” means any waste,
pollutant, hazardous substance, toxic, ignitable, reactive or corrosive
substance, hazardous waste, special waste, industrial substance, by-product,
process intermediate product or waste, petroleum or petroleum-derived substance
or waste, chemical  liquids or solids, liquid or gaseous products, or any
constituent of any such substance or waste, the use, handling or disposal of
which by the Target Company is in any way governed by or subject to any
Governmental Regulation in the PRC.

11.2               Party A and Party B. Each party represents and warrants to
the counterpart that on the date hereof:
(a)
The Parties meet all qualification requirements of applicable Chinese laws and
regulation authorities on Chinese or foreign investors in the scope of
industries that the Target Company operates;

(b)
The Parties are independent legal persons duly organized, validly existing in
good standing under the laws of the place of their respective establishment or
incorporation;

(c)
The Parties have obtained the right to make consent, approve and implement all
necessary actions in order to effectively enter into and validate this Contract.
The Parties have the full right to enter into this contract and to perform their
respective obligations hereunder;

 
(d)

 
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The Parties have authorized their respective representatives to sign this
Contract and from and after the signing date the provisions of this Contract
shall be legally binding upon them;
(e)
If a Party fails to initiate or take any measures to threaten legal proceedings
or any application for dissolution, the Party shall file for bankruptcy or
insolvency application, or appoint the liquidation committee or designate a
manager to manage the assets or business;

(f)
The Parties execution of this Contract and the performance of their respective
obligations hereunder: (i) shall not violate any provisions of their respective
business license, articles of incorporation, articles of association or similar
organizational documents; (ii) shall not violate any applicable laws or any
governmental authorization or approval; and (iii) shall not violate or result in
a default under any contract to which they are a party or to which they are
subject; and (iv) shall not violate any rulings or arbitrations, or the
decisions or regulations of any governmental authorization to which they are
subject;

(g)
No lawsuit, arbitration or other legal or governmental proceeding is pending or,
to its knowledge, has threatened against either Party that would affect its
ability to perform their respective obligations under this Contract;

(h)
Party B has disclosed to Party A all documents issued by any governmental
department that may have a material adverse effect on the Target Company and
Party B’s ability to fully perform its obligations to the Target Company under
this Contract, and the documents previously provided by Party B do not contain
any misstatements or omissions of material facts.

11.3
Consequences of Inaccuracy in Representations and Warranties

If any of items in Section 11.1 or 11.2 are not accurate in all material
respects on the date hereof or a Party to this Contract fails to perform any
other term or condition of this Contract, the party who is responsible for
performance of that term or condition shall be in material breach of this
Contract.

 
11.4
The Responsibilities for Breach of Representations and Warranties

If one party breaches any of its representations or warranties or obligations in
sections 11.1, 11.2, 11.3 or any other section of this Contract, the
non-breaching party may seek any possible relief based on this Contract or
applicable laws and the defaulting party shall indemnify the non-defaulting
party or the Target Company for any loss, damages, costs, expenses, liabilities,
claims, law suits or other legal proceedings, liabilities, judgments, penalties,
fines, settlements, interest and damages (including reasonable attorneys' fees
and expenses), whether suit is instituted or not due to the breach. Party A may
off-set any amounts it owes Party B against the balance of any unpaid portion of
for the Purchase Price as a result of any amounts due Party A by Party B under
this Section 11.3 or a breach of any other term or condition of this Contract.

11.5                Party B’s full obligations, responsibilities and commitment
under this Contract, and the guarantee duration is 4 years after the Contract is
signed.

 
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12
Breach of Contract

12.1
Remedies for the Breach of Contract

Except as otherwise provided in other provisions of the Contract, if one party
(“breaching party”) does not perform under the Contract any one of the major
obligations or fundamentally breaches the Contract, the other party “injured
party” may:
(a)
Issue written notice to the breaching party explaining the nature and the scope
of the breach and require the breaching party to compensate at their own expense
during a period of no less than 20 days as specified in the notice ( but the
breaching party shall not be granted a remedy period if it makes any untrue and
inaccurate representations and warranties under section 11.1, 11.2 and 11.3 or
violate any other provision of this Contract), and

(b)
If the breaching party fails to remedy during the cure period (or, if not
granted such remedy period, then any time after such breach), the injured party
may directly file claims for foreseeable loss caused by the breach.

 
 
12.2
Limitation of Liability

 
Regardless of any other provisions of the Contract, except for a Party who
violates Section 13 (Confidentiality), no Party shall be held liable or
responsible to the other Party for loss of income or profit, business loss,
goodwill or any indirect or consequential loss or liability.  Under any
circumstance, the total accumulated loss, damage or compensation shall be up to
a maximum, of the total amount of the transaction of RMB 112,000,000, except
that the violation of the Section 13 (Confidentiality) or infringement of
intellectual property rights.

13
Duties of Confidentiality

13.1
Confidentiality

Prior to entering into this Contract, one party ("Disclosing Party") has or may
from time to time disclose confidential information to the other party
("Recipient"). For a period of two (2) years after the Closing Date, the
Recipient must:
 
(a) keep the confidentiality of confidential information;

(b) not use confidential information for the purposes other than the ones
explicitly defined by the Contract;
(c) limit the disclosure of the confidential information to the employees and
agents (including attorneys, accountants, bankers and consultants) necessary to
evaluate the transaction, and they must have signed a written nondisclosure
contract (whose provisions shall not be less stringent than the provisions of
section 13 (collectively, "Permitted Exposure Party”).
 
 

13.2
Exceptions

The provisions of section 13.1 above shall not apply to information that:
(a)
Can be shown to be known by the Recipient by written records made prior to
disclosure by the disclosing party;

 
(b)

 
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Is or becomes public knowledge otherwise than through the Recipient’s breach of
this Contract; or
(c)
Was obtained by the Recipient from a third party having no obligation of
confidentiality with respect to such information.

13.3
Rules

Each party shall formulate rules and regulations to inform its directors, senior
staff, and other employees, and those of their affiliates of the confidentiality
obligation set forth in this section.

14
Force Majeure

14.1
Definition of Force Majeure

Force Majeure shall mean all events which are beyond the control of the parties
to this Contract, and which are unforeseen, unavoidable or insurmountable, and
which prevent total or partial performance by either of the parties. Such events
shall include earthquakes, typhoons, flood, fire, war, strikes, riots, acts of
governments, changes in law or the application thereof or any other instances
which cannot be foreseen, prevented or controlled, including instances which are
accepted as Force Majeure in general international commercial practice.

14.2
Consequences of Force Majeure

(a)
If an event of Force Majeure occurs, a party’s contractual obligations affected
by such as an event under this Contract shall be suspended during the period of
delay caused by the Force Majeure and shall be automatically extended, without
penalty or liability, for a period equal to such suspension.

(b)
The party claiming Force Majeure shall promptly inform the other parties in
writing and shall furnish within fifteen (15) days thereafter sufficient proof
of the occurrence and duration of such Force Majeure. The party claiming force
Majeure shall also use all reasonable endeavors to terminate the Force Majeure.

(c)
In the event of Force Majeure, the parties shall immediately consult with each
other in order to find an equitable solution and shall use all reasonable
endeavors to minimize the consequences of such Force Majeure.

 
15
Disputes Resolutions

15.1
Friendly Consultations

In the event of any dispute, controversy or claim arising out of or relating to
this Contract, or the breach, termination or invalidity hereof (“dispute”), the
parties shall attempt in the first instance to resolve such dispute through
friendly consultations.

15.2
Arbitration

(a)
In the event such dispute is not resolved through consultations within sixty
(60) days after the date such consultations were first requested in writing by a
party, then any party may submit the dispute for arbitration in Beijing before
the China International Economic and Trade Arbitration Commission (“CIETAC’) in
accordance with CIETAC Arbitration Rules then in force.

 
(b)

 
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The arbitration tribunal shall consist of three arbitrators, one appointed by
each party and, if either of the parties fails to appoint an arbitrator within
the time specified in the Arbitration Rules, the Chairman of CIETAC shall make
such appointment.
(c)
A third arbitrator (the “Presiding Arbitrator”) shall be appointed by Contract
between the parties, and if the parties fail to jointly appoint the Presiding
Arbitrator within the time specified in the Arbitration Rules, the Chairman of
CIETAC shall make such appointment.

(d)
All costs of arbitration (including but not limited to arbitration fees, costs
of arbitrators and legal fees and disbursements) shall be borne by the losing
party, unless otherwise determined by the arbitration tribunal.

(e)
The arbitration proceedings shall be conducted in Chinese.

15.3
Procedural Compliance

The parties undertake:
(a)
to comply strictly with the time limits specified in the Arbitration Rules for
the taking of any step or the performance of any act in or in connection with
any arbitration; and

(b)
to comply with and to carry out, in full and without delay, any procedural
orders(including, without limitation to, any interim measures of protection
ordered) or any award (interim or final) made by the arbitral tribunal.

15.4
Enforcement of the Arbitration

 
Each of the parties irrevocably:

(a)
agrees that any arbitration result shall be final and binding on both parties;

(b)
undertakes that it will execute and perform the arbitral award fully and without
delay. In the event of judicial acceptance and an order of enforcement, each
party expressly waives all rights to target thereto, including any defense of
sovereign immunity and any other defense based on the fact or allegation that it
is an agency or instrumentality of a sovereign state; and

(c)
waives any rights which it may have to contest the validity of the arbitration
agreement set forth in this section or the jurisdiction of the relevant
arbitration institution to hear and to determine any arbitration begun.

 
   When any dispute occurs and is the subject of friendly consultations or
arbitration, the parties shall continue to exercise their remaining respective
rights and fulfill their remaining respective obligations under this Contract.

15.5
Governing Laws

The legal force, interpretation and implementation of this Contract are governed
by the laws of the People’s Republic of China.
 

 
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16
Miscellaneous Provisions

 
16.1
Binding Effect

 This Contract is made for the benefit of the parities hereto and their
respective lawful successors and Party A and is legally binding on them.
 
16.2
Amendment

 This Contract shall not be changed verbally, but only by a written instrument
signed by the parties; if applicable laws states otherwise, then written
consents and the approval from related approving authorities are required before
amending this contract.
 
16.3
Confidentiality of this Contract

The existence of this Contract, as well as its contents, shall be deemed to fall
within the scope of confidential information and subject to section 13, and
shall not be disclosed in whole or in part to any person or entity, except (i)
to a Permitted Disclosure Party, (ii) to authorized securities regulators or
exchanges in accordance with applicable laws or the relevant rules of the
securities exchange to which the party in question is subject, (iii) to
officials in relevant government departments pursuant to the requirements of
applicable laws, (iv) in order to fulfill any conditions precedent to the
effectiveness of this Contract or (v) for the purpose of the performance by a
party of its obligations or exercise of its rights hereunder or relating hereto,
or (vi) for the purpose for the business of the Target Company after it is
established.

16.4
Notification

 
 (a) Any notice or written communication provided for in this Contract by either
party to the other, including but not limited to any and all offers, writings,
or notices to be given hereunder, shall be made in Chinese with English
translation (if the English translation is ambiguous, Chinese version prevails)
and delivered:

      (i) by hand;
(ii) by courier service delivered letter, or
(iii) by fax.

(b) Notices shall be deemed to have been delivered at the following times:
(i) If by hand, on reaching the designated address and subject to return receipt
or other proof of delivery; 
(ii) If by courier, the fifth business day after the date of dispatch, and  
(iii) If by fax, upon the next business day following the date marked on the
confirmation of transmission report by the sender’s fax machine, indicating
completed uninterrupted transmission to the relevant facsimile number.

 
(c) During the term, each party may change its particulars for receipt of
notices at any time by notice given to the other party in accordance with this
section16.4.   

 
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Party A:
Taiyuan Ruiming Yiwei Magnesium Industry Co., Ltd
Mailing Address: Shagou Village, Yangqu County, Taiyuan, Shanxi Province, China
Fax Number:
Email:
Attention to:
 
With a copy to:                                CDI China
431 Fairway Drive, Suite 200, Deerfield Beach, FL 33441, USA
Fax Number: (954) 363-7320
Email: generalcounsel@cdii.net

Party B:
Taiyuan Yiwei Magnesium Industry Co., Ltd.
Mailing Address: 910, 9th Floor, MeGa Mall Business Center, 10 YiFen Street,
Taiyuan City, ShanXi Province, China
Fax Number: ________________________________
Attention to: ________________________________

Target Company: Lingshi Xinghai Magnesium Industry Co. Ltd.
Mailing Address: ZhijiaZhuang Village, Duanchun Town, Lingshi County, JinZhong
City, Shanxi Province, China
Fax Number: ________________________________
Attention to: ________________________________

 
16.5
Severability

 The Invalidity of any provision of this contract shall not affect the validity
of any other provision of this contract.
 
16.6
Entire Contract

 This Contract and the Schedules and Annexes hereto constitute the entire
Contract between the parties hereto with respect to the subject matter of this
Contract and supersede all prior discussions, negotiations and Contracts between
them. 
16.7
 Waiver

 Either party’s failure to exercise or delay in exercising any right, power or
privilege under this Contract shall not operate as a waiver thereof, and any
single or partial exercise of any right, power or privilege shall not preclude
the exercise of any other right, power or privilege.

 
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16.8
Further Endeavors

 A party shall, at any time, upon the request of the other party, sign (or
facilitate the third party to sign) and procure (or facilitate the third party
to procure) the execution of such documents, Contracts, contracts or deeds.

16.9
Target company Bylaws

 If there are discrepancies between the Target Company’s Bylaws and this
Contract, this Contract supersedes.
 
16.10
Schedules and Annexes

 The schedules and annexes of this Contract are inseparable, and have the same
legal binding as the provisions in the contract. If there are discrepancies
between the provisions in the Contract and the terms and sections in the
schedule or annexes, the provisions of the Contract supersedes.
 
16.11
Securities Laws

Party A and Party B understand and agree that the consummation of this Contract
including the delivery of the Purchase Price to Party B in exchange for the
Acquired Interest as contemplated hereby constitutes the offer and sale of
securities under the United States Securities Act of 1933 (the “Act”).  Party A,
Party B, CDII and Target Company agree that such transaction shall be
consummated in reliance on exemptions from the registration and prospectus
delivery requirements of the Act, which depends, among other items, on the
circumstances under which such securities are acquired.

In order to provide documentation for reliance upon the exemptions from the
registration and prospectus delivery requirements for such transactions, Party B
shall execute and deliver to CDII an Investment Representation Letter in
substantially the same form as that attached hereto as Exhibit II.

16.12
Text

 
This Contract shall have [10] copies of the original Chinese version, and [10]
copies of original English version. Both versions shall have the same legal
effect. If the English translation is ambiguous, the Chinese version shall
prevail.

Both parties have, on the date indicated on the front page of this contract, in
the People’s Republic of China, through their authorized representative, signed
this contract.

 
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Party A: Taiyuan Ruiming Yiwei Magnesium Industry Co., Ltd
Signature:  /s/ James (Yuejian) Wang
Printed Name: James (Yuejian) Wang
English Name:
Title: Chairman
Nationality: U.S.
 
Party B:Taiyuan Yiwei Magnesium Industry Co. Ltd.
Signature: /s/ Yuwei Huang
Printed Name: Yuwei Huang
English Name:
Title: Chairman
Nationality: China

Target Company: Lingshi Xinghai Magnesium Industry Co. Ltd.
Signature:  /s/ Yuwei Huang
Printed Name: Yuwei Huang
English Name:
Title: Chairman
Nationality: China

China Direct Industries, Inc.
Signature:  /s/ James (Yuejian) Wang
Printed Name: James (Yuejian) Wang
English Name:
Title: Chief Executive Officer
Nationality: U.S.

CDI China, Inc.
Signature: /s/ James (Yuejian) Wang
Printed Name:  James (Yuejian) Wang
English Name:
Title: Chief Executive Officer
Nationality: U.S.

Pine Capital Enterprises Inc.
Signature: /s/ Xiaoxin Su
Printed Name: Xiaoxin Su
English Name:
Title: Executive Director
Nationality: China

 
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Yuwei Huang

Signature: /s/ Yuwei Huang
Printed Name: Yuwei Huang
English Name: Yuwei Huang
Nationality: China

 
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Exhibit II - Definition and Interpretation
 
Part 1 - Definition
 
Unless specified in the terms or context of the contract, the below terms are
defined as follows:

 
1.
“Subsequent approvals” refer to the approvals, consents, registrations, and
permits (not including approval for establishment and approval for tax breaks)
from the government regarding the validity and enforceability of the Target
Company’s operational activities listed on Annex 4 of this Contract or any other
supplementary contracts.

 
2.
“Annexes” refer to the required documents provided by the Target Company to
obtain approvals from and registration with Chinese government agencies.

 
3.
“Applicable Laws” means the laws, regulations, rules, and the notices, orders,
decisions or other public notification documents issued by the legislative,
executive or judicial branches, applicable to the parties or the Target Company
of this Contract.

 
4.
“Certificates of Approval” refer to the certificates approving the establishment
of the Target Company, this Contract and Company Bylaws that are issued by the
approving authorities.

 
5.
“Approvals” refer to the approvals signed and issued by approving authorities
regarding the establishment of the Target Company, this Contract and Company
Bylaws.

 
6.
“Company Bylaws” refer to the bylaws of the Target Company to be established by
its Board of Directors.

 
7.
“Assignor” refers to Party B of this Contract, Taiyuan Yiwei Magnesium Industry
Co., Ltd.

 
8.
“Confidential Information” refers to all information of business, sales,
technology or any other information that disclosed with label of
confidentiality, under confidential condition, or regarded to be confidential by
both parties based on logical business determination.

 
9.
“Contract” shall have the meaning given in the beginning parts.

 
10.
“Effective Date” means the effective date of this Contract, which is the date
the Contract is approved by approving authorities.

 
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11.
“Financial Statements” mean the Target Company’s unaudited financial statements
as of June 30, 2011along with the Accounts Detail which are a part thereof.

 
12.
“Fiscal 2010” means the 12 month period ending September 30, 2010.

 
13.
“Fiscal 2011” means the 12 month period ending September 30, 2011.

 
14.
“Fiscal 2012” means the 12 month period ending September 30, 2012.

 
15.
“Fiscal 2013” means the 12 month period ending September 30, 2013.

 
16.
“Fiscal 2014” means the 12 month period ending September 30, 2014.

 
17.
“Land Use Rights” mean the land use rights shown in the following land use right
certificate for the use of real property in China by the Target company as
included in its Financial Statements: with total area of 20.7 acres.

Land Use Right Certificate (Ling Jiyon (2011) # a060300)

 
18.
“Restriction of Property Rights” means any claims, deposits, set security
interest, mortgage, guarantee, pledge, options, equity, selling rights, or any
other third party interest, retention of title, priority, preemption or any
other form of security interest.

 
19.
“Force Majeure” shall have the meaning defined in section 15.1.

 
20.
“Taxation” means any relevant taxes collected from the Target Company by any
taxing collectors at any taxing location (including but not limited to, VAT,
sales tax, stamp duty or other taxes, deductions or withholding taxes
(regardless of natures and names)

 
21.
“Trade Secrets” means any technical and operating information that is unknown to
the general public, is practical and protected by security measures by the
owners, and create economic benefits to the owner.

 
22.
“Management Agreement” means “ the Management Agreement among Party A, the
Target Company, Yuwei Huang and Kong Tung related to the operation of the Target
Company and other magnesium production facilities owned by CDII to be signed on
the Closing Date.

 
23.
“Approved Company” means a company in which Party A owns an interest.

 
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Exhibit II - Investment Letter

INVESTMENT LETTER

___________________________
___________________________
___________________________

China Direct Industries, Inc.
431 Fairway Drive, Suite 200
Deerfield Beach, FL 33441

Gentlemen:

The undersigned hereby represents and warrants to China Direct Industries, Inc.
(the “Company") that (i) the shares of the Company's Common Stock (the
"Securities") which are being received by the undersigned are being acquired
from China Direct Investments, Inc. in connection with the Equity Transfer
Contract entered into between the Company and Taiyuan Ruiming Yiwei Magnesium
Industry Co., Ltd. are for the undersigned’s own account and for investment and
not with a view to the public resale or distribution thereof; (ii) the
undersigned will not sell, transfer or otherwise dispose of the Securities
except in compliance with the Securities Act of 1933, as amended (the "Act");
and (iii) the undersigned is aware that the Securities are "restricted
securities" as that term is defined in Rule 144 of the General Rules and
Regulations under the Act.

The undersigned acknowledges that it has been furnished with disclosure
documents, including, among other things, the Company's Financial Statements.

The undersigned further acknowledges that it has had an opportunity to ask
questions of and receive answers from duly designated representatives of the
Company concerning the terms and conditions pursuant to which the Securities are
being offered.  The undersigned acknowledges that it has been afforded an
opportunity to examine such documents and other information which it has
requested for the purpose of verifying the information set forth in the
documents referred to above.

The undersigned further acknowledges that it is fully aware of the applicable
limitations on the resale of the Securities.  These restrictions for the most
part are set forth in Rule 144.  The Rule permits sales of "restricted
securities" upon compliance with the requirements of such Rule.  If the Rule is
available to the undersigned, the undersigned may make only routine sales of
Securities, in limited amounts, in accordance with the terms and conditions of
that Rule.

 
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By reason of the undersigned's knowledge and experience in financial and
business matters in general, and investments in particular, the undersigned is
capable of evaluating the merits and risks of an investment in the
Securities.  The undersigned is capable of bearing the economic risks of an
investment in the Securities and fully understands the speculative nature of the
Securities and the possibility of such loss.

The undersigned's present financial condition is such that it is under no
present or contemplated future need to dispose of any portion of the Securities
to satisfy any existing or contemplated undertaking, need or indebtedness.

Any and all certificates representing the Securities, and any and all Securities
issued in replacement thereof or in exchange therefor, shall bear the following
or comparable legend, which the undersigned has read and understands:

The Securities represented by this Certificate have not been registered under
the Securities Act of 1933 (the "Act").  The Securities have been acquired for
investment and may not be sold or transferred in the absence of an effective
Registration Statement for the Securities under the Act unless in the opinion of
counsel satisfactory to the Company, registration is not required under the Act.

Very truly yours,

Taiyuan Yiwei Magnesium Industry Co. Ltd.

Signature:                      ________________________________
Printed Name:                                ________________________________
English Name: ________________________________
Title:                      ________________________________
Nationality:                      ________________________________

 
 

Date:  _____________

 
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