UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)




x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934





For the
fiscal year ended December 31, 2008





or




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934





For the
transition period from __________ to __________





COMMISSION FILE NUMBER:001-33929





CHINA
SHEN ZHOU MINING & RESOURCES, INC.


(Name of
Small Business Issuer Specified in its Charter)





Nevada
              87-0430816(State
      of incorporation)
              (IRS
      Employer Identification
Number)





No. 166
Fushi Road, Zeyang Tower,


Shijingshan
District, Beijing, China 100043


(Address
of principal executive offices) (Zip Code)





86-010-8890
6927


(Issuer’s
telephone number, including area code)





Securities
registered under Section 12(b) of the Exchange Act:





Title
      of Each Class:
              
              Name
      of Each Exchange on Which RegisteredCommon
      Stock, par value $.001
              
              NYSE  Amex





Securities
registered under Section 12(g) of the Exchange Act: None.





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes oNo þ





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes oNo þ





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer o
              Accelerated
      filer o
              Non-accelerated
      filer o
                (Do
      not check if a smaller
                reporting
      company)
              Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act):


Yes oNo þ





The
aggregate market value of the 4,970,914 shares of voting and non-voting
common equity stock held by non-affiliates of the registrant was $ 15,161,288 as
of June 30, 2008, the last business day of the registrant’s most recently
completed second fiscal quarter, based on the last sale price of the
registrant’s common stock on such date of $3.05 per share, as reported by NYSE
Amex Market (formerly American Stock Exchange).





As
of April 14, 2009, there were 22,214,514 shares of common stock of China
Shen Zhou Mining & Resources, Inc. outstanding.









TABLE
OF CONTENTS





PART
      IITEM
      1.
                BUSINESS
                4Corporate
      History
                4Our
      Industry
                5Current
      Business Operations
                6Description
      of Products
                6Sales
      and Marketing
                7Our
      Major Customers
                7Competition
                8Business
      Strategies
                8Expansion
      of Production Capacity to Meet Demand
                8Exploration
      Activities
                9Acquire
      More Mineral Resources
                10Competitive
      Advantages
                10Government
      Regulation
                10Employees
                11ITEM
      1A.
                RISK
      FACTORSITEM
      1B.
                UNRESOLVED
      STAFF COMMENTSITEM
      2.
                PROPERTIES
                24General
                24Sumochaganaobao
      Fluorite Mine (Production Stage)
                27The
      Kuru-Tegerek Cu-Au Mine (Under Development)
                31Mining
      Site No. 2 of Qingxing Copper Mine, in production Stage (Qingshan
      Metal)
                34Keyinbulake
      Cu-Zn Property in development stage (Xingzhen Mining)
                37Qianzhen
      Mining
                39ITEM
      3.
                LEGAL
      PROCEEDINGS
                40ITEM
      4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                40PART
      IIITEM
      5.
                MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                41Equity
      Compensation Plan Information
                41




2





ITEM
      6.
                SELECTED
      FINANCIAL DATA
                42ITEM
      7.
                MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                42Expansion
      of Production Capacity to Meet Demand
                38Acquire
      More Mineral Resources
                40ITEM
      8.
                FINANCIAL
      STATEMENTS
                54ITEM
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                54ITEM
      9A.
                CONTROLS
      AND PROCEDURES
                54ITEM
      9B.
                OTHER
      INFORMATION
                55PART
      IIIITEM
      10.
                DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                55Involvement
      in Certain Legal Proceedings
                57Compliance
      with Section 16(a) of the Securities Exchange Act of 1934
                58Code
      of Ethics
                58Director
      Nominees Recommended by Stockholders
                58Board
      Composition; Audit Committee and Financial Expert
                58ITEM
      11.
                EXECUTIVE
      COMPENSATION
                59Outstanding
      Equity Awards at Fiscal Year-End
                59Director
      Compensation
                59Retirement,
      Post-Termination and Change in Control
                60ITEM
      12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.
                60ITEM
      13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                61ITEM
      14.
                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                62PART
      IVITEM
      15.
                EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
                62




3


PART
I





ITEM 1.
            BUSINESS





Corporate
History





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





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





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





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





AFMG owns
all of the registered capital of Inner Mongolia Wulatehouqi Qianzhen Ore
Processing Co., Ltd. (“Qianzhen Mining”), a limited liability company organized
in the PRC.   Qianzhen Mining holds 68% of the registered capital of
Inner Mongolia Xiangzhen Mining Group Co., Ltd., a limited liability company
organized in the PRC (“Xiangzhen Mining”), with the remaining 32% of the
registered capital of Xiangzhen Mining being held by AFMG, thus effectively
making Xiangzhen Mining a wholly-owned subsidiary of AFMG. The percentage of
ownership interest in Xiangzhen Mining by AFMG and Qianzhen Mining changed from
67% and 33% in 2006 to 68% and 32% in 2007, respectively, due to additional
investment into Xiangzhen Mining by AFMG and Qianzhen Mining. Xiangzhen Mining
also holds 100% of the registered capital of Tun-Lin Limited Liability Company
(“Tun-Lin”), which is a Kyrgyz Republic registered company, which in turn owns
100% of Kichi Chaarat Closed Stock Company .  Qianzhen Mining owns 60% of
Wulatehouqi Qingshan Nonferrous Metal Development Co., Ltd. (“Qingshan Metal”).
The other 40% of Qingshan Metal is owned by several individual shareholders.
Xiangzhen Mining owns 90% of Xinjiang Buerjin County Xingzhen Mining Co., Ltd.
(“Xingzhen Mining”). The other 10% is owned by Xinjiang Tianxiang New Technology
Development Co., Ltd.





In
December 2007, the company disposed one of its subsidiaries, Tianzhen Mining, an
exploration stage company located in Wuqia County, Xinjiang Uygur Autonomous
Region.




4




The table
below illustrates the corporate structure of the Company:











Our
common stock is listed on the NYSE Amex under the symbol “SHZ.”





Our
executive offices are located at No. 166 Fushi Road, Zeyang Tower, Suite
1210 Shijingshan District, Beijing, China 100043. Our telephone number is
86-010-88906927.





Our
Industry





Our
primary business activity is mining, processing and distributing fluorite ores
and processed fluorite powder, copper, zinc, lead, and other mineral
concentrates. Along with China’s modernization drive, its economy has witnessed
significant growth in the past three decades, which brought about a rapid growth
in its manufacturing capacity. Moreover, due to its investment environment and
cheap labor, China has attracted many manufacturers from developed
countries.





Fluorite
is mainly used by the steel industry as a melting agent and the fluorite
chemical industry to manufacture hydrofluoric acid, a widely used raw material
for the chemical industry. China produced 3.0  million metric
tons of fluorite ore in 2006, 3.85 million metric tons in 2007 and 4.416
million metric tons in 2008.  In 2008, about 87.5% of the annual output
was consumed within China and 12.5% was exported, according to the
publication of the China Fluorite Conference at Kunming and based on
the estimates by China’s Fluorite Industry Association.. In recent years, large
exports of fluorite and hydrofluoric acid have depleted fluorite resources in
China. In order to protect fluorite reserves, the Chinese government instituted
an export quota system in 2001.





Since 2007, the annual production
capacity of steel has increased by 5% in China.  Due to the increaseof steel production, a
capacity to produce aluminumfluorideat 500,000 metric tons had been built
up by the end of 2008, which requires 0.75 million metric tons of fluorite
powders. As of October 2008, the production capacity of hydrofluoric acid has
increased to 1.0 million
metric tons per year and 345,000 metric tons are under construction, which
requires 2.5 million metric tons and 0.86 million metric tons of fluorite
powders respectively.Due to the global financial
crisis,however,the actual
production is estimated at
60% of its capacity,according to thepublicationof China’s InorganicFluoride Industry
Association.


5





In 2008,
1.75 million metric tons of fluorite powders were consumed by the producers of
hydrofluoric acid, 3.44 million metric tons by the producers of aluminum, 1.0
million metric tons by the producers of steel, 0.516 million metric tons by the
producers of aluminum fluoride and 0.6 million metric tons by the producers of
construction materials in China, according to the publication of
China’s Inorganic Fluoride Industry Association





Current
Business Operations





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





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




Subsidiaries
                      
                      Current
      Business ActivitiesQianzhen
      Mining
                      
                      Engage
      mainly in the processing of zinc-lead oreXiangzhen
      Mining
                      
                      Engage
      in the extraction and processing of fluorite oreXingzhen
      Mining
                      
                      Engage
      mainly in exploration and development of zinc-copper
  mineQingshan
      Metal
                      
                      Engage
      mainly in the extraction of copper-zinc ore, some
    processingTun-Lin
                        Kichi
      Chaarat
                      
                      Holding
      company of Kichi Chaarat
                        Engage
      in the development of Kichi Chaarat gold and copper
  deposit





Description of Products





Fluorite:





We
extract and process fluorite ores or fluorspar in northern Inner Mongolia. In
2008, we extracted a total amount of 122,000 metric tons of fluorite
ores. There are two final products from extraction and processing of fluorites:
high grade fluorite ores with a purity of above 75% CaF2 and fluorite
powder with a purity of greater than 97% CaF2 The high grade fluorite ores,
selected directly from the mined ores, are sold to steel making companies to be
used as a melting agent in steel making. The fluorite powder is a key upstream
material for the manufacture of fluorine compounds by the fluorine chemical
industry.





In 2008,
we produced approximately 61,000 metric tons of high grade fluorite ores and
sold 24,135 metric tons with total sales of approximately US$2.6 million,
accounting for approximately 69% of the revenues of our fluorite business.. We
also processed 32,087 metric tons of fluorite ores, produced 17,664 metric tons
of fluorite powder and sold 15,243 metric tons for approximately US$ 1.1million,
which accounts for approximately 31% of the revenues of our fluorite
business.





Nonferrous:





We
extract and process zinc, copper and lead ores in the central part of Inner
Mongolia and northeastern part of Xinjiang Uyur Autonomous Region. Our final
products are zinc concentrate, copper concentrate and lead concentrate which are
sold to metallurgical companies which in turn refine them into zinc, copper and
lead ingots.


6




In 2008,
we produced zinc concentrate, copper concentrates and concentrate sulfur
equivalent to 1,850 metric tons of zinc metal, 120 metric tons of copper metal
and 20,342 tons of concentrate sulfur and sold zinc and copper
concentrates equivalent to 1,850 metric tons of zinc metal, 145 metric tons of
copper metal and 18,147 metric tons of concentrate sulfur, accounting for
approximately 43%, 29% and 28%, respectively, of the total revenues of our
nonferrous business of approximately $7.1 million.





-Sales and
Marketing





We do not
have any marketing staff. We have maintained long term and good relationships
with our customers, who send their orders directly to us. Our in-house sales
staff fill these orders based on our actual production ability and deliver
the products to our customers through railways or trucks. We expect these
relationships with our customer to continue.





Major
Suppliers





During
the year 2008, We have no concentrated suppliers. We extract and process zinc,
copper and fluorite ores from our mines and purchase fuel and very few raw
materials.





Our
Major Customers





In 2008,
our revenues from our fluorite business and nonferrous metals business were $3.7
million and $3.4 million, respectively.





The
following table shows our major customers (5% or more) for our nonferrous
business as of December 31, 2008:




Number
                      
                      Customer
                      
                      Revenue*
                        ($1,000)
                      
                      
                      Percentage
                        (%)1
                      
                      RuiPeng
      Mining Ltd
                      
                      
                      2,185
                      
                      
                      
                      64
                      %2
                      
                      Jinliyuan
      Trading Ltd
                      
                      
                      345
                      
                      
                      
                      10
                      %3
                      
                      Hubei
      Huawei Trading Ltd
                      
                      
                      217
                      
                      
                      
                      6
                      %4
                      
                      Feishang
      Nonferrous Metals Ltd
                      
                      
                      174
                      
                      
                      
                      5
                      %5
                      
                      Shuangli
      Trading Ltd
                      
                      
                      173
                      
                      
                      
                      5
                      %TOTAL
                      
                      
                      
                      
                      3,094
                      
                      
                      
                      90
                      %


*The
total revenue from our nonferrous segment is $3.4 million





The
following table shows our major customers (5% or more) for our fluorite business
as of December 31, 2008:




Number
                      
                      Customer
                      
                      Revenue*
                        ($1,000)
                      
                      
                      Percentage
                        (%)1
                      
                      Laiwu
      Steel Ltd
                      
                      
                      925
                      
                      
                      
                      25
                      %2
                      
                      Inner
      Mongolia Huadesanli Trading Ltd
                      
                      
                      781
                      
                      
                      
                      21
                      %3
                      
                      Handan
      Hongzhi Substance Ltd
                      
                      
                      754
                      
                      
                      
                      20
                      %4
                      
                      Ningxia
      Jinhe Chemistry Ltd
                      
                      
                      685
                      
                      
                      
                      19
                      %5
                      
                      Zibo
      Bofeng Fertilizer Ltd
                      
                      
                      355
                      
                      
                      
                      10
                      %TOTAL
                      
                      
                      
                      
                      3,500
                      
                      
                      
                      95
                      %





* Total
revenue from our fluorite segment is $3.7 million.


7




Competition
 
 Rapid
industrialization and development in China have been the main drivers for its
increase in non ferrous metal and fluorite consumption. In the current markets
for nonferrous metals and fluorite, demand in general exceeds supply. In the
near term, we do not foresee any difficulty in selling our products and
therefore we do not expect to devote large financial resources to sales and
promotion.
 
 Our
competitors mainly are similar companies in China.
 
 Our main
competitors in the fluorite business are:
  ·
              Jiangxi Yingpeng Mining Co.,
      Ltd., which produced 120,000 metric tons of fluorite ore and
      120,000 metric tons of fluorite powder in
  2007.
 
 ·
              Shandong Hongxing Fluorite Co.,
      Ltd., which produced 110,000 metric tons of fluorite ore and
      30,000metric tons
      of fluorite powder in 2007.
 
 ·
              Gansu Gaotai Hongyuan Mining Co.,
      Ltd., which produced 60,000 metric tons of fluorite ore and
      20,000 metric tons of fluorite powder in
  2007.
 
 ·
              Henan Tongbai Yinhe Mining Co.,
      Ltd., which produced 40,000 metric tons of fluorite and
      5,000 metric tons of fluorite powder in
  2007.
 
 Our
competitors in the zinc, lead and copper concentrates are local mining companies
such as Inner Mongolia Wulatehouqi Huogeqi Copper Mine (Huogeqi Mining) and
Dongshengmiao Mining Industry Co, Ltd, (Dongshengmiao Mining). Our production
volume in zinc, lead and copper concentrates are relatively small compared to
these local mining companies. As the demand for non ferrous metal concentrate
exceeds the supply, we believe that we should have no difficulty in selling
our products.
  Competitor
              
              CapacityHuogeqi
      Mining
              
              1,000,000
      metric tons of extracting and ore processing capacityDongshengmiao
      Mining
              
              600,000
      metric tons of extracting and ore processing capacityWancheng
      Trading Co.,Ltd
              
              400,000
      metric tons of extracting and ore processing
  capacity
 
 Business
Strategy
 
 Expansion
of Production Capacity to Meet Demand
 
 ▼
Fluorite
 
 We
extracted approximately 122,000 metric tons of fluorite
ore in 2008. In early 2006, we began a project at Xiangzhen Mining to produce
300,000 metric tons of fluorite ore, and the project was completed in November
2007. Initially at the newly expanded mine, we expect to extract 80,000 metric
tons of fluorite ore and process them into 40,000 metric tons of fluorite lump
and 40,000 metric tons of fluorite powder in 2009. From 2010 onwards, we expect
to expand our extraction capacity to full capacity of 300,000 metric tons
of fluorite ore per year.
 
 We
produced approximately 6,750 metric tons of fluorite powder in 2008. In early
2006, at our mine site, we started to build a plant with an annual processing
capacity of 200,000 metric tons of fluorite ore. The new plant remained in trial
production in 2008 and we have been engaged in solving certain technological
problems related to the plant’s water supply. We expect to solve the plant’s
technological problems and produce 40,000 metric tons of fluorite powder in
2009. After reaching its full capacity, we expect to produce approximately
100,000 metric tons of refined fluorite powder per year.
  8
 
 ▼
Zinc, Copper and Lead
 
 Due to
supply issues in non-ferrous ores, Qianzhen did not produce any non-ferrous
concentrates during the first six months of 2008. Taking advantage of the
rapidly increasing price of concentrate sulphur, the Company changed to produce
concentrate sulphur by utilizing accumulated sulphur-bearing tailings, in order
to mitigate the impact of the supply issues on the Company’s production. The
Company treated 77,463 metric tons of sulphur-bearing tailings and produced
18,000 metric tons of concentrate sulphur in 2008. No production is planned at
Qianzhen Mining in 2009 due to the low grade of the ores supplied by Qingshan
Metal and low price of copper. During this shutdown period, Qianzhen will look
actively for partners with the help of the local governments and for
opportunities to re-start production.
 
 In July
2006, Xingzhen Mining began a project at Keyinbulake Multi-Metal Mine in Buerjin
County, Aletai Zone, Xinjiang Uygur Autonomous Region. The project has a mining
and processing capacity of 200,000 metric tons of mineralized zinc-copper
material per year. It went into trial production at the end of the second
quarter of 2008 and produced 1,850 metric tons of zinc concentrates and 108
metric tons of copper concentrates in 2008. In 2009, with the lower price of
zinc and copper, the Company will produce 30,000 metric tons of zinc oxide ore
and sell directly without further processing, and process 70,000 metric tons of
ore to produce 8,700 metric tons of zinc concentrate, and 1,900 metric tons of
copper concentrate if we have satifactory test results for high grade ore
dressing or the prices of copper and zinc do not continue to fall.
 
 In
November 2007, we completed the acquisition of Tun-Lin Co. Ltd, a company that
exists under the law of the Republic of Kyrgyzstan, which owns 100% of the
equity in Kichi Chaarat, whose major asset is the subsoil use right for (i)
mining for gold, copper and other metals within the Kuru-Tegerek licensed area;
and (ii) exploration for gold, copper and other metals within the Kuru-Tegerek
licensed area. The purpose of the acquisition was to enable the Company to
explore, develop and mine the potential reserves of the Kuru-Tegerek licensed
area. On July 2008, the development plan for the Kichi Chaarat deposit was
approved by local authority and we plan to complete the construction of a mining
facility in three years.
 
 Exploration
Activities
  ü         Keyinbulake Cu-Zn
Mine
 
 Following
the exploration in 2008, further exploration activities are planned in 2009 in
the southern and northern parts of Keyinbulake Cu-Zn Mine. The exploration
details are scheduled as follows:
 
 Table
1-3: Exploration Program for Keyinbulake Property
 
 Item
                              
                              Method
                              
                              Unit
                              
                              QuantityGeophysical
                              
                              Surface
      scanning
                              
                              km
      2
                              
                              
                              2Drilling
                              
                              four
      medium/deep holes
                              
                              m
                              
                              
                              3500Trenching
                              
                              -
                              
                              m
      3
                              
                              
                              5000Assaying
                              
                              Sampling
      and test
                              
                              -
                              
                              
                              -
 
 The
exploration activities listed above will be completed by a Geophysical
Prospecting Team of Xinjiang Nonferrous Geophysical Prospecting Bureau at the
end of August 2009 with a total budget of approximately $0.58 million, which
will be funded by a shareholder (natural person) of Xingzhen
Mining.
  9
 
 Acquire
More Mineral Resources
 
 To
increase our reserve base and insure supply to our processing facilities, we
plan to acquire domestic and foreign large-scale mines when the right
opportunity arises. We also expect to acquire additional nonferrous metal mines
and fluorite mines domestically that have good extracting and operating
conditions and possess all necessary governmental licenses.
 
 Competitive
Advantages
 
 We
believe we have the following competitive advantages:
  ·
              We own one of the best fluorite
      mines in China which has high purity fluorite ore and good extracting
      conditions with the single largest processing plant in northern
      China.
 
 ·
              We have increased our potential
      reserve base in nonferrous metals by completing an acquisition of a large
      gold and copper deposit in Republic of
  Kyrgyzstan.
 
 ·
              We have an experienced management
      team. Most of our executive officers have more than 20 years of experience in the mining
      industry.
 
 ·
              We have good relationships with
      local government agencies.
 
 ·
              Many of our subsidiaries are
      located in the western part of China and therefore enjoy many preferential
      tax and regulatory policies.
 
 Government
Regulation
 
 The
following is a summary of the principal governmental laws and regulations that
are or may be applicable to our operations in the PRC. The scope and enforcement
of many of the laws and regulations described below are uncertain. We cannot
predict the effect of further developments in the Chinese legal system,
including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement of laws.
 
 The
mining industry, including certain exploration and mining activities, is highly
regulated in the PRC. Regulations issued or implemented by the State Council,
the Ministry of Land and Resources, and other relevant government authorities
cover many aspects of exploration and mining of natural resources, including
entry into the mining industry, the scope of permissible business activities,
interconnection and transmission line arrangements, tariff policy and foreign
investment.
 
 The
principal regulations governing the mining business in the PRC
include:
 
 ·
              China Mineral Resources Law,
      which requires a mining business to have exploration and mining licenses
      from provincial or local land and resources
      agencies.
 
 ·
              China Mine Safety Law, which
      requires a mining business to have a safe production license
      and provides for
      random safety inspections of mining
    facilities.
 
 ·
              China
      Environmental Law, which requires a mining project to obtain an
      environmental feasibility study of the
project.
  10
 
 ·
              Foreign Exchange Controls. The
      principal regulations governing foreign exchange in the PRC are the
      Foreign Exchange Control Regulations (1996) and the Administration of
      Settlement, Sale and Payment of Foreign Exchange Regulations (1996),
      (“the Foreign
      Exchange Regulations”). Under the Foreign Exchange
      Regulations, Renminbi (“RMB”) is freely convertible into
      foreign currency for current account items, including the distribution of
      dividends. Conversion of RMB for capital account items, such as direct
      investment, loans and security investment, however, is still subject to
      the approval of the State
      Administration of Foreign Exchange (“SAFE”). Under the Foreign Exchange
      Regulations, foreign-invested enterprises are required to open and
      maintain separate foreign exchange accounts for capital account items. In
      addition, foreign-invested enterprises may only buy,
      sell and/or remit foreign currencies at those banks authorized to conduct
      foreign exchange business after providing valid commercial documents and,
      in the case of capital account item transactions, obtaining approval
      fromSAFE.
 
 The
Guidance to Businesses by Foreign Investments revised in 2007 by the Chinese
government no longer allows foreign investments into the fields of exploration,
development and mining of fluorite in China. The policy is intended to protect
Chinese businesses.
 
 Our
operating subsidiaries in China have been authorized by land and resources
departments of local governments. Chinese regulations require that mining
enterprises procure an exploration or mining license from the land and resource
department of local governments before they can carry out exploration or mining
activities. This license ensures that an enterprise follow proper procedures in
its own exploring or mining activities and in selling its products to customers.
We have secured the necessary exploration or mining licenses from local
governments. Most of our mining companies possess exploration or mining licenses
and some of them are applying for mining licenses after
exploration.
 
 Chinese
regulations also require that a mining company must have a safety certification
from the PRC Administration of Work Safety before it can engage in mining and
extracting activities. All of our operating subsidiaries have obtained safety
certification from the Administration of Work Safety of local governments. In
addition, all of our operating subsidiaries have passed government safety
inspections.
 
 We also
have been granted an environmental certification from the PRC Bureau of
Environmental Protection.
 
 Employees
 
 As of
December 31, 2008, we employed 351 full-time employees, of whom approximately
2.6% are with our Beijing Representative Office, 20.8% are with Qianzhen Mining,
60.7% are with Xiangzhen Mining, 5.1% are with Tun-Lin Co. (gold and copper
project in Kyrgyz), 2.3% are with Qingshan Metal (copper and zinc ore mining)
and 8.5% are with Xingzhen Mining (holding exploration rights of copper ore and
zinc ore). Approximately 26.5% of our employees are management personnel, and 6%
are sales and procurement staff. In terms of education level,
approximately 20% of our employees have a college degree or
higher.
 
 Under
Chinese law, our employees have formed trade unions which protect employees’
rights, aim to assist in the fulfillment of our economic objectives, encourage
employee participation in management decisions and assist in mediating disputes
between us and union members. We believe that we maintain
a satisfactory working relationship with our employees and we have not
experienced any significant labor disputes or any difficulty in recruiting staff
for our operations.
 
 As
required by applicable Chinese law, we have entered into employment
contracts with all of our employees. We have also entered into a confidentiality
agreement with all of our employees under which such employees are prohibited
from disclosing confidential information of the Company or using it for other
purposes than the benefit of the Company. Directors, officers, mid-level
managers and some key employees in sales and R&D are required to sign a
non-compete agreement which prohibits them from competing with the Company
while they are employees of the Company and within two years after their
employment with the Company is terminated.
  11
 
 Our
employees in China participate in a state
pension arrangement organized by Chinese municipal and provincial
governments. We are required to contribute to the arrangement at the
rate of 20% of the average monthly salary. In addition, we are required by
Chinese law to cover employees in China with other types of social insurance.
Our total contribution may amount to 30% of the average monthly salary. We have
purchased social insurance for all of our employees. Expense related to social
insurance was approximately $107,523 for fiscal year 2008.
 
 Risk
Factors
 
 CAUTIONARY
STATEMENT REGARDING FORWARD - LOOKING INFORMATION AND CERTAIN IMPORTANT
FACTORS
 
 In this
Annual Report on Form 10-KSB we make, and from time to time we otherwise make,
written and oral statements regarding our business and prospects, such as
projections of future performance, statements of management’s plans and
objectives, forecasts of market trends, and other matters that are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Statements containing the words or phrases “will likely result,” “are
expected to,” “will continue,” “is anticipated,” “estimates,” “projects,”
“believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,”
“objective,” “should” or similar expressions identify forward-looking
statements, which may appear in documents, reports and filings with the
Securities and Exchange Commission, news releases, written or oral presentations
made by officers or other representatives made by us to analysts, stockholders,
investors, news organizations and others, and discussions with management and
other of our representatives. For such statements, we invoke the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
 
 Our
future results, including results related to forward-looking statements, involve
a number of risks and uncertainties. No assurance can be given that the results
reflected in any forward-looking statements will be achieved. Any
forward-looking statement speaks only as of the date on which such statement is
made. Our forward-looking statements are based upon assumptions that are
sometimes based upon estimates, data, communications and other information from
suppliers, government agencies and other sources that may be subject to
revision. Except as required by law, we do not undertake any obligation to
update or keep current either (i) any forward-looking statement to reflect
events or circumstances arising after the date of such statement, or
(ii) the important factors that could cause our future results to differ
materially from historical results or trends, results anticipated or planned by
us, or which are reflected from time to time in any forward-looking
statement.
 
 In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time in
any forward-looking statement. Some of these important factors, but not
necessarily all important factors, include the following:
 
 Risks
Related to Our Business
 
 We
risk defaults under our convertible debt.
 
 We
entered into the Second Supplemental Indenture dated September 28, 2007 with the
Bank of New York (the “Trustee”), which amended an Indenture dated December 27,
2006 under which our 6.75% Senior
Convertible Notes Due 2012 initially purchased by Citadel Equity Fund Ltd
were issued. Under the
Second Supplemental Indenture, the Company covenants to achieve certain
quarterly EBITDA targets for 2008 and 2009. If the Company fails to achieve such
quarterly targets and does not cure it within fourteen days after it receives a
written notice of default from the Trustee or the Convertible Notes Holders,
such failure will constitute a default. The Company did not achieve the targets
for the four fiscal quarters of 2008. So far, neither the Trustee nor the
Convertible Note Holders have sent a written notice of default to the Company.
However, the Trustee or the Convertible Note Holders could send a written notice
of default any time in the future when the Company misses its quarterly target.
The Company believes that it is very likely to miss its EBITDA target again and
will unlikely be able to cure it within fourteen days.
  12
 
 Disruptions
in the capital and credit markets related to the current national and worldwide
financial crisis, which may continue indefinitely or intensify, could adversely
affect our results of operations, cash flows and financial condition, or those
of our customers and suppliers.
 
 The
current disruptions in the capital and credit markets may continue indefinitely
or intensify, and adversely impact our results of operations, cash flows and
financial condition, or those of our customers and suppliers. Disruptions in the
capital and credit markets as a result of uncertainty, changing or increased
regulation, reduced alternatives or failures of significant financial
institutions could adversely affect our access to liquidity needed to conduct or
expand our businesses or conduct acquisitions or make other discretionary
investments, as well as our ability to effectively hedge our currency or
interest rate. Such disruptions may also adversely impact the capital needs of
our customers and suppliers, which, in turn, could adversely affect our results
of operations, cash flows and financial condition.
 
 We
may not be able to secure financing needed for future operating needs on
acceptable terms, or on any terms at all.
  From time
to time, we may seek additional financing to provide the capital required to
maintain or expand our exploration activities and mining facilities, and
equipment and/or working capital, as well as repay outstanding loans if cash
flow from operations is insufficient to do so. We cannot predict with certainty
the timing or amount of any such capital requirements. If such financing is not
available on satisfactory terms, we may be unable to expand our business or to
develop new business at the rate desired, and our operating results may suffer.
If we are able to incur debt, we may be subject to certain restrictions imposed
by the terms of the debt and the repayment of such debt may limit our cash flow
and our ability to grow. If we are unable to incur debt, we may be forced
to issue additional equity, which could have a dilutive effect on the then
current holders of equity.
 
 We
receive a significant portion of our revenues from a small number of customers.
Our business will be harmed if our customers reduce their orders from
us.
  A
significant amount of our revenue is derived from only a small number of
customers mainly in the iron and steel and fluorite chemical industries.
Dependence on a few customers could expose us to the risk of substantial losses
if a single dominant customer stops purchasing our products. If we lose any
customers and are unable to replace them with other customers that purchase a
similar number of our products and services, our revenues and net income would
decline considerably.
 
 We
may not have sufficient supply of nonferrous ore.
 
 Qianzhen
Mining, one of our subsidiaries, has a 200,000 metric ton/year processing
capacity for zinc-lead ore. However, it does not produce any ore it processes.
Currently, it obtains its supply of ore from third parties. Its contracts with
third parties will expire in June 2008. We may not be able to renew contracts or
secure new contracts with third party suppliers. Although we plan to increase
the quantity of nonferrous metal ore at Qingshan Metal to replace third
party suppliers, we may not be able to produce a sufficient quantity to ensure
the supply of ore for Qianzhen Mining. As a result, our revenues may be reduced
and our business would suffer.
 
 Inclement
weather may affect our fluorite business.
 
 Our
fluorite business is conducted through Xiangzhen Mining which is located in an
outlying area on the border between China’s Inner Mongolia Autonomous Region and
Mongolia. The weather conditions there are very harsh, especially in winter. If
there is a strong snow storm, our fluorite mining operations may have to be
suspended for an indefinite period of time and we may not be able to ship our
fluorite products to our customers in time. As a result, our revenues may
be negatively impacted.
  13
  Our
administrative costs could affect our ability to be profitable.
 
 Our
exploration and mining operations are scattered across several geographical
locations in China and we will make acquisition of mines in the future. Our
administrative costs may increase as a result and our profitability may be
affected.
 
 Our
ability to operate our company effectively could be impaired if we lose key
personnel
 
 We depend
on the services of key executives and a small number of personnel focused on the
development of our mining projects. Additionally, the number of persons skilled
in the development and operation of mining properties is limited and significant
competition exists for these individuals. We cannot assure you that we will be
able to employ key personnel or that we will be able to attract and retain
qualified personnel in the future. We do not maintain “key person” life
insurance to cover our executive officers. Due to the relatively small size of
our company, our failure to retain or attract key personnel may delay or
otherwise adversely affect the development of our projects, which would have a
material adverse effect on our business.
 
 We
may not be able to attract and retain the additional personnel we will need to
develop any of our projects
 
 We are a
small company with a limited operating history and relatively few employees. The
development of any of our proposed projects will place substantial demands on
us. We will be required to recruit additional personnel and to train, motivate
and manage these new employees. There can be no assurance that we will be
successful in attracting and retaining such personnel.
 
 We
may not be able to obtain or renew licenses, rights and permits required to
develop or operate our mines, or we may encounter environmental conditions or
requirements which would adversely affect our business
 
 In the
ordinary course of business, mining companies are required to seek governmental
permits for expansion of existing operations or for the commencement of new
operations. In addition to requiring permits for the development of our mines,
we will need to obtain various mining during the life of the project. Obtaining
and renewing the necessary governmental permits is a complex and time-consuming
process. Obtaining or renewing necessary permits may increase costs and cause
delays depending on the nature of the activity to be permitted and the
interpretation of applicable requirements implemented by the permitting
authority. There can be no assurance that all necessary permits will be obtained
and, if obtained, will be renewed, or that in each case the costs involved will
not exceed those that we previously estimated. It is possible that the costs and
delays associated with compliance with such standards and regulations could
become such that we would not proceed with the development or operation of a
mine or mines.
 
 Any
material inaccuracies in our production estimates could adversely affect our
results of operations
 
 We have
prepared estimates of future production. We cannot assure you that we will ever
achieve our production estimates or any production at all. Our production
estimates depend on, among other things:
  ·
              the
      accuracy of our mineralization and reserves
  estimates;
 
 ·
              the
      accuracy of assumptions regarding ore grades and recovery
      rates;
  14
  ·
              ground
      conditions and physical characteristics of the mineralization, such as
      hardness and the presence or absence of particular metallurgical
      characteristics;
 
 ·
              the
      accuracy of estimated rates and costs of mining and processing;
      and
 
 ·
              our ability to obtain and keep
      effective all permits for our mines and
  facilities.
 
 Our
actual production may vary from our estimates if any of our assumptions prove to
be incorrect.
 
 Expansion
of our business may put added pressure on our management and operational
infrastructure, impeding our ability to meet any increased demand for our
products and possibly hurting our operating results.
  Our
business plan is to significantly grow our operations to meet anticipated growth
in demand for our products. Our planned growth includes the expansion of
exploration and mining over the next few years. Although most of management
personnel have extensive experience in the mining industry, their training is in
mining operations rather than contemporary management principles. They may be
not able to cope with the challenges presented by being a U.S. public company
and the competitive business environment due to globalization. In addition,
growth in our business may place a significant strain on our personnel,
management, financial systems and other resources. The evolution of our business
also presents numerous risks and challenges, including:
 
 ·
              the
      continued demand of our products by the iron and steel, and fluorite
      chemical industries;
 
 ·
              our
      ability to successfully and rapidly expand our operations in response to
      potentially increasing demand;
 
 ·
              the
      costs associated with such growth, which are difficult to quantify, but
      could be significant;
 
 ·
              rapid
      technological change; and
 
 ·
              the
      highly cyclical nature of the mining
industry.
 
 If we are
successful in obtaining rapid market growth of our products, we will be required
to deliver large volumes of quality products to customers on a timely basis and
at a reasonable cost to those customers. Meeting any such increased demand will
require us to expand our manufacturing facilities, to increase our ability to
purchase raw materials, to increase the size of our work force, to expand our
quality control capabilities and to increase the scale upon which we provide our
products. Such demands would require more capital (including working capital)
than we currently have and we may be unable to meet the needs of our
customers.
 
 There
is certain risk for the company to maintain listing on NYSE Amex.
 
 The
company is currently listed on NYSE Amex. To maintain the listing on Amex, the
company shall meet the continual listing standards required by the Amex, which
include but not limited to financial criteria. If a company falls below any
criteria, the Amex will notify the company and review the appropriateness of
continued listing. Once notified, the company shall submit a plan to return to
compliance. If the Amex accepts the plan, it will monitor the company's
performance throughout the plan period.  If the company fails to achieve
stated goals in a timely manner, the Amex will move to remove it from the
listing. Therefore, the company faces the risk of delisting if it is not
able to comply with the continual listing standards of Amex.
  15
 
 Risks
Related to Our Industry
 
 Fluctuations
in the market price of fluorite and nonferrous metals could adversely affect the
value of our company and our securities
 
 The
profitability of our operations will be directly related to the market price of
the metals we mine and refine. The market prices of fluorite and nonferrous
metals fluctuate widely and are affected by numerous factors beyond the control
of any mining company. These factors include fluctuations with respect to the
rate of inflation, the exchange rates of the Renminbi and other currencies,
interest rates, global or regional political and economic conditions, banking
industry fluctuations, global and regional demand, production costs in major
metal producing areas and a number of other factors. Any drop in the price of
the metals important to our operations would adversely impact our revenues,
profits and cash flows. In particular, a sustained drop in prices
could:
  §
              cause
      suspension of our development and, ultimately our mining operations, if
      such operations become uneconomic at the then-prevailing prices, thus
      further reducing revenues;
 
 §
              prevent
      us from fulfilling our obligations under our agreements or under our
      permits and licenses which could cause us to lose our interests in, or be
      forced to sell, our properties; and
 
 §
              reduce financing available to
      us.
 
 Furthermore,
the need to reassess the feasibility of any of our projects if metal prices
decline could cause substantial delays or might interrupt operations until the
reassessment can be completed. Mineral reserve calculations and life-of-mine
plans using significantly lower metal prices could result in reduced estimates
of mineral reserves and in material write-downs of our investment in mining
properties and increased amortization, reclamation and closure
charges.
 
 Mining
is inherently dangerous and subject to conditions or events beyond our control,
and any operating hazards could have a material adverse effect on our
business
 
 Mining
involves various types of risks and hazards, including: environmental hazards,
industrial accidents, metallurgical and other processing problems, unusual or
unexpected rock formations, structure cave-in or slides, flooding, fires and
interruption due to inclement or hazardous weather conditions.
 
 These
risks could result in damage to, or destruction of, mineral properties,
production facilities or other properties, personal injury or death,
environmental damage, delays in mining, increased production costs, monetary
losses and possible legal liability. We may not be able to obtain insurance to
cover these risks at economically feasible premiums and some types of insurance
may be unavailable or too expensive to maintain. We may suffer a material
adverse effect on our business and the value of our securities may decline if we
incur losses related to any significant events that are not covered by our
insurance policies.
  16
 
 There
is no guarantee that legal title to the properties in which we have an interest
will not be challenged, which could result in the loss of our rights in those
properties
 
 The
ownership and validity, or title, of unpatented mining claims are often
uncertain and may be contested. A successful claim contesting our title or
interest to a property could cause us to lose our rights to mine that property.
In addition, the success of such a claimant could result in our not being
compensated for our prior expenditures relating to the property.
 
 The
mining industry is intensely competitive, and we may have difficulty effectively
competing with other mining companies in the future
 
 Mines
have limited lives and, as a result, we must continually seek to replace and
expand our mineralization and reserves through the acquisition of new
properties. Significant competition exists for the acquisition of properties
producing or capable of producing fluorite and nonferrous metals. We may be at a
competitive disadvantage in acquiring additional mining properties because we
must compete with other individuals and companies, many of which may have
greater financial resources and larger technical staffs than we have. As a
result of this competition, we may be unable to acquire attractive mining
properties on acceptable terms.
 
 Shortages
of critical parts, equipment and skilled labor may adversely affect our
development projects
 
 The
industry has been impacted by increased worldwide demand for critical resources
such as input commodities, drilling equipment, tires and skilled labor. These
shortages have caused and may continue to cause unanticipated cost increases and
delays in delivery times, potentially impacting operating costs, capital
expenditures and production schedules.
 
 Costs
estimates and timing of new projects are uncertain
 
 The
capital expenditures and time required to develop new mines or other projects
are considerable and changes in costs or construction schedules can affect
project economics. There are a number of factors that can affect costs and
construction schedules, including, among others:
  §
                availability
      of labor, power, transportation, commodities and
      infrastructure;
 §
                increases
      in input commodity prices and labor costs;
 §
                fluctuations
      in exchange rates;
 §
                availability
      of financing;
 §
                difficulty
      of estimating construction costs over a period of years;
    and
 §
              delays in obtaining environmental
      or other government permits.
  Risks
Relate to Doing Business in China
 
 The
Company’s business will be affected by PRC government regulation and the
country’s economic environment because most of our sales will be in the China
market.
 
 Although
we export products to other countries, most of our sales are in the PRC.
 It is anticipated that our products in China will continue to represent a
significant portion of sales in the near future.  As a result of our
reliance on the China markets, our operating results and financial performance
could be affected by any adverse changes in economic, political and social
conditions in China.
  17
 
 There can
be no assurance that future regulatory, judicial and legislative changes will
not have a material adverse effect on us, that regulators or third parties will
not raise material issues with regard to compliance or non-compliance with
applicable laws or regulations, or that any changes in applicable laws or
regulations will not have a material adverse effect on our
business.
 
 The
economy of the PRC has been transitioning from a planned economy to market
oriented economy. Although in recent years the Chinese government has
implemented measures emphasizing the utilization of market forces for economic
reforms, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of productive assets in the PRC are still owned by the
Chinese government. For example, all lands are state owned and are leased to
business entities or individuals through governmental granting of state-owned
land use rights or mining and exploration rights.  The granting process is
typically based on government policies at the time of granting and it could be
lengthy and complex. This process may adversely affect our future business
expansion. The Chinese government also exercises significant control over the
PRC’s economic growth through the allocation of resources, controlling payment
of foreign currency and providing preferential treatment to particular
industries or companies. Uncertainties may arise with changing of governmental
policies and measures. At present, our mining and exploration activities are
subject to approvals from the relevant government authorities in China.
 Such governmental approval processes are typically lengthy and complex,
and never certain to be obtained.
 
 There are risks inherent in doing
business in China.
 
 The PRC
is a developing country with a young market economic system overshadowed by the
state. Its political and economic systems are very different from the more
developed countries and are still in the state of change.  China also faces
many social, economic and political challenges that may produce major shocks and
instabilities and even crises, in both its domestic arena and in its
relationship with other countries, including but not limited to the United
States. Such shocks, instabilities and crises may in turn significantly and
adversely affect our performance.
 
 Certain
political and economic considerations relating to the PRC could adversely affect
us.
 
 While the
PRC government has pursued economic reforms since its adoption of the open-door
policy in 1978, a large portion of the PRC economy is still operating under
five-year plans and annual state plans. Through these plans and other economic
measures, such as control on foreign exchange, taxation and restrictions on
foreign participation in the domestic market of various industries, the PRC
government exerts considerable direct and indirect influence on the economy.
Many of the economic reforms carried out by the PRC government are unprecedented
or experimental, and are expected to be refined and improved.  Other
political, economic and social factors can also lead to further readjustment of
such reforms. This refining and readjustment process may not necessarily have a
positive effect on our operations or future business development.  Our
operating results may be adversely affected by changes in the PRC’s economic and
social conditions as well as by changes in the policies of the PRC government,
such as changes in laws and regulations (or the official interpretation
thereof), measures which may be introduced to control inflation, changes in the
interest rate or method of taxation, and the imposition of additional
restrictions on currency conversion.
 
 The
recent nature and uncertain application of many PRC laws applicable to us create
an uncertain environment for business operations and they could have a negative
effect on us.
 
 The PRC
legal system is a civil law system. Unlike the common law system, the civil law
system is based on written statutes in which decided legal cases have little
value as precedents. In 1979, the PRC began to promulgate a comprehensive system
of laws and has since introduced many laws and regulations to provide general
guidance on economic and business practices in the PRC and to regulate foreign
investment. Progress has been made in the promulgation of laws and regulations
dealing with economic matters such as corporate organization and governance,
foreign investment, commerce, taxation and trade. The promulgation of new laws,
changes of existing laws and the abrogation of local regulations by national
laws could have a negative impact on our business and business prospects. In
addition, as these laws, regulations and legal requirements are relatively
recent, their interpretation and enforcement involve significant
uncertainty.
  18
 
 A
new Chinese law may impact our ability to make acquisitions of Chinese
businesses.
 
 On
August 8, 2006, six PRC regulatory agencies namely, the PRC Ministry of
Commerce, the State Assets Supervision and Administration Commission (“SASAC”),
the State Administration for Taxation, the State Administration for Industry and
Commerce, the China Securities Regulatory Commission (“CSRC”), and the
State Administration of Foreign Exchange (“SAFE”), jointly adopted the
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors (the “New M&A Rule”), which became effective on September 8,
2006. The New M&A Rule purports, among other things, to require offshore
Special Purpose Ventures, or SPVs, formed after the effective date, for overseas
listing purposes, through acquisitions of PRC domestic companies and controlled
by PRC companies or individuals, to obtain the approval of the CSRC prior to
publicly listing their securities on an overseas stock exchange.
 
 The
Company intends to make acquisitions of Chinese businesses in the future. There
are uncertainties regarding the interpretation and application of current or
future PRC laws and regulations, including the New M&A Rule and those
uncertainties could make it difficult or impossible to make acquisitions of
Chinese businesses in the future.
 
 Foreign
Investment Policy Change
 
 On March
16, 2007, China's parliament, the National People's Congress, adopted the
Enterprise Income Tax Law, which will take effect on January 1, 2008. The new
income tax law sets a unified income tax rate for domestic and foreign companies
at 25 percent and abolishes the favorable policy for foreign invested
enterprises. After this law takes effect, newly established foreign invested
enterprises will not enjoy favorable tax treatment as in effect under current
tax laws. Some of our subsidiaries are benefiting from the preferred tax rates
for foreign companies and will be subject to the new tax rate when their
respective term of preferred tax rates expires. Our net income margin may be
affected at that time.
 
 Risks
Relate to Doing Business in Kyrgyzstan
 
 The
Company’s business may be affected by Kyrgyzstan laws and its government
regulations and the country’s economic environment.
 
 The
company indirectly controls Tun-Lin Limited Liability Company (“Tun-Lin”), a
Kyrgyzstan Republic registered company which entirely owns Kichi-Chaarat closed
joint stock company. The major asset of Kichi-Chaarat is the subsoil use right
for (i) mining gold and other metals within the Kuru-Tegerek licensed area, and
(ii) exploration of gold and other metals within the Kuru-Tegerek licensed area.
As a result, the company’s operating results and financial performance could be
affected by any adverse changes in economic, political and social conditions in
Kyrgyzstan.
 
 There can
be no assurance that future regulatory, judicial and legislative changes will
not have a material adverse effect on us, that regulators or third parties will
not raise material issues with regard to compliance or non-compliance with
applicable laws or regulations, or that any changes in applicable laws or
regulations will not have a material adverse effect on our
business.
 
 The
economy of the Kyrgyzstan has been transitioning from a planned economy to
market oriented economy. At present, our exploration activities are subject to
approvals from the relevant government authorities in Kyrgyzstan.  Such
governmental approval processes are typically lengthy and complex, and never
certain to be obtained.
  19
 
 There
are risks inherent in doing business in Kyrgyzstan.
 
 The
Kyrgyzstan is a developing country with a young market economic system
overshadowed by the state. Its political and economic systems are very different
from the more developed countries and are still in the state of change.
 Kyrgyzstan also faces many social, economic and political challenges that
may produce major shocks and instabilities and even crises, in both its domestic
arena and in its relationship with other countries, including but not limited to
the United States and China. Such shocks, instabilities and crises may in turn
significantly and adversely affect our performance.
 
 Certain
political and economic considerations relating to the Kyrgyzstan could adversely
affect us.
 
 Through
controls on foreign exchange, taxation and restrictions on foreign participation
in the domestic market of various industries, the Kyrgyzstan government exerts
considerable direct and indirect influence on the economy. Many of the economic
reforms carried out by the Kyrgyzstan government are unprecedented or
experimental, and are expected to be refined and improved.  Other
political, economic and social factors can also lead to further
readjustment of such reforms. This refining and readjustment process may not
necessarily have a positive effect on our operations or future business
development.  Our operating results may be adversely affected by changes in
the Kyrgyzstan’s economic and social conditions as well as by changes in the
policies of the Kyrgyzstan government, such as changes in laws and regulations
(or the official interpretation thereof), measures which may be introduced to
control inflation, changes in the interest rate or method of taxation, and the
imposition of additional restrictions on currency conversion.
 
 The recent nature and uncertain
application of many Kyrgyzstan laws applicable to us
creates an uncertain environment for business operations andthey could have a negative effect on
us.
 
 The
Kyrgyzstan legal system is different from that of United States. Progress has
been made in the promulgation of laws and regulations dealing with economic
matters such as corporate organization and governance, foreign investment,
employment, commerce, taxation and trade. However, the promulgation of new laws,
changes of existing laws and the abrogation of local regulations by national
laws could have a negative impact on our business and business prospects. In
addition, as these laws, regulations and legal requirements are relatively
recent, their interpretation and enforcement involve significant
uncertainty.
 
 Risks
Related to the Market for Our Stock
 
 The
market for our Common Stock is limited.
 
 The
shares of our common stock have been traded on the American Stock Exchange under
the trading symbol “SHZ” since January 31, 2008. Before the listing on the
American Stock Exchange, the shares of our common stock were traded on the OTC
Bulletin Board.
 
 We
currently have approximately 642 shareholders. But the trading volume has been
low. A viable public trading market may not develop for our shares or may take a
period of time to develop. Such a market, if it does develop, could be subject
to extreme price and volume fluctuations. In the absence of an active trading
market:
  ·
                Shareholders
      may have difficulty buying and selling or obtaining market
      quotations;
 ·
                market
      visibility for our Common Stock may be limited; and
 ·
              a
      lack of visibility for our Common Stock may have a depressive effect on
      the market price for our Common
Stock.
  20
  You
may face difficulties in protecting your interests, and your ability to protect
your rights through the U.S. federal courts may be limited, as our subsidiaries
are incorporated in non-U.S. jurisdictions, we conduct substantially all of our
operations in China, and all of our officers reside outside the United
States.
  We
conduct substantially all of our operations in China through our wholly owned
subsidiaries in China. All of our officers reside outside the United States and
some or all of the assets of those persons are located outside of the United
States. As a result, it may be difficult or impossible for you to bring an
action against us or against these individuals in China in the event that you
believe that your rights have been infringed under the securities laws or
otherwise. Even if you are successful in bringing an action of this kind, the
laws of the PRC may render you unable to enforce a judgment against our assets
or the assets of our directors and officers. As a result of all of the above,
our public stockholders may have more difficulties in protecting their interests
through actions against our management, directors or major stockholders than
would stockholders of a corporation doing business entirely within the United
States.
 
 The
trading prices of many companies that have business operations only in China
have been volatile which may result in large fluctuations in the price of our
Common Stock and losses for shareholders.
  The stock
market has experienced significant price and volume fluctuations that have
particularly affected the trading prices of equity securities of many companies
that have business operations only in China. These fluctuations have often been
unrelated or disproportionate to the operating performance of many of these
companies. Any negative change in the public’s perception of these companies
could depress our stock price regardless of our operating results. The market
price of our Common Stock has been and may continue to be volatile. We expect
our stock price to be subject to fluctuations as a result of a variety of
factors, including factors beyond our control. These factors
include:
  ·
                actual
      or anticipated variations in our quarterly operating
    results;
 ·
                announcements
      of technological innovations or new products or services by us or our
      competitors;
 ·
                announcements
      relating to strategic relationships or acquisitions;
 ·
                additions
      or terminations of coverage of our Common Stock by securities
      analysts;
 ·
                statements
      by securities analysts regarding us or our industry;
 ·
                conditions
      or trends in the our industry; and
 ·
              changes
      in the economic performance and/or market valuations of other industrial
      fire safety companies.
  The
prices at which our Common Stock trades will affect our ability to raise
capital, which may have an adverse affect on our ability to fund our
operations.
  21
 
 Our
Common Stock may be considered to be a “penny stock” and, as such, the market
for our Common Stock may be further limited by certain SEC rules applicable to
penny stocks.
  To the
extent the price of our common stock remains below $5.00 per share, we have net
tangible assets of $2,000,000 or less, or if we fall below certain other
thresholds, our common shares will be subject to certain “penny stock” rules
promulgated by the SEC. Those rules impose certain sales practice requirements
on brokers who sell penny stock to persons other than established customers and
accredited investors (generally institutions with assets in excess of $5,000,000
or individuals with net worth in excess of $1,000,000). For transactions covered
by the penny stock rules, the broker must make a special suitability
determination for the purchaser and receive the purchaser’s written consent to
the transaction prior to the sale. Furthermore, the penny stock rules generally
require, among other things, that brokers engaged in secondary trading of penny
stocks provide customers with written disclosure documents, monthly statements
of the market value of penny stocks, disclosure of the bid and asked prices and
disclosure of the compensation to the brokerage firm and disclosure of the sales
person working for the brokerage firm. These rules and regulations adversely
affect the ability of brokers to sell our common shares and limit the liquidity
of our securities.
 
 We
may seek to make acquisitions that prove unsuccessful or strain or divert our
resources.
  We may
seek to expand our business through the acquisition of related businesses and
assets. We may not be able to complete any acquisition on favorable terms or at
all. Acquisitions present risks that could materially and adversely affect our
business and financial performance, including:
  ·
                the
      diversion of our management’s attention from our everyday business
      activities;
 ·
                the
      contingent and latent risks associated with the past operations of, and
      other unanticipated problems arising in, the acquired business;
      and
 ·
              the
      need to expand management, administration, and operational
      systems.
  If we
make such acquisitions we cannot predict whether:
  ·
                we
      will be able to successfully integrate the operations and personnel of any
      new businesses into our business;
 ·
                we
      will realize any anticipated benefits of completed acquisitions;
      or
 ·
              there
      will be substantial unanticipated costs associated with acquisitions,
      including potential costs associated with environmental liabilities
      undiscovered at the time of
acquisition.
  In
addition, future acquisitions by us may result in:
  ·
                potentially
      dilutive issuances of our equity securities;
 ·
              the
      incurrence of additional debt;
  22
  ·
                restructuring
      charges; and
 ·
              the
      recognition of significant charges for depreciation and amortization
      related to intangible assets.
  We
do not intend to pay any dividends on our Common Stock in the foreseeable
future.
  We
currently intend to retain all future earnings, if any, to finance our current
and proposed business activities and do not anticipate paying any cash dividends
on our Common Stock in the foreseeable future. We may also incur indebtedness in
the future that may prohibit or effectively restrict the payment of cash
dividends on our Common Stock.
 
 We
are not currently compliant with certain Sarbanes-Oxley Act
standards.
  The
enactment of the Sarbanes-Oxley Act in July 2002 created a significant number of
new corporate governance and internal control requirements. Although we expect
to implement the requisite changes to become compliant with existing
requirements, and new requirements when they do apply to us, we may not be able
to do so, or to do so in a timely manner. If we do not come into compliance with
the Sarbanes-Oxley Act corporate governance requirements, we may not be able to
continue listing our securities on either AMEX in the event we ever attempt to
do so.
 
 We
will incur increased costs relating to corporate governance
matters.
 
 As a
public reporting company, we will need to comply with the Sarbanes-Oxley Act of
2002 and the related rules and regulations adopted by the SEC, including
expanded disclosures, accelerated reporting requirements and more complex
accounting rules. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002
and other requirements will increase our costs and require additional management
resources. Additionally, these laws and regulations could make it more difficult
or more costly for us to obtain certain types of insurance, including director
and officer liability insurance, and we may be forced to accept reduced policy
limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. The impact of these events could also make it more difficult
for us to attract and retain qualified persons to serve on our board of
directors, our board committees or as executive officers. We are presently
evaluating and monitoring developments with respect to these laws and
regulations and cannot predict or estimate the amount or timing of additional
costs we may incur to respond to their requirements.
 
 Certain
stockholders can exert control over the Company and may not make decisions that
further the best interests of all stockholders.
  Our
officers, directors and principal stockholders (greater than 5% stockholders)
together currently own an aggregate of approximately 79.33% of our outstanding
Common Stock on a fully diluted basis. Consequently, these stockholders, if they
act individually or together, may exert a significant degree of influence over
our management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. In addition, this concentration of ownership may delay or prevent
a change of control of us and might affect the market price of our Common Stock,
even when a change of control may be in the best interest of all stockholders.
Furthermore, the interests of this concentration of ownership may not always
coincide with our interests or the interests of other stockholders, and
accordingly, they could cause us to enter into transactions or agreements which
we would not otherwise consider.
 
 Our
investors may lose their entire investment in our securities.
 
 An
investment in our securities is highly speculative and may result in the loss of
the entire investment. Only potential investors who are experienced investors in
high risk investments and who can afford to lose their entire investment should
consider an investment in our securities.
  23
  ITEM
2.     DESCRIPTION OF PROPERTY
 
 General
 
 As of
December 31, 2008, China Shen Zhou Mining & Resources Inc. owns two
properties in the production in the Inner Mongolia Autonomous Region, the
Peoples’ Republic of China (“PRC”), and two properties under development, one in
Xinjiang Uygur Autonomous Region in the PRC and the other in Kyrgyz
Republic.
 
 The two
properties in production are:
 -
Sumochaganaobao Fluorite Mine in Siziwangqi of Inner Mongolia Autonomous Region
in the PRC (Xiangzhen Mining);
 - Mining
site No. 2 of Qingxing Copper Mine (Tanyaokou Copper Mine) in Wulatehouqi
of Inner Mongolia Autonomous Region in the PRC (Qingshan
Metal);
 
 The two
properties under development are:
 
 -
Keyinbulake Cu-Zn Multi-metal Mine located in Buerjin County, Aletai, Xinjiang
Uygur Autonomous Region in the PRC (Xingzhen Mining).
 -
Kuru-Tegerek Cu-Au Mine located in Kyrgyz Republic (Tun Lin).
  No.
                                    
                                    Nameofproperty
                                    
                                    Type
                                    
                                    Ownership
                                    
                                    Status
                                    
                                    Location/Country1
                                    
                                    Sumochaganaobao
      Fluorite Mine
                                    
                                    Non-metal
      Fluorite
                                    
                                    
                                    100
                                    %
                                    Production
                                    
                                    Inner
      Mongolia, PRC2
                                    
                                    Qingxing
      Copper Mine
                                    
                                    Copper
      and zinc
                                    
                                    
                                    60
                                    %
                                    
                                    
                                    Inner
      Mongolia, PRC3
                                    
                                    Keyinbulake
      Multi-metal Mine
                                    
                                    Copper
      and zinc
                                    
                                    
                                    90
                                    %
                                    Development
                                    
                                    Inner
      Mongolia, PRC4
                                    
                                    Kuru-Tegerek
      Cu-Au Mine
                                    
                                    Copper
      and gold
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    Kyrgyz
      Republic
  24


Figure
2-1: China Shen Zhou’s Properties in China
  
 Figure
2-2: China Shen Zhou’s Property in Kyrgyzstan
 
 China
Shen Zhou Mining & Resources Inc. holds four mining licenses and three
exploration licenses at December 31 of 2008. The licenses are:
 
 -Mining
license of Sumochaganaobao Fluorite Mine, Siziwangqi, Inner Mongolia,
PRC;
 -Mining
license of Mining Site No. 2 of Qingxing Copper Mine, Wulatehouqi, Inner
Mongolia, PRC;
 -Mining
license of Keyinbulake Cu-Zn Mine in Buerjin County, Xinjiang Uygur Autonomous
Region, PRC;
 -Mining
license of Kuru-Tegerek Cu-Au Mine in Kyrgyz Republic;
  25
  -Exploration
license of Southern Part of Keyinbulake Zn Mine in Xinjiang Uygur Autonomous
Region of the PRC;
 -Exploration
license of Northern Part of Keyinbulake Zn Mine in Xinjiang Uygur Autonomous
Region of the PRC;
 -Exploration
license of Kuru-Tegerek Cu-Au Property in the region of Kuru-Tegerek, Kyrgyz
Republic
 
 Tables
2-1/2 present detailed information about the licenses.
 
 Table
2-1: 4 Mining Licenses Held by the Company
 
 Property
                              
                              Sumochaganaobao fluorite deposit
                                (between prospecting line 21-04)
                              
                              Mining Site No. 2 of Qingxing Copper Mine
                                (Tanyaokou Multi- metal Mine )License
      Number
                              
                              1500000820156
                              
                              1500000820421Owner
                              
                              Inner
      Mongolia Xiangzhen Minin g Group Ltd.
                              
                              Qingshan
      Nonferrous Metal Development Co Ltd.Validated
      period
                              
                              April
      2008 to March 2011
                              
                              September
      2008 to September 2011Area
                              
                              0.9088
      km2
                              
                              0.6495km2Mining
      mode
                              
                              Underground
      mining
                              
                              Underground
      miningMining
      scale
                              
                              150,000
      metric tons/annum
                              
                              100,000
      metric tons/ annumOre
      types
                              
                              Fluorite
                              
                              Copper,
      Zinc and sulfurMining
      Level
                              
                              1075m-497m
                              
                              1455m-855m
 
 Property
                        
                        Keyinbulake Cu-Zn Multi-metal Mine
                        
                        Kuru-Tegerek deposit (Tun Lin)License
      Number
                        
                        6500000712980
                        
                        8063-3300-
      AO( ИУ ) 21984940Owner
                        
                        Buerjin
      County Xingzhen Mining.
                        
                        Kichi
      Chaarat CJSCValidated
      period
                        
                        August
      2007.to August 2013
                        
                        July
      22, 2008 to December 31, 2021Area
                        
                        1.955km2
                        
                        105
      hectares (h)Mining
      mode
                        
                        Underground
      mining
                        
                        -Mining
      scale
                        
                        21,000
      metric tons/ annum
                        
                        -Ore
      types
                        
                        Copper
      and zinc
                        
                        Gold,
      silver and copperMining
      Level
                        
                        1420m-1516m
                        
                        -
 
 Table
2-2: 2 Exploration licenses held by the Company
 
 Property
                      
                      Kuru-Tegeret Region (Kichi-
                        Chaarat CJSC)
                      
                      Southern /Northern Region of
                        Keyinbulake Zn Mine (2 licenses)License
      Number
                      
                      8063-3300-
      AO( ИУ ) 21984940
                      
                      650000061272/3Owner
                      
                      Kichi-Chaarat
      CJSC
                      
                      Xingzhen
      MiningValidated
      period
                      
                      May
      2005 to December 2009
                      
                      February
      2007 to February. 2009Area
                      
                      39,500
      hectares (h)
                      
                      13.37km
      2/12.06 km 2
 
 There are
two types of mineral rights in China: exploration right and mining right.
Exploration right is the right for exploring mineral resources within the areas
authorized by the exploration license.  Mining right is the right for
exploitation of mineral resources and production of mineral products. According
to Chinese law, an exploration license is valid for 3 years and shall not be
extended beyond   two additional periods and each no more than two years .
10, 20 and 30 years are the periods of time for mining licenses for small,
medium and large deposits or mine s respectively . The mining license can be
extended in scope or periods of time if the company intends to continue to
operate . Application for extension needs to be submitted at least 30 days
before the expiration date
  26
  SumochaganaobaoFluorite Mine in Production
Stage (Xiangzhen Mining)
 
 The
Company holds 100% ownership of Sumozaganaobao fluorite mine, which was acquired
by Xiangzhen Mining from Inner Mongolia Siziwangqi Northern Fluorite Ltd, Co. in
July 2002.
 
 Location,
Access and Traffic
 
 Sumozaganaobao
fluorite mine is located in Siziwangqi, Wulanchabu City, Inner Mongolia, PRC.
The coordinates are: E111°15′35′′~111°16′30′′; N43°07′10′′~43°07′49′′. This area is
easily accessible, with a mud road of approximate 90km from the mine to
Erlianhot and then a freeway or national highway of about 250km to Hohhot, the
capital city of Inner Mongolia, China. It has a typical continental climate
characterized mainly by low precipitation and high evaporation, a big
temperature difference between day and night, and windy conditions. The
topography is gentle grassland with an elevation difference of only 20-40m.
Figure 2-3 is the index map of Sumochaganaobao Fluorite Mine.
  
 Figure
2-3: Sumochaganaobao Fluorite Mine
 
 Mining
Licenses
 
 Inner
Mongolia Xiangzhen Mining Group Co Ltd. (Xiangzhen Mining) holds the mining
licenses of the area between prospecting line 21 and 04 of Sumochaganaobao
Fluorite Deposit. The mining license Number is 1500000820156, issued by the
Bureau of Land and Resources in April 2008, Wulanchabu City, Inner Mongolia and
expired in March 2011.
 
 Previous
exploration and development
 
 In 1975,
Geological Survey Brigade No.1 of Inner Mongolia conducted a 1/200,000
geological survey in this area and found Sumochaganaobao Fluorite deposit. The
mineral resource was estimated at 1.716 million metric tons of fluorite at that
time.
  27
  From 1981
to 1987, Geological Survey Brigade No.102 of Inner Mongolia conducted
prospecting with continual general and detailed exploration, and completed
the “Geological Report of Sumochaganaobao Fluorite Deposit of Siziwangqi, Inner
Mongolia” in 1987.
 
 In 1987,
the property was mined by a state-owned company, which was later reorganized to
become the Siziwangqi Northern Fluorite Ltd, Co in 1997. The
mining right was then transferred to Xiangzhen Mining Group Co., Ltd from the
Siziwangqi Northern Fluorite Ltd, Co.
 
 Previous
Mining Operation and Expansion
 
 From 1987
to 2002, open-pit mining was conducted by a state-owned company of Siziwang
Banner. The mining capacity was 8,000-20,000 tons per year and the mining depth
reached 58m from elevation of 1,065m to 1,007m. In 1997, the mining right was
transferred to Inner Mongolia Siziwangqi Northern Fluorite Ltd, Co.
 
 Since
2002, the underground mining has been conducted by Xiangzhen Mining. Initially,
the mining capacity was 80, 000 metric tons per year with a concentrator (about
45km southeast of the mine) with an annual processing capacity of 60,000 metric
tons. In April 2006, the Company started an expansion. The new mining
capacity designed is 300,000 metric tons per year and the treatment capacity is
200,000 metric tons per year from a concentrator located near the fluorite mine
.. At the end of 2007 when the expanding construction had basically been
completed and commissioning started. The Company invested USD$2,895,380 in
underground expansion and USD$7,760,300 in the new concentrator.
 
 Water
and Power Supply
 
 Before
October 2007, a state power network was not built into the mining area, and
power for production and living was supplied by diesel generators. Since October
2007, power has been supplied to the mine by the state power
network.
 
 Water
supply for production and living is from three wells about one kilometer away
from the mine.
 
 Current
Mining Operation
 
 Inclined
shaft development has been assumed. As a result, currently there are one main
inclined shaft, one auxiliary inclined shaft and inclined shaft
No.2.
 
 Hoisting
and transportation: Underground transportation is carried out by electric
locomotives. After loading by rock loaders, ores are transported by the electric
locomotive to a shaft station and then lifted to ground by the hoister and
unloaded onto a storage platform where high grade lumps (CaF2>80%) are
directly sold to consumers (steel plant) after manual classification and
the remaining is sent to concentrator for further processing.
 
 Ventilation:
fresh air is blown in from the main inclined shaft, passes through the work area
and is exhausted out from the auxiliary inclined shaft and inclined shaft No.
2.
 
 Drainage
system: water in each level flows into sumps of drifts and is pumped to a pond
on a higher level on the ground for secondary use in production.
 
 Mining
Method: Short-hole shrinkage stopping method with the mining loss at 25% and
dilution at 10% and comprehensive recovery rate of ore at 75%.
  28
  Major
equipment in the mine is as follows:
 
 Name
                                  
                                  Type
                                  
                                  Qty (set)
                                  
                                  Life of Service
                                    (year)
                                  
                                  NotesHoisters
                                  
                                  Ф2M
                                  
                                  3
                                  
                                  20Rock
      loaders
                                  
                                  Z-20W
                                  
                                  6
                                  
                                  20Compressors
                                  
                                  20M
      3
                                  
                                  4
                                  
                                  20
                                  
                                  Power drivenElectric
      Locomotives
                                  
                                  
                                  
                                  6
                                  
                                  20Ventilators
                                  
                                  
                                  
                                  4
                                  
                                  20Transformers
                                  
                                  
                                  
                                  5Pumps
                                  
                                  
                                  
                                  6
 
 Ore Processing:
 
 The newly
established concentrator has an annual treatment capacity of 200,000 metric
tons. The process consists of two-stage closed crushing with primary and
secondary grindings, rough flotation, scavenging, eight steps of cleaning,
dehydrating (thickening, filtrating and drying), and final packaging for
delivery. The major facilities include a ball mill workshop, a flotation
ore processing plant, a press and filtration workshop, concentrate pools,
tailings houses, a lab, electronic scales, water supply wells, power supply
lines and offices, etc. The major equipment is as follows:
 
 No.
                                    
                                    Equipment
                                    
                                    Unit
                                    
                                    Qty
                                    
                                    Life of
                                      Service
                                    
                                    Notes1
                                    
                                    Linear
      vibrating feeder, XSW380x95
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New2
                                    
                                    Jaw-type
      crusher, PE-500 × 500
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New3
                                    
                                    Standard
      cone crusher, 36AF
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New4
                                    
                                    Vibrating
      screen, 2YAH1800 × 4800
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New5
                                    
                                    Overflow
      ball mill, MQY2700x4500
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New6
                                    
                                    Twin
      spiral classifiers, FLGT24
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New7
                                    
                                    Overflow
      ball mill, MQY1830x5700
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New8
                                    
                                    Flotation
      machines, SF-8
                                    
                                    set
                                    
                                    34
                                    
                                    20
      years
                                    
                                    New9
                                    
                                    Thickeners,
      NZSG-12
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New10
                                    
                                    High
      efficiency thickeners, Φ 18
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New11
                                    
                                    Ceramic
      filter, TC-45
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New12
                                    
                                    Rotary
      dryer, SD2422
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New13
                                    
                                    Air
      heater, EFL500
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New14
                                    
                                    Packing
      machine, BG-4WY
                                    
                                    set
                                    
                                    1
                                    
                                    20
      years
                                    
                                    New
 
 The
processing recovery is 83%. Fluorite concentrate grade is over 96%. The main
component of fluorite is CaF2, an important chemical that is used in steel
making as a flux and in glass making as an additive. The concentrates are in
high demand and demand is expected to increase in the future.
 
 Geology
of the Property
 
 The
Sumochaganaobao fluorite deposit is located in the Suniteyou Banner Fold Zone in
late-Varican, Inner Mongolia Fold Belt. The main strata in the property are:
late Paleozoic lower Permian System Xilimiao Formation (P1xl) with three
sections: P1xl2-4, P1xl3, and P1xl4-1; Proterozoic Ailegemiao Formation and
Jurassic Chagannoer group. The fluorite mineralized body and mineralization
marble occurs in the lower of P1xl3 and on the top of P1xl2-4.
  29
  The
mineralized body is bedded, which strikes 40°-60°, dips to 310°-330° at angle
21°-40°, exceptional with 47°. The distribution is stable and continual. The
length of mineralized body is 1100 meters; the maximum dip length controlled at
present is 1540 meters. The thickness is 0.52 meters to 22.48 meters averaged at
5.80 meters. The mineral is fluorite only, whose main composition is CaF2. The
gangue minerals are: quartz, chlorite and sericite. By the contents of useful
component, the mineralized body is divided to high grade mineralized material
(rich ore), CaF2≥60%, and low grade mineralized material (lean ore), 20% ≤ CaF2≥
60%.
 
 Mineralized
Materials
 
 In March
2007, the Bureau of Land and Resource of Wulanchabu City commissioned the
Land-resources Institute of Inner Mongolia to verify the mineralized material in
the Mining License area .  The Institute submitted “the Verification Report
of Resources/Reserve between Prospecting line 21 and 04, of Sumochaganaobao
Fluorite Deposit in Siziwangqi, Inner Mongolia.”  The “Consulting Center of
the China Mining Association” had reviewed and assessed the verification report
and recognized the mineralized material statement in the report, and the
indicated mineralized materials were confirmed as 5.051 million metric tons of
fluorite with the average grade of 57.58%.In 2008, we exacted a total amount of
122,000 metric tons of fluorite ore, which consumed 163,000 metric tons of the
indicated mineralized materials. As of December 31, 2008, there are 4.888
million metric tons of retained mineralized materials.
 
 Sampling,
Analytical Procedures and Quality Control
 
 The core
recovery is over 85% for the drill holes. The samples were taken by splitting
the core into halves, one half being the sample and the other half being stored
in the core box.  Sample length was usually 0.5 meters to 1.5 meters and
core recovery is over 85%.
 
 Trenching
samples were collected along channels with widths of 10  centimeters and
depths of 5  centimeters and in parallel along the walls of the pits. Each
sample was 1 to 2 meters in length.
 
 Samples
are crushed by three jaw crushers to 0.9mm in size and then are split. About 500
grams of each sample is sent for pulverization and the rest are kept as coarse
rejects. 100 grams of each pulp sample are sent to the lab for assaying and the
rest are stored. Items of CaF2, CaCO3, SiO2, Fe2O3 and S are assayed in the
lab.
 
 Assaying
of samples was completed in the laboratory of Geological Brigade No.102 of Inner
Mongolia and checked by the Central Laboratory of Bureau of Geology of Inner
Mongolia. Internal and external check samples were assayed: 95% of samples sent
for internal checkup and 6.4% for external checkup. The qualification rate of
the check samples was above 95%. The criteria of Barite, Fluorite and Boron
Exploration were also adopted in sample assaying.
 
 Products
and Output:
 
 The mine
produces fluorite ores which are classified into two commodities, one being high
grade fluorite lump and the second being fluorite powders processed in
concentrator. The following table lists the products and output and the average
prices in past three years:
 
 Table 2-3: The Output and Price of
Products of2006-2008, Xiangzhen Mining, Ltd.
  Year
                                      
                                      Product
                                      
                                      Output (t)
                                      
                                      
                                      Average Price per Year (USD$/t)2006
                                      
                                      Fluorite
      lump
                                      
                                      
                                      50,839.44
                                      
                                      
                                      
                                      71.50Fluorite
      concentrate
                                      
                                      
                                      14,791.02
                                      
                                      
                                      
                                      111.162007
                                      
                                      Fluorite
      lump
                                      
                                      
                                      52,523.96
                                      
                                      
                                      
                                      84.62Fluorite
      concentrate
                                      
                                      
                                      22,447.23
                                      
                                      
                                      
                                      144.132008
                                      
                                      Fluorite lump
                                      
                                      
                                      24,135.33
                                      
                                      
                                      
                                      106.54Fluorite
      concentrate
                                      
                                      
                                      6,747.16
                                      
                                      
                                      
                                      167.91
  30
  Potential
for Further Exploration
 
 In June
2007, the Company hired the Third Geological Prospecting Institute of China
Metallurgy Geological General Bureau to conduct supplementary prospecting. As
result of it, Category of this fluorite mine is upgraded.
 
 There is
low possibly to find new ore bodies or extensions to existing ore bodies since
the deposit is well defined and well understood geologically.
 
 The Kuru-Tegerek Cu-Au Mine
Under Development (Tun Lin)
 
 The
company indirectly holds 100% ownership of Tun Lin Limited Liability Company
(“Tun Lin”), a Kyrgyz Republic registered company which entirely owns
Kichi-Chaarat Closed Joint Stock Company. The major asset of Kichi-Chaarat is
the subsoil use right for (i) mining gold and other metals within the
Kuru-Tegerek licensed area, and (ii) exploring gold and other metals within the
Kuru-Tegerek licensed area.
 
 Location,
Accessibility, Geography and Climate
 
 The
Kuru-Tegerek Cu-Au Mine is located in Chatkal region of the province of
Jalal-Abad in the western part of Kyrgyzstan (see the Figure below). It occupies
a southern slope of the Chandalash range, which is part of the Talas Altai
Mountains between the Chakmakus River and the Kuru-Tegerek River. The geographic
coordinates of the deposit are: 42°02'N and 71°25'E.
 
 The mine
is about 120 kilometers away from the station near Talas City, which is to the
west of the capital city Bishkek. It is easily accessible via road.
 
 The
Kuru-Tegerek region has a typical continental climate with fast temperature
changes daily and seasonally and characterized by cold winters and hot
summers.
  31
  
 Figure
2-4:  The Kuru-Tegerek Region
 
 Mining
and Exploration Licenses
 
 Kichi Chaarat CJS
Company currently holds two licenses: one mining license No. 8063-3300- AO( ИУ )
21984940 covering 105hectares (h) over the
Kuru-Tegerek area, which was issued by the Ministry of Land and Mine of
Kyrgyzstan and expired in December31,2021, and anexploration license No. 8063-3300- AO( ИУ ) 21984940 covering 39,500
hectares (h) of the area of the eastern slope of the Sandal mountain range
including the Kuru-Tegerek mountain, which was issued by the Ministry of Land
and Mine of Kyrgyzstan and will expire in
December31,2009.
 
 History
of Exploration
 
 The
regional geological investigations started in 1963 and ended in 1980, executed
by Geological Bureaus of former Soviet Union and Kyrgyzstan. The following major
and basic prospecting work has been completed.
 
 1.
              Trenching:
      systematically disclosed the deposit in spacing 25-50
    meters;
 
 2.
              Drilling:
      completed drilling of 40,028 meters both on ground and underground (at
      elevations of 2,505, 2,722 and 2,880). In the southern part of the
      deposit, drilling was conducted in the grids of 100m x 100m from the
      ground surface deep to elevation 2,505m, below which was the grids of
      200x100m. In the eastern and western part, the grid is between
      100x100-200x100m.
 
 3.
              Pitting:
      19,037 meters
 
 4.
              Topographic
      survey, assaying and ore dressing
test:
 
 In 2007,
the Company entrusted Kyrgyz Avista Geology Team to conduct geological work in
the 20 km 2area around the deposit, which had discovered a good clue for gold
mine.
  32
  In
compliance with the requirements of the mining permit, the Company also
entrusted Kentoo Research Center (Kyrgyzstan) to undertake the mine design of
upper part oxide deposit, based upon which the construction in the mine can
start with the approval of the Kyrgyz government.
 
 Geology
of the Property
 
 The Cu-Au
deposit of Kuru-Tegerek is associated with intrusive quartz porphyry diorite
which represents the first stage of Sandalash-Chatkal complex.
 
 The
mineralization of gold is mainly restricted in contact zones with skarns and
marbles or around the carbonated rock among skarn body on the
ground.
 
 The
mineralization of copper occurs during the beresitization in the formation
course of magnesium metasomatism. There is no more decrease of copper contents
in the deep part.
 
 Gold
mineralization concentrating in beresite metasomatism has a good development on
the upper part of deposit. Due to the gradual disappearance of this
mineralization, the distribution of these rocks is decreased along with increase
of depth and the content of gold is also sharply reduced.
 
 The
mineralized bodies occur mostly lense-like with thickness generally varying from
10 to 50 meters, and the dips of the shoots vary from 45° to 60° .
 
 The main
minerals are: chalcopyrite, pyrrhotite, magnetite, pyrite, and native gold. More
rarely present: covelite, chalcocite, molybdenite, arsenopyrite, cobaltite,
sphalerite, bismuthinite, and minerals of platinum.
 
 Mineralized
Materials/Reserves
 
 In 2006,
Ken-Too conducted a feasibility study for the Kuru-Tegerek deposit and a reserve
estimate of the upper part of the deposit (layers of the oxide ore for open pit
mining). With a gold price $400 USD/oz, copper $2,400 USD/t, copper recovery
rate of dressing 62% and gold recovery 80%, production cost of copper $1,914
USD/t, production cost of gold $9USD/t and economic cutoff grade 2g/t, the
proven reserves was confirmed as 3.66 million metric tons (excluding mining
losses) with an average copper grade 0.78% and gold 2.95g/t.
 
 In July
2008, based on this feasibility study for the Kuru-Tegerek deposit of the upper
part of the deposit (layers of the oxide ore for open pit mining), the mining
program designed was completed by Ken-Too Design Institute. With a gold
price $550 USD/oz, copper $5,000 USD/t, and economic cutoff grade 2g/t, the
proven recoverable reserves was confirmed as 4.5022 million metric tons
(excluding mining losses) with an average copper grade 1.00% and gold
2.79g/t.
 
 It is
obvious that this reserve is only a small portion (which can be extracted by
open pit mining) of the whole deposit where the total mineralized materials is
172.66 million metric tons with the average grade of copper at 0.60% and gold at
0.56g/t.
 
 Sampling,
Analytical Procedures and Quality Control
 
 During
exploration, the samples were taken of outcrop mineralized body, skarns,
strongly corroded intrusive rocks and limestone. The sampling methods include
trenching, coring and other ways. In addition, the ore bodies were taken the
samples. The process samples and the samples to determine the mass of ore and
wall rock were taken as well.
  33
  Trenching
sampling was undertaken in sublevels based on the geological outline and the
extents of hydrothermal alteration and metasomatic alteration. The average
length of each sample was 1 meters (sometime between 05-1.5 meters) with a
channel section size of 0.1 m  (wide) x 0.5 m (deep). The length of the
trenching sample varies with the mineralization characteristics and the
thickness of mineralized band and mineralized body. 28,643 samples were taken in
trenching.
 
 For the
cores drilled from 1966 to 1968, the samples were taken by splitting the core
into halves, one half being the sample, and the other half being stored in core
box. With the drilling cores of hydrothermal alteration rock taken in
preliminary phase from 1969 to 1980, samples were systematically taken. In order
to guarantee the weight of samples, the samples were usually taken over 0.3
meters in length. 13,700 samples were taken in cores. The core recovery is about
70% for the drill holes.
 
 For
samples of trenching and coring, sample preparations were completed respectively
in the crushing workshops of Geological Brigade of Southern Kyrgyz, Geological
Bureau of (former) Soviet Socialism Republic of Kyrgyz, Geological Bureau of
(former) Soviet Socialism Republic of Uzbek and Geological Bureau of
(former) Soviet Socialism Republic of Kazakhstan. Sample preparation was made
according to the formula Q= Kd3 with K value=0.8.
 
 Assaying
of samples was also completed respectively in the laboratories of Geological
Team of Southern Kyrgyz, Geological Bureau of (former) Soviet Socialism Republic
of Kyrgyz, Geological Bureau of (former) Soviet Socialism Republic of Uzbek and
Geological Bureau of (former) Soviet Socialism Republic of Kazakhstan. Optical
spectrum analysis, chemical analysis, gold-measuring analysis and hydrochemistry
analysis were conducted in the assaying of samples.
 
 Internal
check samples were assayed. 1,059 samples of trenching and cores were taken in
the preliminary phase of exploration and the assaying results of metal copper,
gold and molybdenum in different grades were at the range of allowable
tolerance. External checks were also carried out: 1,230 samples were taken in
the preliminary phase of exploration and the probability factor (t) for metal
copper, gold and molybdenum in different grades was less than 2. The results
indicate that no systematic tolerance exists in the analysis in labs and all
analysis can be used for the calculation of reserve.
 
 Mining Site No. 2 of
Qingxing Copper Mine in Production Stage (Qingshan
Metal)
 
 Qingshan
Metal owns 100% of Qingxing Copper Mine. Before April 2006, Qingshan Metal was
owned by several individuals such as Zhu Yongxia. On April 12, 2006, 60% of the
shares of Qingshan were transferred to Qianzhen Mining by the shareholders such
as Zhu Yongxia.
 
 Location
 
 Mining
site No. 2 of the Qingxing Copper Mine is located in Qingshan Town, Wulatehouqi,
Bayannoer City, Inner Mongolia Autonomous Region of the PRC.
 
 The
coordinates are E 106o45′15′′-106o45’45”, N 47o57′14” - 40o57′45” 。
 
 The mine
is 59 kilometers southeast to Linhe Railway Station of Beijing-Lanzhou Railway
Line. It is conveniently accessible by highways and
telecommunications.
  34
  
 Figure
2-5:  Mining Site No. 2 of Qingxing Copper Mine
 
 History
of Operation
 
 Qingshan
Metal had been in operation for 3 years before it was acquired by the Company.
The Mining Project was designed by the Inner Mongolia Metallurgy Design
Institute, and the mining capacity designed was 60,000 metric tones per year.
The actual mining capacity is 50,000 metric tones of ores per year, of which
copper ores account for about 40,000 metric tones and the remaining pertains to
10,000 metric tones of zinc and lead ores.
 
 Geology
of the Property
 
 Qingxing
Copper Mine is located at west part of the Langshan-Baiyunebo geotectogene,
north boundary of North China Platform. The main strata spread over the mine
area are Zhaetaishan Formation member 2 (Pt2zh2) and member 3
(Pt2zh3).
 
 The
Zhaetaishan member 2 (Pt2zh21) consists of three sequences which are set forth
below.
 
 Upper
Sequence (Pt2zh23): mineralized bodies occur in this sequence which is comprised
of mica quartz schist, carbonaceous mica quartz schist and carbonaceous
phyllitic quartz schist.
 
 Middle
Sequence (Pt2zh22): carbonaceous slate, carbonaceous phyllite, banded
carbonaceous quartzite, bearing-carbon quartzite, dark quartzite and tremolite,
diopsidite etc.
 
 Lower
Sequence (Pt2zh21): lower part consists of carbonaceous phyllite; carbonaceous
slate inter-bedded calcareous chlorite schist, chlorite quartz schist and lens
of crystal carbonate, followed by biotitic quartz schist, andalusite-mica schist
and bearing-carbon mica quartz schist.
  35
  The
Zhaetaishan member 3 (Pt2zh3) consists of lower sequence of quartz schist and
upper sequence of middle-thick quartzite inter-bedded thin
quartzite.
 
 The
strata occur as monocline which strikes southwest and dips to northwest at 30-89
° . All faults were formed after the metallic mineralization that re-constructed
the mineralized -bodies.
 
 Mineralized
bodies, strictly controlled by the stratum, are blind and covered by gossans.
There are two known mineralization zones, mineralization zone 3# and
mineralization zone 5#. Zone 3# is distributed in north of the property which is
500 meters long and 10-30 meters wide, within which the mineralized body No.1
Cu-1 and No.2 Zn-1, No.3 Zn-2 were defined. Zone 5# is distributed in
middle-south of the property which is 850 meters in length and 10-40 meters in
width, where mineralized body No.4 Cu-2, No.5 Zn-3 as well as No.6 Zn-4 were
defined.
 
 Main
metallic minerals are comprised of chalcopyrite, galena, sphalerite and pyrite
and main gangue consists of quartz, calcite and chlorite.
 
 Mining
and Extraction technical conditions:
 
 Mineralized
body is inclined with the occurrence stratified and stratoid with small
thickness but stable. It has simple conditions of hydrogeology and engineering
geology with well stability of slake on top of mineralized body. In topography,
incision is deep. It is available with good conditions of pit
mining.
 
 The
Current Situation of the Mine
 
 When the
mine was acquired by the Company, the mining system already existed. Adit
development system has been assumed.
 
 Transportation:
Underground transportation is carried out by electric locomotives. After they
are loaded by rock loaders, ores are transported by the electric locomotive
underground, and then lifted to ground by the hoister and unloaded onto a
storage yard.
 
 Ventilation:
fresh air is blown in from sublevel adit, passes through the work area and is
exhausted out from the special shaft of ventilation connected to
ground.
 
 Drainage
system: Adit development has the conditions of underground water naturally
discharged from waterway in adits.
 
 Mining
Method: Short-hole shrinkage stopping method with the mining loss at 25% and
dilution at 15% and comprehensive recovery rate at 80%.
 
 Major
equipment in the mine is as follows:
 
 Name
                                
                                Type
                                
                                Qty (set)
                                
                                Life of Service (year)
                                
                                NotesHoisters
                                
                                Ф
      2M
                                
                                2
                                
                                20Rock
      loaders
                                
                                Z-20W
                                
                                3
                                
                                20Compressors
                                
                                20M
      3
                                
                                2
                                
                                20
                                
                                Power drivenElectric
      Locomotives
                                
                                
                                
                                3
                                
                                20Ventilators
                                
                                
                                
                                4
                                
                                20Transformers
                                
                                
                                
                                5
                                
                                20
  36
  Power
and Water Supply
 
 There is
a 10 KV power supply line for mining production. Water is supplied by a special
water pipe line from the He Tao Plain about 5 kilometers to the south of
the Mining Ares.
 
 Mineralized
Materials
 
 In
January 2007, Wulatehouqi Qingshan Non-ferrous Metals entrusted No.3 Geological
Exploration Institute of China Metallurgy Geological Bureau to conduct the
supplementary geological survey on the “Tanyaokou Multi-Metal Zinc-copper Mine”,
between prospecting line 42-58. The final supplementary geological survey was
reported in May 2007, which confirmed the mineralized materials and
category within the mining area. As of April 30, 2007, the total retained
indicated mineralized materials is 1.81 million metric tons with the average
grade at 0.6%. Our plan for 2008 was to carry out exploration and prepare for
mining in the first half of the year, and start mining in the second half of the
year and then supply ores to Qianzhen. Due to the decrease in the price of
copper, Qingshan did not move on to mining in 2008.
 
 Potential
for Further Exploration
 
 In the
mining process, two mining tunnels in 1 ,390m level and in 1,350m level
intercepted Cu-2 mineralized body which improves the control degree and has
increased the resources of Cu-2 mineralized body from 0.0286 million metric tons
to 1.3778 million metric tons. Our geological consultant believes that if
further exploration is conducted in the future, more minerals could be defined.
Drilling will upgrade some of the mineralized materials to Category C (332).
Underground exploration (associated with mining operation) should upgrade the
mineralized material categories, and explore the extension deeply. In 2008, 865
meters of exploration was completed.
 
 Keyinbulake Cu-Zn Property
in Development Stage (Xingzhen Mining)
 
 Xingzhen
Mining owns 100% of the Keyinbulake Multi-Metal Property. Before 2004 it was
operated by Xinjiang Tianxiang New Tech Co. Ltd (“Tianxiang”) and Mr. Li Leyi
together. On April 28, 2006 Xiangzhen Mining acquired 80% of the ownership, and
on June 25, 2007 Xiangzhen acquired another 10% from Tianxiang. By December 31,
2007, Xiangzhen Mining owned 90% of Xingzhen Mining.
 
 Location
and Traffic
 
 Keyinbulake
Multi-Metal Property is located in Buerjin County, Aletai, Xinjiang Uygur
Autonomous Region. The coordinates are E 87o17′30′′-87o9’30”, N 47o58′30” -
47o59′45”, and the area is in 3.59 km 2. It is
65 kilometers west-north of Aletai city, and 60 kilometers east-north of Buerjin
County, and 26 km east-north of Dulaiti town. With the highway from Aletai city
to Dulaiti Town passing through the property, it is conveniently accessible.
Figure 2-6 is the index map of the Keyinbulake Multi-Metal Property
..
  37
  
 Figure
2-6: Keyinbulake Multi-Metal Property
 
 Previous
Geological work:
 
 In June
2006, the Company conducted geological explorations in the mining area by means
of ground geophysical prospecting and drilling as well as underground Pitting
exploration and drilling. At the end of 2007, ground drilling completed 5909
meters and underground exploration 4322 meters and underground drilling 7389
meters.
 
 In April
2007, the Company began to build a concentrator in the mining area with a daily
processing capacity of 600 metric tons (200,000 metric ton/annually). Such a
concentrator started to be put into a trial operation in May 2008.
 
 Ore Processing:
 
 The
process of concentrator consists of two-stage closed crushing with one stage
grindings, flotation of copper primary and zinc secondary, scavenging, two steps
of dehydrating (thickening and filtrating). The final products are copper
concentrates and zinc concentrates. The major equipment is as
follows:
  38
 
 No.
                                  
                                  Equipment
                                  
                                  Type
                                  
                                  Unit
                                  
                                  Qty1
                                  
                                  Vibrating
      feeder
                                  
                                  ZSW380X95I
                                  
                                  Set
                                  
                                  12
                                  
                                  Jaw-type
      crusher,
                                  
                                  PE-500X750
                                  
                                  set
                                  
                                  13
                                  
                                  Belt
      conveyor No.1
                                  
                                  8063
      a=15 o v=1.60m/s Lh=53.393m
                                  
                                  set
                                  
                                  14
                                  
                                  Cone
      crusher
                                  
                                  H-36AFJ1-3
                                  
                                  set
                                  
                                  15
                                  
                                  Belt
      conveyor No.2
                                  
                                  8063
      a=15.96 o v=1.60m/s Lh=47.393m
                                  
                                  set
                                  
                                  16
                                  
                                  Electric
      drive rolling drum
                                  
                                  JWD2220-160-8063
                                  
                                  set
                                  
                                  17
                                  
                                  Heavy
      magnetic vibration- actuated feeder
                                  
                                  DZ-C-80160
                                  
                                  set
                                  
                                  18
                                  
                                  Circular
      vibrating screen
                                  
                                  2YA1542(
      Over screen 40mm,Below screen 15mm)
                                  
                                  set
                                  
                                  349
                                  
                                  Belt
      conveyor No.3
                                  
                                  B=650
      Lh=36.85m a=16 o
                                  
                                  set
                                  
                                  110
                                  
                                  Belt
      conveyor No.4
                                  
                                  B=650
      Lh=20.713m a=15 o
                                  
                                  set
                                  
                                  111
                                  
                                  Wet
      grate discharge ball mill
                                  
                                  MQG2700
      × 3600
                                  
                                  set
                                  
                                  112
                                  
                                  Sinking
      win-spiral classifiers
                                  
                                  2FC-20
                                  
                                  set
                                  
                                  113
                                  
                                  Flotation
      machines
                                  
                                  SF-4
      scraper YIOOL-6 P=1.5KW
                                  
                                  set
                                  
                                  1614
                                  
                                  Flotation
      machines
                                  
                                  SF-2.8
      scraper YIOOL-6 P=1.5KW
                                  
                                  set
                                  
                                  715
                                  
                                  Flotation
      machines
                                  
                                  SF-1.2
      scraper Y90S-4 P=1.1KW
                                  
                                  set
                                  
                                  716
                                  
                                  Horizontal
      slurry pump
                                  
                                  ZBG(P)-458B(P)
      P=75kw n=1480r/min H=74m
                                  
                                  set
                                  
                                  217
                                  
                                  Upright
      slurry pump
                                  
                                  65Q-LPR
                                  
                                  set
                                  
                                  218
                                  
                                  Center
      drive thickeners
                                  
                                  NZ-9
                                  
                                  set
                                  
                                  119
                                  
                                  Center
      drive thickeners
                                  
                                  NZ-12
                                  
                                  set
                                  
                                  120
                                  
                                  Ceramic
      filter
                                  
                                  TT-6
      P=13kw
                                  
                                  set
                                  
                                  121
                                  
                                  Ceramic
      filter
                                  
                                  TT-8
      P=13kw
                                  
                                  set
                                  
                                  1
 
 All
equipment is brand new and their lives of service are 20 years.
 
 Power
and Water Supply
 
 There is
a 35Kv high voltage power line from the Buerjin Power Station to the mining
area. The Company has built the power line itself.
 
 Three
wells 4km away from the mining area provide production and drinking
water.
 
 Mineralized
Materials
 
 Earth-Physics
Exploration Brigade of Xinjiang Non-ferrous Geological Exploration Bureau
completed the Geological Evaluation between May 2002 and July 2006, and the
survey was reported on August 31, 2006. The Technology Commission examined and
approved this survey report on September 5, 2006.
 
 In June
2007, the No.3 Geological Prospecting Institute of China Metallurgical
Geological Bureau conducted a supplementary survey on the Keyinbulake property.
In December 2007, it presented the final supplementary prospecting report
confirming relevant mineralized materials within the mining property. In this
report, the total indicated mineralized materials included 0.6035 million metric
tons with an average grade of copper at 0.68% and zinc at 4.19%.
 
 Qianzhen
Mining
 
 Qianzhen
Mining owns a concentrator with an annual treatment capacity of 200,000 metric
tons. The process of concentrator includes two-stage closed crushing with
primary and secondary grindings, roughing flotation, scavenging, three steps of
cleaning, thickening, filtrating and drying. The major facilities of
concentrator include a ball mill workshop, a flotation ore processing plant, a
filtration workshop, concentrate pools, dams, a laboratory, electronic scales,
water supply wells, power supply lines and offices, etc. The major equipment
consists of ball mills (3 sets, 2.1mx3m and 1.5mx3m), 4m3 fl otation machines (24 sets),
2m3flotation
machines (12 sets),Φ12m thickeners(1 set),
classifiers (2 sets, 1.5mx10m), 20m2filters, pumps, power
transformers and power distribution panels and so on.   In 2005, Qianzhen
Mining invested approximately $750,000 to modernize the processing
production line to increase its yearly capacity to approximately 200,000 metric
tons. The current equipment is new.
  39
  Qianzhen
Mining conducts the operation by purchasing zinc, copper and/or lead ore from
Qingshan Nonferrous Metal or other suppliers. The final products are in bulk.
The transportation means for the products is truck. Table 2-4 shows the annual
output and the concentrate’s average price of Qianzhen Mining in past three
year.
 
 Table
2-4: Annual treatment & concentrate average price in last three years of
Qianzhen Mining
  Year
                                                            
                                                            Product
                                                            
                                                            Treatment
                                                              (t)
                                                            
                                                            
                                                            Concentrate
                                                              (t)
                                                            
                                                            
                                                            Average Metal Price
                                                              per Year (USD $/t)2006
                                                            
                                                            Zn
      concentrate
                                                            
                                                            
                                                            129,548
                                                            
                                                            
                                                            
                                                            13,959.16
                                                            
                                                            
                                                            
                                                            2,363.65Pb
      concentrate
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            12,19.77
                                                            
                                                            
                                                            
                                                            1,205.54Zn
      concentrate
                                                            
                                                            
                                                            66,270
                                                            
                                                            
                                                            
                                                            5,582.5
                                                            
                                                            
                                                            
                                                            2,628.552007
                                                            
                                                            Pb
      concentrate
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            777.21
                                                            
                                                            
                                                            
                                                            2,231.13Cu
      concentrate
                                                            
                                                            
                                                            29,512
                                                            
                                                            
                                                            
                                                            402.27
                                                            
                                                            
                                                            
                                                            7,130.132008
                                                            
                                                            Cu
      concentrate
                                                            
                                                            
                                                            5,420
                                                            
                                                            
                                                            
                                                            36.83
                                                            
                                                            
                                                            
                                                            7,006.98Concentrate
      sulphur
                                                            
                                                            
                                                            77,463
                                                            
                                                            
                                                            
                                                            18,146.70
                                                            
                                                            
                                                            
                                                            54.53(Average
      price of concentrate)
  ITEM
      3.
              LEGAL
      PROCEEDINGS
 
 None.
 
 ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 None
  40
  PART
II
 
 ITEM
      5.
              MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES.
 
 The
shares of our common stock have been traded on the NYSE AMEX (formerly
American Stock Exchange) under the trading symbol “SHZ” since January 31, 2008.
Before the listing on the NYSE AMEX, the shares of our common stock were quoted
on the OTC Bulletin Board. The following table sets forth the quarterly average
high and low bid prices per share for the common stock for the past two
years:
 
 Year
      ending December 31, 2009
                  
                  High
                  
                  
                  LowFirst
      Quarter
                  
                  $
                  0.54
                  
                  
                  $
                  0.25Second
      Quarter (until April 13)
                  
                  $
                  0.59
                  
                  
                  $
                  0.44Third
      Quarter
                  
                  $
                  
                  
                  
                  $Fourth
      Quarter
                  
                  $
                  
                  
                  
                  $
 
 Year
      ending December 31, 2008
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    9.85
                    
                    
                    $
                    2.5Second
      Quarter
                    
                    $
                    6.47
                    
                    
                    $
                    3.05Third
      Quarter
                    
                    $
                    3.00
                    
                    
                    $
                    0.90Fourth
      Quarter
                    
                    $
                    1.00
                    
                    
                    $
                    0.30Year
      ending December 31, 2007
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    4.75
                    
                    
                    $
                    3.11Second
      Quarter
                    
                    $
                    4.75
                    
                    
                    $
                    2.25Third
      Quarter
                    
                    $
                    3.70
                    
                    
                    $
                    2.25Fourth
      Quarter
                    
                    $
                    3.50
                    
                    
                    $
                    2.40
 
 Holders.
As of March 30, 2009, we had 642 holders of record of our common stock. Our
common stock had a closing bid price of $0.59 per share on April 13,
2009.
 
 Dividends.
We have never declared or paid any cash dividends or distributions on our common
stock. We currently intend to retain our future earnings to support operations
and to finance future growth and expansion and, therefore, do not anticipate
paying any cash dividends on our common stock in the foreseeable
future.
 
 Transfer Agent
and Registrar. Our transfer agent is Standard Registrar & Transfer,
Inc. located at12528
South 1840, East Draper, Utah, 84020. Their telephone number is (801)
571-8844.
 
 Securities
Authorized for Issuance Under Equity Compensation Plans.As of the fiscal
year ended December 31, 2008, we have no shares of our common stock or preferred
stock that are issuable under compensation plans approved by our security
holders.
 
 Recent Sales of
Unregistered Securities. None.
 
 Equity
Compensation Plan Information
 
 As of
December 31, 2008, the Company has no equity compensation plan nor any shares
reserved for the issuance of compensation options or other stock awards to its
employees or directors.
  41
 
 ITEM
      6.
              SELECTED
      FINANCIAL DATA.
 
 Not
required.
 
 ITEM
      7.
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
      OPERATIONS.
 
 The
following management’s discussion and analysis should be read in conjunction
with our consolidated financial statements and the notes thereto and the other
financial information appearing elsewhere in this item. In addition to
historical information, the following discussion contains certain
forward-looking statements within the “safe harbour” provisions of the Private
Securities Litigation Reform Act of 1995. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as “may”, “will”, “could”, “expect”,
“anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar
terms or terminology, or the negative of such terms or other comparable
terminology. Although we believe the expectations expressed in these
forward-looking statements are based on reasonable assumptions within the bound
of our knowledge of our business, our actual results could differ materially
from those discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed in the “Risk
Factors” section of this Annual Report on Form 10-K. We undertake no obligation
to update publicly any forward-looking statements for any reason even if new
information becomes available or other events occur in the future.
 
 Our
financial statements are prepared in U.S. Dollars and in accordance with
accounting principles generally accepted in the United States. See “Exchange
Rates” below for information concerning the exchanges rates at which Renminbi
(“RMB”) were translated into U.S. Dollars (“USD”) at various pertinent dates and
for pertinent periods.
 
 OVERVIEW
 
 We are
principally engaged in the exploration, development, mining, and processing of
fluorite, zinc, lead, copper, and other nonferrous metals, through our
subsidiaries in the PRC.
 
 BUSINESS
 
 ▼
Fluorite
 
 In early
2006, we started a 300,000 metric ton fluorite ore project at Xiangzhen Mining,
which was completed in November 2007. We extracted approximately 109,000 metric
tons of fluorite ores in 2007.
 
 In early
2006, we started to build a 200,000 metric ton/year fluorite ore processing
plant at the mine site. The new processing plant was  constructed and
went into trial production in November 2007. We produced approximately 22,400
metric tons of refined fluorite powder in 2007.
 
 2008 is
the first year of operation and production after the mining capacity of 300,000
tons per year and the processing capacity of 200,000 tons per year were built
up.  During 2008, mining continued, but processing did not operate as
planned.  We are planning to start full-scaled production at an
appropriate time in 2009.
 
 In 2008,
122,000 tons of fluorite ore were extracted, and a tunnel of 2,802 meters was
excavated. 6,700 tons of refined powder were produced, and 6,746 tons of refined
powder were sold.
  42
  We did
not reach our projected targets for 2008 for the following
reasons.  First, the quality of water supply failed to meet processing
requirements.  Impurity contents over technological specifications in
the water supply were not identified at the experimental stage and have caused
problems to production.  Second, as a new system was put into
production, time for personnel, procedures and technological specifications to
adapt or readjust in order to run stably is required.
 
 Due to
the difficulties in processing, mining stopped in August 2008 in order to
mitigate undue accumulation of fluorite ores.
 
 As a
result of further trials and technological readjustment, production was
improved.  We have identified a new water source for
processing.  The new water source, which was previously our drinking
water source, possesses the water quality needs of production.  We
have appointed Beijing Research Institute of Mining & Metallurgy, a reputed
and influential organization in mining and processing experiments and testing,
to conduct experiments, which have produced good
results.  Construction of the new water source is expected to be
completed in May 2009.
 
 We are
planning to sell the large inventory of fluorite ore and earn cash flow in order
to maintain the fluorite operation and prepare for full-scaled
production.
 
 Subject
to purchase orders and weather conditions, we plan to start processing in April
2009, and begin mining in the tunnel after June 2009.  We plan to
produce refined fluorite powder of 40,000 tons, extract fluorite ore of 80,000
tons, and process fluorite ore of 85,000 tons.  In addition, we plan
to sell fluorite lump rock of 40,000 tons and refined powder of 40,000
tons.
 
 ▼Zinc,
Copper and Lead
 
 Qianzhen
Mining
 
 Before
2008, Qianzhen Mining processed ores supplied by local mining
companies.  By the end of 2007, the supplier contracts
expired.  It was planned that Qianzhen Mining processed and produced
sulfur concentrate in the first half of the year, and processed copper ore to be
supplied by Qingshan Metal in the second half of the year.  Production
of sulfur concentrate continued until July when the price of sulfur concentrate
dropped to RMB150 per ton from RMB400 per ton, and Qianzhen ceased production
due to the lowered margin.  In 2008, Qianzhen Mining sold sulfur
concentrate of 18,000 tons.
 
 No
production is planned at Qianzhen Mining in 2009 due to the low grade of the
ores supplied by Qingshan Metal and low copper price.  During this
shutdown period, Qianzhen will look actively for partners with the help of the
local governments and for opportunities of re-starting production.
 
 Qingshan
Metal
 
 In 2007,
Qingshan Metal extracted 59,000 metric tons of copper ores and processed
copper concentrate equivalent to 71 metric tons of copper metal and supplied an
additional 35,000 metric tons of copper ore to Qianzhen Mining. In the third
quarter of 2007, Qingshan Metal stopped its processing operation and began to
supply Qianzhen copper ore for its processing operation.
 
 The plan
for 2008 was to carry out exploration and prepare for mining in the first half
of the year, begin mining in the second half of the year and supply ores to
Qianzhen.  Due to the decrease in the price of copper, however,
Qingshan completed exploration only and did not begin mining.  In
2008, 865 meters of drilling in exploration was completed.
 
 No
production is planned in 2009 at Qingshan due to market conditions and the low
grade of copper ore supplied.  We will consider re-starting its
operation when we see fit to do so and copper prices change more
favorably.
  43
  Xingzhen
Mining
 
 In July
2006, Xingzhen Mining started to build a 200,000 metric ton/year zinc-copper ore
mining and processing project at Keyinbulake Multi-Metal Mine in Buerjin County,
Aletai Region, Xinjiang Uygur Autonomous Region.
 
 On April
28, 2008, Xingzhen completed a successful testing at its first trial, then went
into production.  In parallel with processing, Xingzhen did
exploration in the area.  In September 2008, Xingzhen stopped
operations due to a price decrease of non-ferrous metals.  In 2009, we
plan to start processing and complete more exploration.
 
 In 2008,
Xingzhen extracted ores of 86,000 tons, excavated tunnels of 2,196 meters,
processed ores of 51,400 tons, and produced refined zinc of 1,850 tons and
refined copper of 108.5 tons.  Xingzhen sold refined zinc of 1,850
tons and refined copper of 108.5 tons.
 
 Xingzhen
did not reach projected targets in 2008 for the following
reasons.  First, Xingzhen’s location experienced power shortages from
May 2008 through August 2008.  During this time, production was
intermittent, with one or two shift at work at one time within a day. In
September 2008, the local power supplier increased its capability of supply, and
Xingzhen was able to undergo normal production.  Second, Xingzhen
stopped operation on October 15, 2008 due to inclement weather, large price
decreases of non-ferrous metals and the low grade of ores available to Xingzhen
(copper grade: 0.33%; zinc grade: 4.33%).
 
 In
2009,Xingzhen plans to begin full production of mining, processing and
prospecting, The main products will be zinc concentrate, copper
concentrate, and zinc oxide ore (in the mining area there is a part of
high-grade zinc oxide ores, which can be sold with no processing). As
weather conditions permit, we plan to start production in May 2009. In 2009,
because of the grades of ores for processing are different with those in 2008
(zinc and copper grades are higher), it is necessary to carry out the ore
dressing tests in March and April before we start the concentrator to
confirm the key technical process and targets of production. In 2009,
we plan to produce 30,000 metric tons of zinc oxide ore and to process
70,000 metric tons of ore to produce 8,700 metric tons of zinc concentrate,
1,900 metric tons of copper concentrate.
 
 We may
adjust production plans if we have unsatisfactory test results, or the
prices of non-ferrous metals of copper and zinc continue to fall.
 
 In 2009,
we will continue the prospecting work in the mining area, and the details are as
follows:
 
 Methods
of work: our major work is to carry out the drilling work (including underground
drilling in the tunnel), geophysical exploration, trenches and other geological
work.
 
 Work
area: our work will focus on revealing the four favorable regional parts at the
sites in the northern zone of lines 2-11, the southern zone of lines 5-19,
the Southeast zone of lines 25-39 and other related geophysical, trenching,
drilling work.
 
 Workload:
Drilling: 3500 meters (including four medium/deep holes: 400 meters per
hole; excluding underground drilling work); Trenching: 5000 cubic meters;
Geophysical Surface scanning:2 square kilometers; and work to be timely
adjusted according to the changes of the actual situations.
 
 Estimated
cost: $0.58 million to be invested by a shareholder (natural person) of
Xingzhen Mining.
 
 Kichi
Chaarat Copper and Gold Mine
 
 In
November 2007, We completed the acquisition of Tun-Lin Co. Ltd, a company that
exists under the law of the Republic of Kyrgyzstan, which owns the 100% of the
equity in Kichi Chaarat, whose major asset is the subsoil use right for (i)
mining for gold, copper and other metals within the Kuru-Tegerek licensed area;
and (ii) exploration for gold, copper and other metals within the Kuru-Tegerek
licensed area.
 
 In 2008,
we planned exploration and mining construction, but did not carry out the plan
because it was not approved by the Kyrgyz government.  The plan was
approved officially by the end of July 2008, and the mining license was renewed
to be valid until the end of December 2021.  Exploration was
subcontracted to a local geological organization, which terminated the contract
in the middle and made it impossible for the budget work to be
completed.
  44
  The
development will be in two stages.  During the first stage, we plan to
extract the upper oxide ore by means of open pit mining, of which the developing
plan has been approved by the local government and its designed capacity is
0.5million metric tons per year with the recoverable reserves of 4.5022 million
metric tons, an average copper grade of 1.00% and gold of 2.79g/t.
 
 We plan
to begin a full-scaled operation in 2009 and within 3 years, to complete
construction.
 
 Kichi
Chaarat Copper and Gold Mine is a mine of relatively large size.  We
believe that it has significant potential values and requires
investments.  To speed up development, we have been looking for
strategic opportunities and partners.
 
 Exploration
Activities
 
 Keyinbulake
Cu-Zn Mine
 
 Following
the exploration in 2008, further exploration activities are planned in 2009 in
the southern and northern parts of Keyinbulake Cu-Zn Mine. The exploration
details are scheduled as follows:
 
 Table1-3:
Exploration Program for Keyinbulake Property
 
 Item
                          
                          Method
                          
                          Unit
                          
                          QuantityGeophysical
                          
                          Surface
      scanning
                          
                          km
      2
                          
                          2Drilling
                          
                          four
      medium/deep holes
                          
                          m
                          
                          3500Trenching
                          
                          -
                          
                          m 3
                          
                          5000Assaying
                          
                          Sampling
      and test
                          
                          -
                          
                          -
 
 The
abovementioned exploration activities shall be completed by a Geophysical
Prospecting Team of Xinjiang Nonferrous Geophysical Prospecting Bureau at the
end of August 2009 with a total budget of approximately $0.58 million, which
will be funded by a shareholder (natural person) of Xingzhen
Mining.
 
 RECAPITALIZATION
AND REORGANIZATION
 
 On July
14, 2006, American Federal Mining Group, Inc. (“AFMG”, the then holding company
of China Shen Zhou’s PRC subsidiaries) completed the terms of a stock exchange
agreement with Earth Products & Technologies, Inc. (“EPTI”). Pursuant to the
stock exchange agreement, and as instructed by the Company, EPTI issued
20,000,000 shares of its common stock, of which 17,687,000 shares were issued to
shareholders of AFMG, 1,013,000 shares to management of AFMG and 1,300,000
shares to the financial advisors of AFMG, in exchange for a 100% equity interest
in AFMG, making AFMG a wholly-owned subsidiary of EPTI.
 
 The above
stock exchange transaction resulted in those shareholders of AFMG obtaining a
majority voting interest in EPTI. Generally accepted accounting principles in
the United States of America require that the Company whose shareholders retain
the majority interest in a combined business be treated as the acquirer for
accounting purposes. Consequently, the stock exchange transaction has been
accounted for as a recapitalization of AFMG as AFMG acquired a controlling
equity interest in EPTI as of September 15, 2006. The reverse acquisition
process utilizes the capital structure of EPTI and the assets and liabilities of
AFMG recorded at historical cost. Although AFMG is deemed to be the acquiring
corporation for financial accounting and reporting purposes, the legal status of
EPTI as the surviving corporation did not change.
 
 Subsequent
to completion of the reverse takeover transaction, on October 5, 2006, EPTI
changed its name to China Shen Zhou Mining and Resources, Inc.
  45
  ACQUISITIONS
IN 2007
 
 Kichi-Chaarat
Closed Joint Stock Company (“Kichi-Chaarat”)
 
 On
November 6, 2006, Xiangzhen Mining entered into contractual arrangements with
Mr. Li Jiaxing and Mr. Huang Guan to appoint Mr. Li and Mr. Huang to acquire the
entire ownership of Kichi Chaarat Closed Joint Stock Company (“Kichi Chaarat”)
for cash consideration of $10,000,000 in aggregate. Mr. Li and Mr. Huang jointly
owned Tun-Lin Limited Liability Company (“Tun-Lin”), which is a Kyrgyz Republic
registered company. Pursuant to the arrangements, Tun-Lin will acquire the
entire ownership in Kichi Chaarat from Altyn Minerals (BVI) Ltd. Subsequently,
Xiangzhen Mining will acquire the entire ownership in Tun-Lin. The major asset
of Kichi Chaarat is the subsoil use right for the purpose of (i) mining for gold
and other metals within the Kuru-Tegerek licensed area, and (ii) exploration for
gold and other metals within the Kuru-Tegerek licensed area. The purchase
consideration was fully settled in 2006.
 
 The
acquisition was officially completed on December 26, 2007, when the Ministry of
Justice of Kyrgyzstan officially approved the share transfer. The management
believe with the completion of the acquisition, the company will be able
explore, develop and mine the potential reserves at Kichi Chaarat deposit and
potentially increase our reserve base in the nonferrous segment and enhance
our earnings prospect in future.
 
 ACQUISITION
OF ADDITIONAL 10% EQUITY IN XINGHZEN MINING
 
 In August
2007, the Company completed an acquisition of additional equity in Xingzhen
Mining from Xinjiang Tianxiang New Technology Development Company Ltd and thus
increased the company’s ownership of equity in Xingzhen Mining from 80% to
90%.
 
 RESULTS
OF OPERATIONS - YEAR ENDED DECEMBER 31, 2008 AS COMPARED TO YEAR ENDED DECEMBER
31, 2007
 
 Selected
information from the Consolidated Statements of Operations
 
 For
      the years ended
                                                        December
      31,2008
                                                      
                                                      2007(in
      thousands)
                                                      
                                                      (in
      thousands)Net
      revenue
                                                      
                                                      $
                                                      7,137
                                                      
                                                      
                                                      $
                                                      14,351Gross
      profit
                                                      
                                                      
                                                      1,307
                                                      
                                                      
                                                      
                                                      6,507-
      Gross profit margin
                                                      
                                                      
                                                      18
                                                      %
                                                      
                                                      
                                                      45
                                                      %General
      and administrative expenses
                                                      
                                                      
                                                      9,252
                                                      
                                                      
                                                      
                                                      6,741Interest
      expenses
                                                      
                                                      
                                                      2,744
                                                      
                                                      
                                                      
                                                      3,962Net
      income (loss)
                                                      
                                                      $
                                                      (12,149
                                                      )
                                                      
                                                      $
                                                      (2,646
                                                      )
  46
  REVENUES.
Net revenues for the year ended December 31, 2008 were $7.14 million,
representing a $7.21 million or 50% decrease as compared to 2007. The decrease
in net revenues is mainly attributable to Qianzhen Mining, whose zinc processing
operations were materially impacted by a shortage of ore supplies and sharp
decrease of the price of metals, which resulted in a reduction of revenue of 83%
or approximately $5.83 million as compared to 2007. Net revenue from Xiangzhen
Mining’s fluorite products decreased 44% to $3.7 million as compared to 2007 due
to the trial operation of the newly completed fluorite processing plant of
Xiangzhen.
 
 Due to
the fluctuating price of sulphur concentrate, the Company produced sulphur
concentrate in Qianzhen Mining by utilizing accumulated sulphur-bearing
tailings, in order to mitigate the impact of the supply issues on the Company’s
production in the third quarter.
 
 Net
revenue from Xingzhen Mining’s zinc & copper products is $2.2 million.
Xingzhen Mining was in developmental stages in 2007 and its trial production
began at the end of the second quarter of 2008.
 
 Qingshan
Metal, which was acquired in 2006, had not yet contributed any revenue. The plan
for 2008 was to carry out exploration and prepare for mining in the first half
of the year, begin mining in the second half of the year and supply ores to
Qianzhen.  Due to the decrease in the price of copper, however,
Qingshan completed exploration only and did not begin mining.
 
 GROSS
PROFIT AND GROSS PROFIT MARGIN. For the year ended December 31, 2008, gross
profit was $1.3 million, representing a decrease of approximately 80% as
compared to $6.5 million of 2007. Gross profit margin significantly dropped from
45% in 2007 to 18% in 2008. The fixed amortization of mining assets and rights
over the terms of the extraction license (three years or six years) that is
included in the costs of sales caused the movement of the costs of sales to be
disproportionate to actual production and sales, resulting in a lower gross
profit margin. The low zinc price also created downside pressure on the gross
profit margin of the nonferrous segment.
 
 GENERAL
AND ADMINISTRATIVE EXPENSES.  General and administrative expenses increased
by approximately $2.6 million to $9.3 million in 2008 from $6.7 million in
2007. The significant increase in general and administrative expenses was
primarily due to (i) trial operating expenses of $1.7 million by Xiangzhen and
(ii) increased administrative expense of $0.9 million for the newly acquired
Tun-Lin in Kyrgyzstan.
 
 INTEREST
EXPENSE.   Total interest expense of $2.74 million is mainly due
to the related cash and non cash interest expense and costs associated with the
convertible bonds and related issuance cost in the fourth quarter of 2006. This
includes: i) cash interest payment of $0.30 million for the year ended December
30, 2008; ii) non cash principal accretion of approximately $0.03 million for
the year ended December 31, 2008; iii) $0.51 million of revaluation of the
detachable warrant liability associated with the issuance; and iv) $1.90 million
of amortization of deferred debt issuance costs and deferred financing cost for
the year ended December 31, 2008. The total non-cash interest expenditure is
approximately $2.44 million.
 
 NONRECURRING
GAIN FROM DISPOSITION. The company disposed of one of its subsidiaries, Tianzhen
Mining, an exploration stage company located in Wuqia County, Xinjiang Uygur
Autonomous Region, in December 2007 and realized a gain of approximately $1.5
million. The following table presents the revenue, net loss from discontinued
operations and net gain on disposal of Tianzhen Mining for the periods
presented:
  47
  Year
      ended December 31,2008
                            
                            
                            2007(in
      thousands)
                            
                            
                            (in
      thousands)Revenue
                            
                            $
                            -
                            
                            
                            $
                            367Net
      loss from discontinued operations, net of income tax of
nil
                            
                            $
                            -
                            
                            
                            $
                            (197
                            )Net
      gain on disposal of subsidiary, net of income tax of nil
                            
                            $
                            -
                            
                            
                            $
                            1,504
 
 NET
INCOME.  Net loss for the year ended December 31, 2008 was $12.1
million, an increase of $9.5 million compared to net loss of $2.6 million
for 2007. Basic earnings per share were $0.55 or $0.55 fully diluted for the
year ended December 31, 2008.
 
 SEGMENT
PERFORMANCE ANALYSIS
 
 (amounts
      in thousand)
                                
                                Segment
      revenue
                                
                                
                                Segment profit
      (loss)2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007Fluorite
                                
                                $
                                3,704
                                
                                
                                $
                                6,605
                                
                                
                                $
                                (3,898
                                )
                                
                                $
                                418Nonferrous
      metals
                                
                                $
                                3,433
                                
                                
                                $
                                7,746
                                
                                
                                $
                                (4,251
                                )
                                
                                $
                                422
 
 Fluorite
 
 Fluorite
segment revenue decreased by 43.9% from $6.6 million for 2007 to $3.7 million
for 2008. The decrease was primarily due to the decreases in sales volume in
both fluorite powder and lumps. Our old plant did not operate at full capacity
as a result of relocation of certain resources to our new plant. The new plant
has made little contribution to revenue because of technological difficulties
involving its water supply.
 
 Xiangzhen
Mining sold a total of 6,746 metric tons of fluorite powder, representing an
decrease of 71% compared to 2007 due to the trial operation of the newly
completed fluorite processing plant of Xiangzhen . During this period, the
average sales price for fluorite powder increased by 20.7% to $168 per metric
ton.  The sales of fluorite lumps decreased by 50% from 48,406 metric
tons in 2007 to 24,135 metric tons in 2008 as a result of the Company’s
initiative to produce more fluorite powder which enjoyed a good pricing
environment and a robust market demand.
 
 Revenue
contributed from our fluorite segment accounted for 52% of the Company’s total
revenue for the year ended December 31, 2008 as compared to 46% in
2007.
 
 Our
fluorite segment reported a segment loss of $3,9million for the year ended
December 31, 2008 compared to a segment profit of $0.4 million in
2007.
  48
  Nonferrous
metals
 
 Nonferrous
metals segment revenue for 2008 amounted to $3.4 million, representing a
decrease of approximate $4.3 million or 56% compared to 2007. In addition, the
nonferrous metals segment has reported a significant decrease in segment loss to
$4.3 million in 2008 from segment profit of $0.42million in 2007. The
performance of the nonferrous metals segment was materially impacted by
(i) the decline of zinc processing operations of Qianzhen Mining, which
experienced both a shortage of supply of zinc ores as a raw material and (ii)
the increased purchase costs of zinc ores from a major supplier of Qianzhen’s
zinc ores and (iii) the performance
of the nonferrous metals segment was materially impacted by the decline of the
price of zinc.
 
 FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 
 Cash and
cash equivalents were $0.21 million as of December 31, 2008, a decrease of $2.74
million as compared to the balance at December 31, 2007 of $2.95 million.
The significant decrease in cash position was mainly due to (i) the capital
expenditures for mine development, construction, and purchase of processing
plants and mining equipment at Xiangzhen Mining and Xingzhen Mining and (ii) net
cash used in operating activities.
 
 Net cash
used by operating activities for the year ended December 31, 2008 was $1.3
million, as compared to $3.55 million provided for the year ended December 31,
2007. The decrease in operating cash flows was mainly due to the decreases in
revenue and gross profits in 2008 as explained above.
 
 Net cash
used in investing activities of $2.4 million for the year ended December 31,
2008 which was mainly due to capital expenditures for mining development and
capacity expansion projects at Xiangzhen Mining and Xingzhen
mining.
 
 Net cash
outflows from financing activities for the year ended December 31, 2008 was
$0.44 million, which was mainly due to proceeds from short-term borrowings. For
the same period in 2007, net cash outflows from financing activities were $3.51
million, which was mainly due to $1.36 million of net repayments on short-term
borrowings and $2.15 million of issuance costs related to the convertible
note.
 
 ENVIRONMENTAL
 
 The
Company’s mining and exploration activities are subject to various PRC laws and
regulations governing the protection of the environment. These laws and
regulations are continually changing and are generally becoming more
restrictive. The Company conducts its operations so as to protect the public
health and environment and believes its operations are in compliance with
applicable laws and regulations in all material respects. The Company’s mining
operations are subject to “Natural Resource Compensation Charges”, but the
charging rate varies in different cities in the PRC. As of December 31,
2008 and 2007 Natural Resource Compensation Charges of $87,648 and $156,784,
respectively, were charged to operations and included in cost of sales. For
more information, please see Note 23 to the Consolidated Financial
Statements.
 
 CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
 
 CONVERTIBLE
NOTES
 
 On
December 27, 2006, the Company entered into a Notes Purchase Agreement with
Citadel Equity Fund Ltd. (“Citadel”), under the terms of which Citadel purchased
a total of US$28,000,000 in convertible senor notes (“Notes”). The Notes have a
maturity of December 27, 2012.
  49




Conversion
feature





The Notes
are convertible at the option of the holders, at any time on or prior to
maturity, into common shares of the Company. Pursuant to a Second Supplemental
Indenture entered into between the Company and Citadel on September 28, 2007,
the conversion price has been revised from $3.20 to $2.25 per share and is
subject to adjustment in certain circumstances but shall in no event fall below
$2.00 per share.  In addition, in no event shall the number of conversion
shares issuable upon conversion of all the outstanding Notes exceed 49.90% of
all outstanding shares upon the conversion of all of the outstanding
Notes.





Consistent
with EITF 98-05, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, the intrinsic
value of the beneficial conversion feature (“BCF”) on the commitment date, i.e.
the Second Supplementary Indenture Date of September 28, 2007, has been
recalculated: The change of conversion price in the Second Supplemental
Indenture resulted in a BCF. The BCF was recognized on the effective date of
September 28, 2007, as a discount and will be amortized using the effected
interest rate method from September 28, 2007 to maturity date.




Redemption


The Notes
contain a principal accretion feature that increases the redemptions or
repurchase price of the Notes.  The principal is accreted 5% per annum, on
semi-annual basis, such that if the Notes are held to maturity the total
accreted principal amount is equal to 130% of the original principal amount.
 The Company can redeem all of the Notes on or after December 27, 2009, at
110% of the then accreted principal amount, plus accrued and unpaid interest to
but excluding the redemption date. In addition, Note holders have rights to
request the Company to repurchase the Notes at a price in cash equal to
104% of the then accreted principal amount plus accrued and unpaid interest to
the redemption rate if there is a change of control of the Company.  In
addition, from and after December 27, 2009, Note holders have the right to
require the Company to repurchase the Notes for 100% of the then accreted
principal amount plus accrued and unpaid interest to the redemption
date.





Interest
rate





The Notes
initially bore interest at 6.75% per annum, which were subject to upward
adjustments and were payable semi-annually. However, pursuant to the Second
Supplemental Indenture entered into between the Company and Citadel on September
28, 2007, the interest rate has been revised as follows:





(a)
            at the rate of 6.75% per annum of
      the Original Principal Amount of the Notes, from and
      including the Issue Date to and including September 30,
      2007;





(b)
            at the rate of 0.00% per annum of
      the Original Principal Amount of the Notes, from and including October 1,
      2007 to and excluding January 31, 2008;
  and





(c)
            at the rate of 0.00% per annum of
      the Original Principal Amount of the Notes, from and including January 31,
      2008 to but excluding the Maturity Date, if the Public Listing has
      occurred on or prior to January 31, 2008 and if the Company maintains
      suchlisting.





Detachable
warrants


Together
with the issuance of the Notes, the Company issued a put warrant to one of the
Company’s financial advisors in the transaction for the purchase of 875,000
shares of the Company’s common stock at an exercise price of $3.20 per share,
exercisable on or before 3 years from the date of grant.  As of December
31, 2008, the fair value of the put warrant was $33,126. Further details of the
warrants are disclosed in Note 14.


50





Debt
issuance costs


The
issuance costs directly associated with the Notes and the put warrant aggregated
$2,522,497.  The amount was capitalized as deferred debt issuance costs,
and is being amortized using the effective interest rate method over the term of
the convertible loan, with the amounts amortized being recognized as interest
expense. Any unamortized debt issuance costs remaining at the date of conversion
of the loan will be recognized as interest expense in the period the conversion
takes place. As of December 31, 2008, the deferred debt issuance costs were
approximately $1,755,000.





OFF-BALANCE
SHEET ARRANGEMENTS





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





INFLATION





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





CRITICAL
ACCOUNTING POLICIES





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





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





We
believe that the following critical accounting policies reflect the significant
estimates and assumptions which are used in the preparation of the consolidated
financial statements and affect our financial condition and results of
operations.





Property,
Plant and Mine Development





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




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





Major
development costs incurred after the commencement of production are amortized
using the UOP method based on estimated recoverable volume in mineralized
material. To the extent that these costs benefit the entire mineralized body,
they are amortized over the estimated life of the mineralized body. Costs
incurred to access specific mineralized blocks or areas that only provide
benefit over the life of that area are amortized over the estimated life of that
specific mineralized block or area.  Interest cost allocable to the cost of
developing mining properties and to constructing new facilities, if any, is
capitalized until assets are ready for their intended use.


51




Asset
Impairment





Long-lived
Assets




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




Goodwill





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





Stock
Based Compensation





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


52





Recent
accounting pronouncements





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




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





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115.” This statement permits, but does not require, entities to
measure many financial instruments at fair value. The objective is to provide
entities with an opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. The Company does not believe that
this standard will significantly affect the Company’s financial position or
results of operations.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations,” (“SFAS No. 141(R)”). This standard will significantly change the
accounting for business combinations. Under SFAS No. 141(R), an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited exceptions. SFAS
No. 141(R) also includes a substantial number of new disclosure requirements.
SFAS No. 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No.
160”), which establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. This standard does not currently affect
the Company.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - An Amendment of FASB Statement No. 133” (“SFAS No.
161”), which changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. This statement will be effective for financial statements issued for
fiscal years and interim periods beginning after November 15,
2008.


53





CONCENTRATION
OF CUSTOMERS AND SUPPLIERS





The
Company had five main customers who contributed approximately $5,300,000 or
75% of the Company’s consolidated net revenue for the year ended December 31,
2008. For the same period of 2007, the Company had five main customers
who contributed approximately $10,936,000 or 75% of the Company’s
consolidated net revenue.





Our main
materials were from our mines, and we purchased few raw materials, so we had no
concentrated suppliers in 2008.





ITEM 7A.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
RISK.





Not
required.




ITEM 8.
            FINANCIAL
      STATEMENTS.




Please
see the “Consolidated Financial Statements of the Company”.





ITEM 9.
            CHANGES IN AND DISAGREEMENTS WITH
      ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
  DISCLOSURE.





There are
no reportable events as required by Item 304(b) of Regulation S-K.




ITEM 9A.
              CONTROLS AND
      PROCEDURES.





(a)
Management’s annual report on  disclosure controls and
procedures.





Management
of the Company is responsible for establishing and maintaining adequate
disclosure controls and procedures and for the assessment of the effectiveness
of disclosure controls and procedures. The Company's disclosure controls and
procedures is a process designed under the supervision of the Company's chief
executive officer and chief financial officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
consolidated financial statements in accordance with United States generally
accepted accounting principles (“U.S. GAAP”).





As of the
end of the period covered by this report, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15(e) of the Exchange Act. This evaluation was
done under the supervision and with the participation of our principal executive
officer and principal financial officer. Based on their evaluation of our
disclosure controls and procedures, our principal executive officer and
principal financial officer have concluded that during the period covered by
this report, such disclosure controls and procedures were not effective due to
deficiencies described below.





(b)Management’s annual report on internal control over financial
reporting.




All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can only
provide reasonable assurances with respect to financial statement preparation
and presentation. In addition, any evaluation of effectiveness for future
periods are subject to the risk that controls may become inadequate because of
changes in conditions in the future.





As of the
end of the period covered by this report, we carried out an evaluation of the
effectiveness of the design and operation of our internal control over financial
reporting pursuant to Rule 13a-15(f) of the Exchange Act. This evaluation was
done under the supervision and with the participation of our principal executive
officer and principal financial officer. To make this assessment, we used the
criteria for effective internal control over financial reporting described in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treasury Commission. Based on their evaluation of our
internal control over financial reporting, our principal executive officer and
principal financial officer have concluded that during the period covered by
this report, such internal control over financial reporting were not effective
to detect the inappropriate application of U.S. GAAP as more fully described
below. This was due to deficiencies that existed in the design or operation of
our internal control over financial reporting that adversely affected our
disclosure controls and that may be considered “material weaknesses”. The Public
Company Accounting Oversight Board has defined a material weakness as a
“deficiency, or combination of deficiencies, in internal control over financial
reporting (ICFR) such that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis by the company’s ICFR.”


54





The
significant deficiencies we identified in the prior year in our internal
controls and disclosure controls related to the application of U.S. GAAP were in
adopting an inappropriate period to depreciate and amortize property, plant and
equipment, including extraction and exploration rights; inappropriate
capitalization of exploration expenses; and inappropriate classification of
balance sheet and income statement balances. These deficiencies, when taken
together, resulted in a conclusion that the Company’s controls suffered from a
material weakness as of December 31, 2006. In 2007, we have remedied all these
significant deficiencies except the failure to provide for an allowance for
doubtful accounts in accordance with the Company’s policy by means of
implementation of the remediation program we planed in the prior year. This
deficiency still resulted in a conclusion that the company’s controls suffered
from a material weakness as of December 31, 2008.





Because
of the identification of the misapplication of U.S. GAAP, our management has
concluded that, as of December 31, 2008, our internal controls over financial
reporting were not effective.





Remediation
of Material Weaknesses





In light
of the conclusion that our Company’s internal control over financial reporting
was not effective, our management has developed a plan intended to remediate
such ineffectiveness and to strengthen our internal controls over financial
reporting through the implementation of certain remedial measures, which
include:





1)
Continue enhancing our U.S. GAAP training program for our existing personnel and
recruiting additional professional personnel;





2)
Improving the collection from our head office and our subsidiaries of financial
data required to produce U.S. GAAP statements, standardizing the data collection
procedures and assigning data collection responsibilities to designated
personnel;





3)
Implementing the appropriate procedures to provide for an allowance for doubtful
accounts in accordance with the Company’s policy.





We will
continue these efforts until we are satisfied that all “material weaknesses”
have been eliminated. We expect that resolution of all of these issues will take
place before the end of 2009.





This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.





(c)
Changes in Internal Control over Financial Reporting





There
have been no changes in our internal control over financial reporting that
occurred during the fourth quarter within the fiscal year ended December
31, 2008 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.





ITEM 9B.
            OTHER
      INFORMATION.





None




PART
III




ITEM10.
            DIRECTORS, EXECUTIVE OFFICERS,
      PROMOTERS AND CONTROL PERSONS; COMPLIANCEWITH SECTION 16(A) OF THE
      EXCHANGE ACT .


55


Set forth
below is certain information concerning each of the directors and executive
officers of the Company as of April 13, 2009. None of our directors or executive
officers holds directorships in other public companies as of April 13, 2009
except Gene Michael Bennett who is also an independent director for Kunming
Shenghuo Pharmaceutical (NYSE Amex: KUN) and Feng Bai who is also an independent
director for Fushi Copperweld Inc. (NasdaqGM: FSIN) and Harbin Electric Inc.
(NasdaqGM: HRBN). The directors listed below will serve until the Company’s next
annual meeting of the stockholders:





Name
                            
                            Age
                            
                            PositionXiao-Jing
      Yu
                            
                            52
                            
                            Director,
      CEO and Chairman of the BoardXueming
      Xu
                            
                            48
                            
                            Director,
      President and Chief Operating OfficerHelin
      Cui
                            
                            53
                            
                            DirectorJiusheng
      Zhang
                            
                            45
                            
                            Interim
      Chief Financial Officer (since March 2009)Youming
      Yang
                            
                            54
                            
                            DirectorJian
      Zhang
                            
                            67
                            
                            Director,
      Chairman of Corporate Governance and Nominating
  CommitteeFeng
      Bai
                            
                            38
                            
                            Director,
      Chairman of Compensation CommitteeLigang
      Wang
                            
                            48
                            
                            Vice
      President and President of Qianzhen MiningGene
      Michael Bennett
                            
                            61
                            
                            Director
      and Chairman of Audit
Committee





Ms. Xiaojing Yuhas served as
Director, Chief Executive Officer and Chairman of the Board of Directors of the
Company since September 15, 2006. She has over 20 years’ experience in the
mining industry. She currently also serves as director and chairwoman of Inner
Mongolia Gulatehou Banner Qianzhen Mining and Processing Co., Ltd and Inner
Mongolia Xiangzhen Mining Co., Ltd. She has served in that capacity since May
2002. Prior to that, she was the general manager of Dalian Zhikun Metal
Materials Co. Ltd and finance manager of Gansu Baiyin Nonferrous Industrial
Corporation. Ms. Yu also serves as the Executive Vice President of China
Fluorite Industry Association. She attended an advanced Management Program run
by Tsing Hua University.





Mr. Xueming Xuserves
as Director, President and Chief Operating Officer. He has more than 20
years’ experience in the mining industry.  He is currently director and
President of Inner Mongolia Gulatehou Banner Qianzhen Mining and Processing Co.,
Ltd and of Inner Mongolia Xiangzhen Mining Co., Ltd. He has served in that
capacity since May 2002. Prior to that, Mr. Xu served as technician,
vice-superintendent and superintendent at Inner Mongolia’s Huiyaokou Iron Ore
Plant and deputy general manager of Inner Mongolia Dongshengmiao Mining Co.,
Ltd. Mr. Xu graduated from Lianyungang College of Chemical Mining and
attended an advanced Management Programme run by Tsing Hua
University.





Mr. Helin Cuiserves
asDirector. He has
more than 20 years’ experience in the mining industry. He is currently a
director and deputy chairman of Inner Mongolia Gulatehou Banner Qianzhen Mining
and Processing Co., Ltd and of Inner Mongolia Xiangzhen Mining Co., Ltd. He has
serves in that capacity since May 2002. Prior to that, Mr. Cui worked at Gansu
Province’s No. 3 Geological Team as a technician, engineer and team leader and
deputy general manager at Baiyin Trading Company in Gansu Province. He graduated
from the Xi'an Geology College.





Mr. Youming Yangserves
asDirector. He has
25 years’ experience in nonferrous geological prospecting field and was
responsible for the prospecting of a number of large sized nonferrous mining
projects in China. He has served as Chief of the Nonferrous Geological
Prospecting Bureau of Xinjiang Uygur Autonomous Region since May 2000. Prior to
that, Mr. Yang worked as a Chief Engineer at the Nonferrous Geological
Prospecting Bureau of Xinjiang Uygur Autonomous Region from October 19 to April
2000. Mr. Yang studied geology and graduated from Central South China
Mining and Metallurgy College.





Mr. Jian Zhangserves as
Director. He has over 30 years’ experience in nonferrous mining, project
construction and management and is currently an external director of China
Construction Materials Company Ltd. Prior to that, Mr. Zhang was President of
China Nonferrous Mining Construction Group from September 2003 to August
2005. He served as President of China Nonferrous Mining Construction Group from
April 2002 to September 2003. Mr. Zhang graduated from the environmental
engineering department of Xi ’ an Mining Architecture College in
1968.


56





Mr. Feng Baiserves as Director. He
has served as managing director of Lighthouse Consulting Ltd. in Hong Kong since
February 2003.  Mr. Bai has been active in advising foreign
corporations to invest and set up joint ventures in China.   Since
1999, Mr. Bai has been doing business in China mainly in consulting,
investment and brand name agency services.  Prior to that, Mr. Bai
worked at the investment banking division of Banco Santander assisting clients
and completing deals in Asia from 1997 to 1999.  Mr. Bai received his
MBA degree from Harvard Business School in 1997 and graduated from Babson
College in 1993 with a BS in Financial Investment and International Business
Administration.  Mr. Bai sits on the board of Harbin Electric Inc., a
U.S.-listed company that designs, develops and manufactures lineal motors and
special electric motors.





Mr. Jiusheng Zhang serves as
the Interim Chief Financial Officer of the Company. Mr. Zhang is a senior
economist and has over 15-year experience in financing and investment. From
August 2004 to December 2008, he served as Chief Financial Officer and Vice
General Manager of Zhong Xing Company. From January 2001 to August 2004, he
served as Chief Financial Officer of Tianjin Olympic Garden Investment Limited
of China Sport Industry Group Co. LTD. Mr. Zhang has a Master of Arts in
economics from the Xi’an Finance and Economics College in China.





Mr. Gene Michael Bennettserves as Director and Chairman of the Audit Committee. He has over 25
years’ experience as CFO,   Professor and Consultant. His
abundant working experience in China has assisted Chinese firms to
develop "Good Corporate Governance" and transparent
infrastructures.   He is a CPA (inactive), and has experience
working for one of the top auditors in the world, Grant Thornton.
He graduated from Michigan State University. Currently, he also holds
positions for other two US-listed Chinese companies: China AgriTech
Group, Inc (CAGC, Amex) (Audit Chair - Audit Committee BOD) and China
Pharma Holding, Inc. (CPHI, OTC-BB) (Audit Chair-Audit Committee
BOD).





Mr. Ligang Wangserves as
Vice President. Since July 2002, he has served as President of Qianzhen Mining.
He has more than 20 years’ experience in mine management. From January 1986 to
June 2002, he worked as plant manager in the Wulatehou Banner Baynnur
Mining.





Each of
the directors named above will serve until our next Annual Meeting of
Stockholders or until their successors are duly elected and qualified. Directors
will be elected for one-year terms at the Annual Meeting of Stockholders.
Officers will hold their positions at the pleasure of the Board of Directors,
absent any employment agreement, of which none currently exists or is
contemplated. There is no arrangement or understanding between any of our
directors or officers and any other person pursuant to which any
director or officer was or is to be selected as a director or officer, and
there is no arrangement, plan or understanding as to whether non-management
stockholders will exercise their voting rights to continue to elect the current
directors to our Board of Directors. There are also no arrangements, agreements
or understandings between non-management stockholders that may directly or
indirectly participate in or influence the management of our
affairs.





There are
no agreements or understandings for any officer or director to resign at the
request of another person, and none of the officers or directors is acting on
behalf of, or will act at the direction of, any other person.





Involvement
in Certain Legal Proceedings





During
the past five years, no present or former director, executive officer or person
nominated to become a director or an executive officer of our
Company:





(1)
            Was a general partner or
      executive officer of any business against which any bankruptcy petition
      was filed, either at the time of the bankruptcy or two years prior to that
      time;





(2)
            Was
      convicted in a criminal proceeding or named subject to a pending criminal
      proceeding (excluding traffic violations and other minor
      offenses);


57





(3)
            Was subject to any order,
      judgment or decree, not subsequently reversed, suspended or vacated, of
      any court of competent jurisdiction, permanently or temporarily enjoining,
      barring, suspending or otherwise limiting his involvement in any type of
      business, securities or banking activities;
  or





(4)
            Was found by a court of competent
      jurisdiction (in a civil action), the SEC or the Commodity Futures Trading
      Commission to have violated a federal or state securities or commodities
      law, and the judgment has not been reversed, suspended or
      vacated.




Compliance
with Section 16(a) of the Securities Exchange Act of 1934




Section
16(a) of the Securities and Exchange Act of 1934 requires our executive officers
and directors and persons who own more than 10% of a registered class of our
equity securities, to file with the SEC initial statements of beneficial
ownership on Form 3, reports of changes in ownership on Form 4 and annual
reports concerning their ownership on Form 5. Executive officers, directors and
greater than 10% stockholders are required by the SEC regulations to furnish us
with copies of all Section 16(a) reports they file.





During
the fiscal year ended December 31, 2008, Ms. Xiaojing Yu was late in filing Form
4 transactions.





Code
of Ethics





We have
adopted a Code of Business Conduct and Ethics (the “Code”) that is applicable to
all employees, consultants and members of the Board of Directors, including the
Chief Executive Officer, Chief Financial Officer and Secretary. This Code
embodies our commitment to conduct business in accordance with the highest
ethical standards and applicable laws, rules and regulations. We will provide
any person a copy of the Code, without charge, upon written request to the
Company. Requests should be addressed in writing to: Fulun Song, office of t h e
Board of Directors, China Shen Zhou Mining & Resources, Inc., No. 166 Fushi
Road, Zeyang Tower, Suite 1210, Shijingshan District, Beijing, China
100043.





Director
Nominees Recommended by Stockholders





We have
not implemented any changes to the procedures by which stockholders may
recommend nominees to our board of directors since we last disclosed those
procedures in our most recent proxy statement.





Board
Composition; Audit Committee and Financial Expert




Our Board
has seven (7) members, of which four (4) are independent directors. The
independent directors are Gene Michael Bennett, Jian Zhang, Feng Bai and Youming
Yang. We have an Audit Committee, a Compensation Committee and a Corporate
Governance and Nominating Committee. The Audit Committee has been established as
a separately-designated standing committee in accordance with section
3(a)(58)(A) of the Exchange Act. The Audit Committee has at least one member,
Mr. Gene Michael Bennett, who meets the definition of an “audit committee
financial expert” under SEC rules and whom the Board has determined to be
“independent”.





Audit Committee. The Audit
Committee is currently comprised of Gene Michael Bennett, Feng Bai and Jian
Zhang, with Gene Michael Bennett as the chairman, each of whom are “independent”
as that term is defined by SEC rules and under the American Stock Exchange
listing standards. The Audit Committee is directly responsible for the
appointment, retention and oversight of the work of any independent accountants
employed by the Company for the purpose of preparing or issuing an audit report
or related work or performing other audit, review or other services. Any such
registered public accounting firm must report directly to the Audit Committee.
The Audit Committee has the ultimate authority and responsibility to evaluate
and, where appropriate, replace the registered public accounting
firm.





Audit
Committee has held 2 meetings in 2008 and the attendance rates for all committee
members are 100%.





Compensation Committee. The
Compensation Committee is responsible for the administration of all salary,
bonus and incentive compensation plans for our officers and key employees. The
members of the Compensation Committee are Feng Bai, Jian Zhang and Youming Yang,
with Feng Bai as the chairman, all of whom are “independent”
directors.





Compensation Committeehas
not held any meeting in 2008.


58





Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee is
responsible for overseeing, reviewing, and making periodic recommendations
concerning the company’s corporate governance policies and recommending
candidates for election to the Company’s Board of Directors. The committee also
oversees our adherence to our corporate governance standards. The members
of the committee are Jian Zhang, Feng Bai, and Youming Yang with Jian Zhang as
the chairman.





Nominating and Corporate Governance
Committeehas not held any meeting in 2008.




ITEM 11.
            EXECUTIVE COMPENSATION
      .




During
2008, Only Xiaojing Yu and Xueming Xu’s total annual salary and bonus exceeded
$100,000. The other executive officers’ salary did not exceed
$100,000 during 2008.





Summary Compensation
Table


Name and Principal
                                                                        Underlying
                                                                        Positions (a)
                                                                      
                                                                      Year
                                                                        (b)
                                                                      
                                                                      Salary
                                                                        (c)
                                                                      
                                                                      
                                                                      Bonus
                                                                        (d)
                                                                      
                                                                      
                                                                      Option
                                                                        Awards
                                                                        (e)
                                                                      
                                                                      
                                                                      Stock
                                                                        Awards
                                                                        (f)
                                                                      
                                                                      
                                                                      Non-equity
                                                                        Incentive Plan
                                                                        Compensation
                                                                        (g)
                                                                      
                                                                      
                                                                      Nonqualified
                                                                        Deferred
                                                                        Compensation
                                                                        Earnings
                                                                        (h)
                                                                      
                                                                      
                                                                      All Other
                                                                        Compensation
                                                                        (i)
                                                                      
                                                                      
                                                                      Total
                                                                        (j)Xiaojing
      Yu, CEO
                                                                      
                                                                      2008
                                                                      
                                                                      
                                                                      278,292
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      
                                                                      278,2922007
                                                                      
                                                                      $
                                                                      83,528
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      
                                                                      83,528Xueming
      Xu,
                                                                      
                                                                      2008
                                                                      
                                                                      
                                                                      131,359
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      
                                                                      131,359President
      and COO
                                                                      
                                                                      2007
                                                                      
                                                                      $
                                                                      25,941
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      
                                                                      25,941Steven
      Jiao, CFO**
                                                                      
                                                                      2008
                                                                      
                                                                      
                                                                      20,653
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      
                                                                      20,6532007
                                                                      
                                                                      $
                                                                      49,569
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      
                                                                      49,569Hu
      Ye, CFO**
                                                                      
                                                                      2008
                                                                      
                                                                      $
                                                                      42,029
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      
                                                                      42,029Ligang
      Wang, Vice
                                                                        President, Prsident
                                                                      
                                                                      2008
                                                                      
                                                                      
                                                                      26,764
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      
                                                                      26,764of Qianzhen
                                                                        Mining***
                                                                      
                                                                      2007
                                                                      
                                                                      $
                                                                      10,017
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      $
                                                                      0
                                                                      
                                                                      
                                                                      
                                                                      10,017


* The
salary of 2008 amounting to $153,495 has not been paid by April 15, 2009,
including Xiaojing Yu’s salary amounting to $98,307, Xueming Xu’s salary
amounting to $48,865 and Ligang Wang’s salary amounting to $3,000.


**Steven
Jiao was CFO from April 2007 to May 2008. Hu Ye was
appointed CFO in May 2008.


*** Ligang
Wang was appointed on April 11, 2007 and his 2008 salary amounting to $3,000 has
not been paid by April 15, 2009





Outstanding
Equity Awards at Fiscal Year-End




As of
December 31, 2008, the Company currently does not have any equity compensation
plans in place.





Director
Compensation





We paid
all directors in 2008 as follows:


59





Name(a)
                
                Fees Paid in
                  Cash (b)
                
                
                Stock Awards
                  (c)
                
                
                Option
                  Awards (d)
                
                
                Non-Equity
                  Incentive Plan
                  Compensation(e)
                
                
                Nonqualified
                  Deferred
                  Compensation
                  Earnings (f)
                
                
                All Other
                  Compensation
                  (g)
                
                
                Total (h)Helin
      Cui*
                
                $
                30,317
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                
                
                $
                30,317Yonming
      Yang**
                
                $
                17,391
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                17,391Jian
      Zhang**
                
                $
                17,391
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                17,391Feng
      Bai**
                
                $
                17,391
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                17,391Gene
      Michael Bennett**
                
                $
                19,800
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                19,800





* Helin
Cui’s 2008 salary amounting to $3,323 has not been paid by April 15,
2009.


**Independent
director


We
currently pay an independent director the compensation of $17,391 in 2008,
except the Chairman of Audit Committee, Gene Michael Bennett whose 2008
compensation was $19,800.





Retirement,
Post-Termination and Change in Control




We have
no retirement, pension, or profit-sharing programs for the benefit of directors,
officers or other employees, nor do we have post-termination or change in
control arrangements with directors, officer or other employees, but our Board
of Directors may recommend adoption of one or more such programs in the
future.




ITEM 12.
            SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
    MATTERS.




The
following table sets forth certain information as of April 14, 2009 relating to
the beneficial ownership (as defined by the rules of the SEC) of shares of
common stock by (i) each person who owns beneficially more than 5% of the
outstanding shares of our common stock, (ii) each of our directors, (iii) each
of our executive officers as of April 14, 2009, and (iv) all of our executive
officers and directors as a group.




Amount and Nature of Beneficial Ownership (1)NameandAddress
                
                Number of Shares (2)
                
                
                Percentage Owned
      (3)Xiaojing
      Yu
                
                
                14,973,600
                
                
                
                67.40
                %Xueming
      Xu
                
                
                1,870,000
                
                
                
                8.42
                %Helin
      Cui
                
                
                200,000
                
                
                
                *Qijiu
      Song **
                
                
                100,000
                
                
                
                *Ligang
      Wang
                
                
                100,000
                
                
                
                *American
      Eastern Securities, Inc. (4)
                
                
                2,060,000
                
                
                
                9.27
                %Directors
      and executive officers as a group (5 persons)
                
                
                17,243,600
                
                
                
                77.62
                %


60








*  
Less than 1%


**
            Mr.
      Qijiu Song resigned on December 22, 2008.  A Form 4 on Mr. Song’s
      resignation was filed with the SEC on January 15, 2009. His shares are
      planned to be transfered to Ms. Xiaojing Yu
  (CEO).





(1)
            As ofApril 14, 2009, there were
      22,214,514shares of
      common stock
      outstanding. Each person named above has sole investment and voting power
      with respect to all shares of the common stock shown as beneficially owned
      by the person, except as otherwise indicated
  below.





(2)
            Under applicable rules
      promulgated bythe
      SEC pursuant to the Exchange Act, a person is deemed the “beneficial owner”of a security with regard to
      which the person, directly or indirectly, has or shares (a) the voting
      power, which includes the power to vote or direct the voting of the
      security, or (b) the investment power,
      which includes the power to dispose or direct the disposition of the
      security, in each case irrespective of the person’s economic interest in the
      security. Under these SEC rules, a person is deemed to beneficially own
      securities which the person has the
      right to acquire within 60 days through (x) the exercise of any option or
      warrant or (y) the conversion of another
  security.





(3)
            In determining the percent of
      common stock owned by a person (a) the numerator is the numberof shares of common
      stock beneficially owned by the person, including shares the beneficial
      ownership of which may be acquired within 60 days upon the exercise of
      options or warrants or conversion of convertible securities, and (b) the
      denominator is thetotal of (i) the shares of common
      stock outstanding as ofApril 14, 2009, and (ii) any shares of common
      stock which the person has the right to acquire within 60 days upon the
      exercise of options or w8arrants or conversion of
      convertible securities. Neither the numerator nor the
      denominator includes shares which may be issued upon the exercise of any
      other options or warrants or the conversion of any other convertible
      securities.





(4)
            Held by American Eastern Group,
      Inc., American Eastern Securities, Inc., EIC Investments, LLC, and
      Trang Chong Hung individually. The shares so held are directly or
      indirectly owned by Trang Chong Hung and his family
      members.




ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS.





On June
25, 2007, the Company entered into a share transfer agreement with Xinjiang
Tianxiang New Technology Development Co. Ltd, the minority shareholder of
Xiangzhen Mining to acquire an additional 10% ownership interest in Xingzhen
Mining for a cash consideration of $479,150. On August 10, 2007, the share
transfer agreement was approved by the China local government authorities. As a
result, the Company’s shareholding in Xingzhen Mining has increased from 80% to
90%.





Xinjiang
Tianxiang New Technology Development Co., Ltd, the minority shareholder of
Xingzhen Mining, provided exploration services to Xingzhen Mining for service
fees of $52,073 in 2008 and $974,621 in 2007 respectively.


61


ITEM 14.
              PRINCIPAL
      ACCOUNTANT FEES AND
SERVICES





Sherb
& Co. LLP has audited our financial statements for the 2008 fiscal year.
Grobstein, Horwath & Company, LLP (“Horwath”), has audited our financial
statements since 2006. All of the services described below were approved by
our board prior to performance. Our board has determined that the payments made
to its independent accountant for these services are compatible with maintaining
such auditor's independence.





Audit Fees.The aggregate fees
billed by Sherb & Co., for professional services rendered for the audit of
the Company’s financial statements for the fiscal year ended December 31, 2008
are $130,000. The aggregate fees billed by Horwath for professional services
rendered for the audit and review services of the Company’s financial statements
for the fiscal year ended December 31, 2008 and December 31, 2007 were $ 117,000
and $369,800 respectively.




Audit-Related Fees. There were
no fees for assurance and related services by Sherb & Co., for the fiscal
year ended December 31, 2008. The fees for related services by Horwath for the
fiscal years ended December 31, 2007 were $60,500, including $ 50,000 for the
2006 8-K/A filings and $ 10,500 for the SEC comment letter response in October
2007.




Tax Fees. We engage e-Fang
Accountancy Corp., & CPA to provide service for the income tax returns in
the U.S. for the fiscal year ended December 31, 2008, which are estimated to be
$ 5,000 . There were no fees for tax compliance, tax advice or tax planning
services by Horwath for the fiscal year ended December 31, 2007.




All Other Fees. There were no
other fees for either audit-related or non-audit services billed by Sherb &
Co. for the fiscal year ended December 31, 2008. There were no other fees for
either audit-related or non-audit services billed by Horwath for the fiscal year
ended December 31, 2007.





ITEM
      15.
              EXHIBITS




Statements
filed as part of this Report




Exhibits




The
following documents are filed as exhibits herewith or incorporated by reference
to exhibits previously filed with the SEC:




Exhibit
                    Number
                  
                  Description of Exhibit2
                  
                  Stock
      Exchange Agreement by and among Earth Products & Technologies, Inc.,
      American Federal Mining Group, Inc. and shareholders of American Federal
      Mining Group, Inc., dated July 14, 2006 (Incorporated by reference to
      Exhibit 2.1 to the Company’s Form 8-K filed on July 20,
    2006)3.1
                  
                  Amended
      and Restated Articles of Incorporation of the Company, effective December
      13, 2006 (Incorporated by reference to the Company’s Form 10-KSB/A filed
      on April 24,
2007)


62





3.2
                
                Bylaws of the Company adopted on
      November 27, 2006 (Incorporated by reference to the Company’s Form 10-KSB/A filed on April
      24, 2007)3.3
                
                Bylaws
      of China Shen Zhou Mining & Resources, Inc., dated November 2, 2007.
      (Incorporated by reference to the Company’s 8-k filed with SEC on November
      05, 2007.)10.1
                
                Indenture
      dated December 27, 2006 (Incorporated by reference to Exhibit 4.1 to the
      Company’s Form 8-K filed on December 29, 2006)10.2
                
                Note
      Purchase Agreement by and between the Company and Citadel Equity Fund,
      Ltd., dated December 21, 2006 (Incorporated by reference to Exhibit 10.1
      to the Company’s Form 8-K filed on December 29, 2006).10.3
                
                Voting
      Agreement by and between the Company, Xiaojing Yu, Xueming Xu and Citadel
      Equity Fund, Ltd. (Incorporated by reference to Exhibit 10.2 to the
      Company’s Form 8-K filed on December 29, 2006).10.4
                
                Service
      Agreement for Going Public between Inner Mongolia Xiangzhen Mining Group
      Co. Ltd and American Eastern Group, Inc., dated November 1, 2006, and as
      amended on December 10, 2006 (Incorporated by reference to the Company’s
      Form 10-KSB/A filed on April 24, 2007)10.5
                
                Stock
      Option Agreement by and between the Company and American Eastern Group,
      Inc., dated December 3, 2005 (Incorporated by reference to the Company’s
      Form 10-KSB/A filed on April 24, 2007)10.6
                
                Stock
      Option Agreement by and between the Company and Shenzhen DRB Investment
      Consultant, Limited, dated December 3, 2005 (Incorporated by reference to
      the Company’s Form 10-KSB/A filed on April 24, 2007)10.7
                
                Letter
      Agreement by and between the Company and American Eastern Securities,
      Inc., dated November 1, 2006, as amended on December 27, 2006
      (Incorporated by reference to the Company’s Form 10-KSB/A filed on April
      24, 2007)10.8
                
                Stock
      Purchase Agreement by and between American Federal Mining Group, Inc. and
      Xinjiang Buerjin County Xingzhen Mining Co., Ltd., dated April 28, 2006,
      as amended on July 6, 2006 and July 20, 2006 (Incorporated by reference to
      the Company’s Form 10-KSB/A filed on April 24, 2007)10.9
                
                Stock
      Purchase Agreement by and between American Federal Mining Group, Inc. and
      Inner Mongolia Qingshan Nonferrous Metal Development Co., Ltd., dated
      April 12, 2006, as amended on July 8, 2006 and July 20, 2006 (Incorporated
      by reference to the Company’s Form 10-KSB/A filed on April 24,
      2007)10.10
                
                Share
      Equity Acquisition Agreement by and between Inner Mongolia Xiangzhen
      Mining Group, Ltd. and Jiaxing Li and Guan Huang, dated as of November 6,
      2006 (Incorporated by reference to the Company’s Form 10-KSB/A filed on
      April 24, 2007)10.11
                
                Industrial
      Product Sales Contract by and between Inner Mongolia Wulatehouqi Qianzhen
      Ore Processing Co., Ltd. and Baiyin Nonferrous Metal Group. Co., Ltd.,
      dated July 28, 2006 (Incorporated by reference to the Company’s Form
      10-KSB/A filed on April 24, 2007)10.12
                
                Refined
      Zinc Ore Supply Agreement by and between Wulatehouqi Qianzhen Ore
      Processing Co., Ltd. and Zijin Nonferrous Metal Co., Ltd., dated as of
      March 26, 2006 (Incorporated by reference to the Company’s Form 10-KSB/A
      filed on April 24, 2007)10.13
                
                Contract
      by and between Wulatehouqi Qianzhen Ore Processing Co., Ltd. and
      Wulatehouqi Zijin Mining Co., Ltd., dated as of December 10, 2006
      (Incorporated by reference to the Company’s Form 10-KSB/A filed on April
      24, 2007)


63




Exhibit
                Number
              
              Description of Exhibit10.14
              
              Fluorite
      Purchase Agreement by and between Inner Mongolia Xiangzhen Fluorite
      Industrial Co., Ltd. and Langfang Xinda Iron Alloy Co., Ltd., dated as of
      April 23, 2006 (Incorporated by reference to the Company’s Form 10-KSB/A
      filed on April 24, 2007)10.15
              
              Contract
      by and between American Federal Mining Group, Inc., Xiaojing Yu and Inner
      Mongolia Wulatehouqi Qianzhen Ore Processing Co., Ltd., dated as of
      February 16, 2006 (Incorporated by reference to the Company’s Form
      10-KSB/A filed on April 24, 2007)10.16
              
              Industrial
      Product Sales Contract by and between Inner Mongolia Xiangzhen Mining Co.,
      Ltd. and Beijing Capital Steel Company Limited by Shares, dated as of
      March 31, 2005 (Incorporated by reference to the Company’s Form 10-KSB/A
      filed on April 24, 2007)10.17
              
              Fluorite
      Powder Supply Agreement by and between Ningxia Jinhe Chemical Co., Ltd.
      and Inner Mongolia Xiangzhen Mining Group Co., Ltd. dated as of April 3,
      2006 (Incorporated by reference to the Company’s Form 10-KSB/A filed on
      April 24, 2007)10.18
              
              Working
      Capital Loan Agreement by and between Inner Mongolia Xiangzhen Mining
      Group Co., Ltd. and China Industrial and Commerce Bank, dated as of
      November 30, 2006 (Incorporated by reference to the Company’s Form
      10-KSB/A filed on April 24, 2007)10.19
              
              Equity
      Transfer Agreement, dated as of December 10, 2007, by and among Inner
      Mongolia Xiangzhen Mining Group Co Ltd., Xiaojing Yu, and Dechang Wang,
      incorporated by reference to the Company’s 8-k filed with SEC on December
      12, 2007.10.20
              
              Stock
      Purchase Agreement by and between Inner-Mongolian Xiangzhen Mining Group
      Ltd. Co and Xinjiang Tianxiang Development Co. of New Technology, dated
      June 25, 2007 incorporated by reference to 10-KSB filed on April 14,
      2008.14.1
              
              Code
      of Ethics, dated as of April 16, 2007 (Incorporated by reference to the
      Company’s Form 10-KSB filed on April 17, 2007.)21
              
              Subsidiaries
      of the Company incorporated by reference to Form 10-KSB filed on April 14,
      2008.*
      31.1
              
              Statement
      of Chief Executive Officer Furnished Pursuant To Section 302 Of The
      Sarbanes-Oxley Act Of 2002, 18 U.S.C. Section 1350.*
      31.2
              
              Statement
      of Chief Financial Officer Furnished Pursuant To Section 302 Of The
      Sarbanes-Oxley Act Of 2002, 18 U.S.C. Section 1350.*
      32
              
              Statement
      of Chief Executive Officer and Chief Financial Officer Furnished Pursuant
      To Section 906 Of The Sarbanes-Oxley Act Of 2002, 18 U.S.C. Section
      1350.





* Filed
here with.


64


SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





CHINA
      SHEN ZHOU MINING & RESOURCES, INC.Dated:
      April 15, 2009
                      
                      /s/ Xiaojing
      YuXiaojing
      YuDirector,
      Chief Executive Officer, and Chairman of the
  Board





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.





Signature
                                                  
                                                  Title
                                                  
                                                  Date/s/ Xiaojing Yu
                                                  
                                                  Chief
      Executive Officer
                                                  
                                                  April
      15, 2009Xiaojing
      Yu
                                                  
                                                  (Principal
      Executive Officer)/s/Jiusheng
      Zhang
                                                  
                                                  Interim
      Chief Financial Officer
                                                  
                                                  April
      15, 2009Jiusheng
      Zhang
                                                  
                                                  (Principal
      Financial and Accounting Officer)/s/ Helin Cui
                                                  
                                                  Director,
                                                  
                                                  April
      15, 2009Helin
      Cui/s/ Xueming Xu
                                                  
                                                  Director
                                                  
                                                  April
      15, 2009Xueming
      Xu/s/ Gene Michael Bennett
                                                  
                                                  Director
                                                  
                                                  April
      15, 2009Gene
      Michael Bennett/s/ Jian Zhang
                                                  
                                                  Director
                                                  
                                                  April
      15, 2009Jian
      Zhang/s/ Yang Youming
                                                  
                                                  Director
                                                  
                                                  April
      15, 2009Yang
      Youming


65




China
Shen Zhou Mining & Resources, Inc. and Subsidiaries





Index
to Consolidated Financial Statements





PageReport
      of Successor Independent Registered Public Accounting
      Firm
              
              67Report
      of Predecessor Independent Registered Public Accounting
      Firm
              
              68Consolidated
      Balance Sheets
              
              69Consolidated
      Statements of Operations
              
              71Consolidated
      Statements of Cash Flows
              
              72Consolidated
      Statements of Changes in Stockholders’ Equity
              
              74Notes
      to Consolidated Financial Statements
              
              75-101


66


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Stockholders and Board of Directors
 China
Shen Zhou Mining & Resources, Inc. and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheet of China Shen Zhou Mining
& Resources, Inc. and Subsidiaries (the “Company”) as of December 31, 2008
and the related consolidated statement of operations and comprehensive income,
stockholders' equity and cash flows for the year ended December 31, 2008. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and the results of their operations and their cash flows for the year
ended December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred operating
losses and negative cash flows as more fully described in Note 2. These issues
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
  /s/Sherb
& Co., LLP
 Certified
Public Accountants
 New York,
New York
 April 15,
2009


67
  Report
of Independent Registered Public Accounting Firm
 To the
Stockholders and Board of Directors of China Shen Zhou Mining & Resources,
Inc. and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of China Shen Zhou Mining
& Resources, Inc. and Subsidiaries (the “Company”) as of December 31, 2007
and the related consolidated statements of operations, stockholders’ equity and
comprehensive income and cash flows for year then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provide a reasonable basis for our
opinion.
 
 In our
opinion, the 2007 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of China
Shen Zhou Mining & Resources, Inc. and Subsidiaries as of December 31, 2007,
the consolidated results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America.
 
 
 /s/
GROBSTEIN, HORWATH & COMPANY LLP
 
 Sherman
Oaks, California
 April 10,
2008


68




CHINA
SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Amounts
in thousands, except share data)





December
      31,
                
                
                December
      31,2008
                
                
                2007Audited
                
                
                AuditedASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                205
                
                
                $
                2,949Accounts
      receivable, net
                
                
                561
                
                
                
                2,481Other
      deposits and prepayments, net
                
                
                1,167
                
                
                
                1,254Inventories
                
                
                2,958
                
                
                
                1,639Total
      current assets
                
                
                4,891
                
                
                
                8,323Prepayment
      for office rent
                
                
                505
                
                
                
                -Available
      for sale investment
                
                
                146
                
                
                
                137Property,
      machinery and mining assets, net
                
                
                47,716
                
                
                
                47,094Deferred
      debt issuance costs
                
                
                1,755
                
                
                
                2,170Deferred
      income tax assets
                
                
                -
                
                
                
                507Goodwill
                
                
                -
                
                
                
                1,070Total
      assets
                
                $
                55,013
                
                
                $
                59,301LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                3,471
                
                
                $
                718Fair
      value of detachable warrants liability
                
                
                33
                
                
                
                1,100Short
      term bank loans
                
                
                1,756
                
                
                
                1,314Other
      payables and accruals
                
                
                4,794
                
                
                
                3,469Taxes
      payable
                
                
                411
                
                
                
                257Due
      to related parties
                
                
                2,666
                
                
                
                2,062Total
      current liabilities
                
                
                13,131
                
                
                
                8,920Convertible
      notes payable,net
                
                
                24,251
                
                
                
                21,186Deferred
      tax liabilities
                
                
                -
                
                
                
                1,201Total
      liabilities
                
                
                37,382
                
                
                
                31,307Minority
      interests
                
                
                22
                
                
                
                144


69


CHINA
SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS (Continued)


(Amounts
in thousands, except share data)





December
      31,
                
                
                December
      31,2008
                
                
                2007Audited
                
                
                AuditedCommitment
      and contingencies (Note 22)STOCKHOLDERS’
      EQUITY:Common
      Stock, $0.001 par value:Authorized
      – 50,000,000 shares (72006: 50,000,000 shares)Issued
      and outstanding 22,214,514shares  72214514(2006: 21,297,
      shares)
                
                
                22
                
                
                
                22Additional
      paid-in capital
                
                
                25,251
                
                
                
                25,251PRC
      statutory reserves
                
                
                1,672
                
                
                
                1,672Accumulated
      other comprehensive income
                
                
                4,020
                
                
                
                2,112Accumulated
      deficit
                
                
                (13,356
                )
                
                
                (1,207
                )Total
      stockholders’ equity
                
                
                17,609
                
                
                
                27,850Total
      liabilities and stockholders’ equity
                
                $
                55,013
                
                
                $
                59,301





The
accompanying notes are an integral part of these consolidated financial
statements.


70


CHINA
SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 (Amounts
in thousands, except per share data)


For
      the Years Ended December 31,2008
              
              
              2007Net
      revenue
              
              $
              7,137
              
              
              $
              14,351Cost
      of sales
              
              
              (5,830
              )
              
              
              (7,844
              )Gross
      profit
              
              
              1,307
              
              
              
              6,507Operating
      expenses:Selling
      and distribution expenses
              
              
              146
              
              
              
              223General
      and administrative expenses
              
              
              9,252
              
              
              
              6,741Total
      operating expenses
              
              
              9,398
              
              
              
              6,964Net
      loss from operations
              
              
              (8,091
              )
              
              
              (457
              )Other
      income (expense):Interest
      expense
              
              
              (2,744
              )
              
              
              (3,962
              )Impairment
      of goodwill
              
              
              (1,127
              )
              
              
              -Other,
      net
              
              
              227
              
              
              
              397Total
      other income (expense)
              
              
              (3,644
              )
              
              
              (3,565
              )Loss
      from continuing operations before income taxes and minority
      interests
              
              
              (11,735
              )
              
              
              (4,022
              )Income
      tax expenses
              
              
              (544
              )
              
              
              (45
              )Loss
      from continuing operations before minority interests
              
              
              (12,279
              )
              
              
              (4,067
              )Minority
      interests
              
              
              130
              
              
              
              114Loss
      from continuing operations
              
              
              (12,149
              )
              
              
              (3,953
              )Discontinued
      operation (Note 4):Loss
      from operations of discontinued component, net of taxes
              
              
              -
              
              
              
              (197
              )Gain
      on disposal of discontinued subsidiary, net of taxes
              
              
              -
              
              
              
              1,504Income
      from discontinued operations
              
              
              (12,149
              )
              
              
              1,307Net
      loss
              
              
              (12,149
              )
              
              
              (2,646
              )Other
      comprehensive income:Foreign
      currency translation adjustments
              
              
              1,908
              
              
              
              1,512Comprehensive  income
      (loss)
              
              $
              (10,241
              )
              
              $
              (1,134
              )Net
      loss per common share – basic and dilutedFrom
      continuing operations
              
              $
              (0.55
              )
              
              $
              (0.18
              )From
      discontinued operations
              
              
              -
              
              
              
              0.06Net
      loss
              
              $
              (0.55
              )
              
              $
              (0.12
              )Weighted
      average common shares outstanding-
      Basic and Diluted
              
              
              22,215
              
              
              
              21,959





The
accompanying notes are an integral part of these consolidated financial
statements.


71


CHINA
SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
in thousands)





For
      the Years EndedDecember
      31,2008
                
                
                2007Audited
                
                
                AuditedCash
      flows from operating activities:(Loss)income
      from continuing operations
                
                $
                (12,149
                )
                
                $
                (3,953
                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Provision
      for doubtful accounts
                
                
                (2
                )
                
                
                39Provision
      for deferred tax asset
                
                
                685
                
                
                
                -Impairment
      provision for fixed assets
                
                
                -
                
                
                
                60Impairment
      of goodwill
                
                
                1,127
                
                
                
                -Depreciation
      and amortization
                
                
                4,367
                
                
                
                2,415Write
      off of deferred tax abilities
                
                
                (1,201
                )
                
                
                -Loss
      from investments
                
                
                -
                
                
                
                86Deferred
      income tax benefits
                
                
                (178
                )
                
                
                (43
                )Fair
      value adjustment of warrants
                
                
                (1,067
                )
                
                
                70(Gain)/ Loss on
      disposal of fixed assets
                
                
                -
                
                
                
                109Accrual
      of coupon interests and accreted principal
                
                
                1,489
                
                
                
                1,417Amortization
      of deferred financing costs
                
                
                1,576
                
                
                
                496Amortization
      of debt issuance costs
                
                
                415
                
                
                
                348Minority
      interests
                
                
                (122
                )
                
                
                (100
                )Changes
      in operating assets and liabilities:
                
                
                -
                
                
                
                -(Increase)
      decrease in -
                
                
                -
                
                
                
                -Accounts
      receivable
                
                
                1,922
                
                
                
                (1,575
                )Deposits
      and prepayments
                
                
                87
                
                
                
                2,930Inventories
                
                
                (1,319
                )
                
                
                (354
                )Due
      from related companies
                
                
                -
                
                
                
                71Increase
      (decrease) in -
                
                
                -
                
                
                
                -Accounts
      payable
                
                
                990
                
                
                
                95Other
      payables and accruals
                
                
                1,325
                
                
                
                1,007Taxes
      payable
                
                
                154
                
                
                
                (328
                )Due
      to related parties
                
                
                604
                
                
                
                805Net
      cash provided by (used in) operating activities from continuing
      operations
                
                
                (1,297
                )
                
                
                3,595Net
      cash (used in) operating activities from discontinued
      operations
                
                
                -
                
                
                
                (45
                )Net
      cash provided by (used in) operating activities
                
                
                (1,297
                )
                
                
                3,550


72


CHINA
SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
in thousands)




For the Years EndedDecember 31,2008
                      
                      
                      2007Audited
                      
                      
                      AuditedCash
      flows from investing activities:Purchases
      of property, machinery and mining assets
                      
                      
                      (1,894
                      )
                      
                      
                      (19,632
                      )Prepayment
      for office rent
                      
                      
                      (505
                      )
                      
                      
                      -Decrease
      in investment deposits
                      
                      
                      -
                      
                      
                      
                      888Acquisition
      of subsidiaries, net of cash and cash equivalents acquired
                      
                      
                      -
                      
                      
                      
                      (403
                      )Decrease
      in available-for-sale securities – margin deposit
                      
                      
                      -
                      
                      
                      
                      326Net
      cash used in investing activities of continuing operations
                      
                      
                      (2,399
                      )
                      
                      
                      (18,821
                      )Net
      cash provided by disposal of discontinued operations
                      
                      
                      -
                      
                      
                      
                      2,759Purchases
      of property, machinery and mining assets of discontinued
      operations
                      
                      
                      -
                      
                      
                      
                      (544
                      )Net
      cash used in investing activities
                      
                      
                      (2,399
                      )
                      
                      
                      (16,606
                      )Cash
      flows from financing activities:Issuance
      costs of convertible note
                      
                      
                      -
                      
                      
                      
                      (2,156
                      )Proceeds
      from short-term borrowings
                      
                      
                      442Repayments
      of short-term borrowings
                      
                      -
                      
                      
                      
                      (1,354
                      )Net
      cash provided by (used in) financing activities
                      
                      
                      442
                      
                      
                      
                      (3,510
                      )Foreign
      currency translation adjustment
                      
                      
                      510
                      
                      
                      
                      615Net
      decrease in cash and cash equivalents
                      
                      
                      (2,744
                      )
                      
                      
                      (15,951
                      )Cash
      and cash equivalents at the beginning of the year
                      
                      
                      2,949
                      
                      
                      
                      18,900Cash
      and cash equivalents at the end of the year
                      
                      $
                      205
                      
                      
                      $
                      2,949Non-cash
      investing and financing activitiesIssuance
      of shares for acquisition
                      
                      $
                      -
                      
                      
                      $
                      3,670Additional
      capital caused by the reduction of conversion price from $3.2 to
      $2.25
                      
                      $
                      -
                      
                      
                      $
                      7,716Supplemental
      disclosures of cash flow informationCash
      paid for interest expenses
                      
                      $
                      298
                      
                      
                      $
                      1,631Cash
      paid for income tax
                      
                      $
                      1
                      
                      
                      $
                      45





The
accompanying notes are an integral part of these consolidated financial
statements.


73


CHINA
SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
 (Amounts
in thousands)
  AccumulatedCommon Stock
                    
                    
                    Additional
                    
                    
                    PRC
                    
                    
                    
                    
                    
                    Other
                    
                    
                    TotalNumber of
                    
                    
                    paid-In
                    
                    
                    Statutory
                    
                    
                    Accumulated
                    
                    
                    Comprehensive
                    
                    
                    Stockholders'Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Reserves
                    
                    
                    Deficit
                    
                    
                    Income
                    
                    
                    EquityBalance
      at January 1, 2007
                    
                    
                    21,298
                    
                    
                    $
                    21
                    
                    
                    $
                    13,865
                    
                    
                    $
                    1,111
                    
                    
                    $
                    1,865
                    
                    
                    $
                    600
                    
                    
                    $
                    17,462Issuance
      of shares for acquisitions
                    
                    
                    917
                    
                    
                    
                    1
                    
                    
                    
                    3,670
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,671Discount
      of issuing the convertible notes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,716
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,716Net
      loss for the year ended December 31, 2007
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,646
                    )
                    
                    
                    -
                    
                    
                    
                    (2,646
                    )Appropriation
      of PRC statutory reserves
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    426
                    
                    
                    
                    (426
                    )
                    
                    
                    -
                    
                    
                    
                    -Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    135
                    
                    
                    
                    -
                    
                    
                    
                    1,512
                    
                    
                    
                    1,647Balance
      at December 31, 2007
                    
                    
                    22,215
                    
                    
                    
                    22
                    
                    
                    
                    25,251
                    
                    
                    
                    1,672
                    
                    
                    
                    (1,207
                    )
                    
                    
                    2,112
                    
                    
                    
                    27,850Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (12,149
                    )
                    
                    
                    -
                    
                    
                    
                    (12,149
                    )Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,908
                    
                    
                    
                    1,908Balance
      at December 31 , 2008
                    
                    
                    22,215
                    
                    
                    $
                    22
                    
                    
                    $
                    25,251
                    
                    
                    $
                    1,672
                    
                    
                    $
                    (13,356
                    )
                    
                    $
                    4,020
                    
                    
                    $
                    17,609
 
 The
accompanying notes are an integral part of these consolidated financial
statements.


74


CHINA
SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1  DESCRIPTION OF BUSINESSS AND
ORGANIZATION





China
Shen Zhou Mining & Resources, Inc. and its subsidiaries (collectively known
as the “Company” or “we”) are principally engaged in the exploration,
development, mining, and processing of fluorite, zinc, lead, copper, and other
nonferrous metals in the People’s Republic of China (“PRC” or “China”).





At
December 31, 2008, the subsidiaries of China Shen Zhou Mining & Resources,
Inc. are as follows:





Name
                                  
                                  Domicile and Date
                                    of Incorporation
                                  
                                  Paid-in Capital
                                  
                                  
                                  Percentage
                                    of Effective
                                    Ownership
                                  
                                  Principal ActivitiesAmerican
      Federal Mining Group, Inc. (“AFMG”)
                                  
                                  Illinois
                                    November
      15, 2005
                                  
                                  USD
                                  
                                  
                                  10
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  Investments
      holdingsInner
      Mongolia Xiangzhen Mining Industry Group Co. Ltd. (“Xiangzhen
      Mining”)
                                  
                                  The
      PRC
                                    July
      3,2002
                                  
                                  RMB
                                  
                                  
                                  88,860,699
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  Acquisition,
      exploration and extraction, and development of natural resource
      propertiesInner
      Mongolia Wulatehouqi Qianzhen Ore Processing Co.,  Ltd. (“Qianzhen
      Mining”)
                                  
                                  The
      PRC
                                    September
      22, 2002
                                  
                                  RMB
                                  
                                  
                                  37,221,250
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  Sales
      and refinery of nonferrous metals, ore dressing, and sales of chemical
      productsWulatehouqi
      Qingshan Non-Ferrous Metal Developing Company Ltd. (“Qingshan
      Metal”)
                                  
                                  The
      PRC
                                    April
      23, 1995
                                    (Acquired
      on April 12, 2006)
                                  
                                  RMB
                                  
                                  
                                  4,100,000
                                  
                                  
                                  
                                  60
                                  %
                                  
                                  Nonferrous
      ore dressings, copper, zinc, lead etcXinjiang
      Buerjin County Xingzhen Mining Company (“Xingzhen Mining”)
                                  
                                  The
      PRC
                                    April
      10,2006
                                    (Acquired
      on April 28, 2006)
                                  
                                  RMB
                                  
                                  
                                  1,000,000
                                  
                                  
                                  
                                  90
                                  %
                                  
                                  Exploration
      of solid metals, refinery and sales of mining
  products.


75





Tun-Lin
      Limited Liability Company (“Tun-Lin”)
                              
                              Kyrgyz
      Republic
                                September
      1,2005
                                (Acquired
      on November 26, 2007)
                              
                              KGS
                              
                              
                              5,000
                              
                              
                              100
                              %(a)
                              
                              Investments
      holdingsKichi-Chaarat
      Closed Joint Stock Company (“Kichi-Chaarat”)
                              
                              Kyrgyz
      Republic September 17,1998 (Acquired on November 26, 2007)
                              
                              KGS
                              
                              
                              10,000
                              
                              
                              100
                              %(b)
                              
                              Exploration,
      development, mining, and processing of gold, copper and other mineral
      products.


(a)  
100% ownership of Tun-Lin was acquired by Xiangzhen Mining on November 26,
2007.


(b)  
100% ownership of Kichi Chaarat was acquired through the acquisition of Tun-Lin
on November 26, 2007.





NOTE
2 RECAPITALIZATION, REORGANIZATION AND GOING CONCERN





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





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





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





Going
Concern - These consolidated financial statements have been prepared by
management in accordance with accounting principles generally accepted in the
United States on a “going concern” basis, which presumes that the Company will
be able to realize its assets and discharge its liabilities in the normal course
of business for the foreseeable future.





The
Company has incurred operating losses and negative cash flows from its operating
activities for the years ended December 31, 2008 and 2007, as well as an
accumulated deficit of approximately $13,356,000 and a working capital deficit
of approximately $8,240,000 as of December 31, 2008





The
Company’s ability to continue as a going concern is dependent upon continued
production and the discovery of economically recoverable mining
aseets  as well as upon obtaining additional financing to develop the
properties, the ultimate realization of profits through future production or
sale of properties, and the success of the Company’s business plan. The outcome
of these matters cannot be predicted at this time. These consolidated financial
statements do not include any adjustments to the amounts and classifications of
assets and liabilities that might be necessary should the Company be unable to
continue its business.


76


NOTE
3 ACQUISITIONS





Tun-Lin


On
November 26, 2007, China Shen Zhou Mining & Resources, Inc. completed the
acquisition of a 100% ownership interest in Tun-Lin for cash consideration of
$10 million. The Company financed the acquisition through internal resources.
The results of operations of Tun-Lin are included in the Company’s consolidated
statement of operations from the date of acquisition.





Tun-Lin
was incorporated on June 1, 2005 under the laws of the Kyrgyz Republic.
Tun-Lin’s principal asset consists of a 100% ownership interest in Kichi
Chaarat, which was incorporated in Bishkek, Kyrgyzstan. Kichi Chaarat’s major
asset is the subsoil use right for (i) mining for gold, copper and other metals
within the Kuru-Tegerek licensed area; and (ii) exploration for gold, copper and
other metals within the Kuru-Tegerek licensed area. The purpose of the
acquisition was to enable the Company to explore, develop and mine the potential
reserves of the Kuru-Tegerek licensed area. As of December 31, 82007, Kichi
Chaarat has not commenced any production.





This
acquisition has been accounted for using the purchase method of accounting. The
allocation of the purchase price for this acquisition, based on fair values of
identifiable tangible and intangible assets as of the acquisition date, is as
follows:





Book
      value
                  
                  
                  Fair
      valueNet
      assets of Tun-Lin as of November 26, 2007 (in thousands):Tangible
      Fixed Assets (Mineral Property) (a)
                  
                  $
                  10
                  
                  
                  $
                  11,981Tangible
      Fixed Assets (Real Estate)
                  
                  
                  10
                  
                  
                  
                  45Other
      assets
                  
                  
                  287
                  
                  
                  
                  287Total
      assets acquired
                  
                  
                  307
                  
                  
                  
                  12,313Accrued
      expenses and other liabilities
                  
                  
                  1,112
                  
                  
                  
                  1,112Deferred
      tax liability
                  
                  
                  -
                  
                  
                  
                  1,201Total
      liabilities assumed
                  
                  
                  1,112
                  
                  
                  
                  2,313Net
      assets (liabilities) acquired
                  
                  $
                  (805
                  )
                  
                  $
                  10,000





(a)
            Mineral
      property represents the future extraction rights. Under Kyrgyz laws, in
      order to develop the Kuru-Tegerek deposit, Kichi Chaarat needs to obtain a
      temporary land use right to the licensed area. Pursuant to a development
      license agreement, which is an integral part of the development license,
      Kichi Chaarat has obtained such a temporary   land use
      right from the competent Kyrgyz government authorities in
      2008.





An
independent professional appraiser was engaged to estimate the fair value of the
tangible fixed assets, current assets and identifiable intangible assets of
Kichi-Chaarat as of November 26, 2007 for the purpose of applying the purchase
price allocation using the income approach. Significant assumptions used in the
estimation included the following:





Risk-free
      rate
                  
                  
                  13.4
                  %Beta
      coefficient
                  
                  
                  0.98Market
      risk premium
                  
                  
                  5.5
                  %Size
      premium
                  
                  
                  6.42
                  %Industry
      risk premium
                  
                  
                  -3.5
                  %





Since
Tun-Lin had insignificant operation since its incorporation, no pro forma
information is presented.





Additional
equity interest in Xingzhen Mining


On June
25, 2007, the Company entered into a share transfer agreement to acquire an
additional 10% ownership interest in Xingzhen Mining for a cash consideration of
$479,150. On August 10, 2007, the share transfer agreement was approved by the
China local government authorities. As a result, the Company’s shareholding in
Xingzhen Mining has increased from 80% to 90%. We have accounted for the
acquisition of additional interest in Xingzhen Mining as a purchase business
combination for accounting purposes. The total amount paid for shares acquired
has been allocated to the assets acquired and liabilities assumed based on their
estimated fair values as of the date of acquisition. No goodwill has arisen from
this acquisition.


77


NOTE
4 DISCONTINUED OPERATIONS





On
December 10, 2007, the Company completed the sale of all its ownership interest
in Xinjiang Wuqia Tianzhen Mining Co., Ltd. (“Tianzhen Mining”), a subsidiary of
the Company within the nonferrous metals segment. The Company received cash
proceeds of HK$22 million (equivalent to approximately $2,759,000) and assumed
all debts incurred by Tianzhen Mining before the date of sale which amounted to
$150,867. The terms of the transaction also provides for an additional
compensation of HK$10 million (equivalent to approximately $1,253,690) payable
by the buyer to the Company if a qualified geological exploration and
exploitation authority issues an official report to certify a reserve of over
200,000 metric tons copper, lead or zinc minerals in the Jiangejier Lead-Zinc
deposit covered by Tianzhen’s exploration right. However, the Company has not
recognized any gain arising from this contingent consideration. The Company has
recorded a net gain on disposal of approximately $1,504,000, net of income tax
of nil. In accordance with FAS 144, Accounting for Impairment or Disposal of
Long-Lived Assets, the Company has reflected Tinazhen Mining’s results of
operations in the consolidated statement of operations through the date of the
sale as discontinued operations for all periods presented. The assets and
liabilities of Tianzhen Mining in the Company’s consolidated balance sheet as of
December 31, 2006 have been reclassified. The cash flows of discontinued
operations also have been reclassified.





The
following table presents the revenue, net loss from discontinued operations and
net gain on disposal of subsidiary for Tianzhen Mining for the periods
presented:





Years
      Ended December 31,2008
                          
                          2007(In
      thousands)
                          
                          (In
      thousands)Revenue
                          Not Applicable
                          
                          $
                          367Net
      (loss) from discontinued operations, net of income tax of
    nil
                          Not Applicable
                          
                          $
                          (197
                          )Net
      gain on disposal of subsidiary, net of nil income tax of
    nil
                          Not Applicable
                          
                          $
                          1,504





NOTE5  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Use
of Estimates


The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of the Company’s consolidated financial statements requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the related disclosure of contingent assets and
liabilities at the date of the Consolidated Financial Statements and the
reported amounts of revenues and expenses during the reporting period. The more
significant areas requiring the use of management estimates and assumptions
relate to mineral reserves and value beyond proven and probable reserves that
are the basis for future cash flow estimates utilized in impairment
calculations, the estimated lives of the mineralized bodies based on estimated
recoverable volume through the end of the period over which the company has
extraction rights that are the basis for units-of-production depreciation,
depletion and amortization calculations; estimates of fair value for certain
reporting units and asset impairments (including impairments of goodwill,
long-lived assets and investments); write-downs of inventory to net realizable
value; reserves for contingencies and litigation; and the fair value and
accounting treatment of financial instruments. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Accordingly, actual results may differ
significantly from these estimates under different assumptions or
conditions.


78


Principles
of Consolidation


The
consolidated financial statements include the accounts of China Shen Zhou Mining
& Resources, Inc. and more-than-50%-owned subsidiaries that it controls.
Inter-company balances and transactions have been eliminated. The functional
currency for the majority of the Company’s operations is the Renminbi
(“RMB”).





Basis
of preparation


These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America.





Cash
and Cash Equivalents


Cash and
cash equivalents consist of all cash balances and highly liquid investments with
an original maturity of three months or less. Because of the short maturity of
these investments, the carrying amounts approximate their fair value. Restricted
cash is excluded from cash and cash equivalents and is included in other current
and long-term assets.





Accounts
receivable


Accounts
receivable is stated at cost, net of an allowance for doubtful accounts.  
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the failure of customers to make required payments. The Company
reviews the accounts receivable on a periodic basis and makes allowances where
there is doubt as to the collectibility of individual balances. In evaluating
the collectibility of individual receivable balances, the Company considers many
factors, including the age of the balance, the customer’s payment history, its
current credit-worthiness and current economic trends.





Inventories


Inventories
are stated at the lower of cost, determined on a weighted average basis, or net
realizable value. Costs of finished goods are composed of direct materials,
direct labor and an attributable portion of manufacturing overhead. Net
realizable value is the estimated selling price, in the ordinary course of
business, less estimated costs to complete and dispose. The management also
regularly evaluates the composition of its inventories to identify slow-moving
and obsolete inventories to determine if valuation allowance is
required.





Available-for-sale
securities


The
Company accounts for its investments in auction rate securities in accordance
with SFAS No. 115. Specifically, when the underlying security of an
auction rate security has a stated or contractual maturity date in excess of 90
days, regardless of the frequency of the interest rate reset date, the security
is classified as an available-for-sale marketable debt security.





Property,
machinery and mining assets


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





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





Major
development costs incurred after the commencement of production are amortized
using the UOP method based on estimated recoverable volume in mineralized
material. To the extent that these costs benefit the entire mineralized body,
they are amortized over the estimated life of the mineralized body. Costs
incurred to access specific mineralized blocks or areas that only provide
benefit over the life of that area are amortized over the estimated life of that
specific mineralized block or area.  Interest cost allocable to the cost of
developing mining properties and to constructing new facilities, if any, is
capitalized until assets are ready for their intended use.


79


Land use
rights are stated at cost, less accumulated amortization. Amortization is
computed using the straight-line method over the estimated useful lives of 25
years.





Property,
plant and mining assets (continued)


The
Company’s depreciation and amortization policies on fixed assets are summarized
as follows:





Useful
      Life(In
      years)Land
      use rights
                    
                    
                    25Buildings
                    
                    
                    25Machinery
                    
                    
                    12Mining
      assets
                    
                    License
      termMotor
      vehicle
                    
                    
                    6Equipment
                    
                    
                    5Extraction
      rights
                    
                    License
      termExploration
      rights
                    
                    License
      term





Stripping
Costs


Stripping
costs are costs of removing overburden and other mine waste materials.
 Stripping costs incurred during the production phase of a mine are
variable production costs that are included as a component of inventory to be
recognized in cost of sales in the same period as the revenue from the sale of
inventory.





Debt
Issuance Costs


Debt
issuance costs are costs of commissions, interest expenses for bridge loan and
legal fees for convertible notes. Debt issuance costs are deferred and amortized
over the life of the convertible notes using the effective interest rate
method.





Asset
Impairment





(a)
Long-lived Assets


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


80


(b)
Goodwill


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





Financial
instruments


The
Company values its financial instruments as required by SFAS No. 157,
“Disclosures about Fair Value of Financial Instruments”. The estimated fair
value amounts have been determined by the Company, using available market
information or other appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop estimates of fair
value. Consequently, the estimates are not necessarily indicative of the amounts
that could be realized or would be paid in a current market
exchange.





The
Company’s financial instruments primarily consist of cash and cash equivalents,
accounts receivable, other current assets; accounts payable, warrant
liability,accrued expenses, short-term bank loans, other current liabilities,
and due to a director.





As of the
balance sheet dates, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented due to the
short maturities of these instruments and that the interest rates on the
borrowings approximate those that would have been available for loans of similar
remaining maturity and risk profile at respective year ends.





Revenue
Recognition


Revenue
is recognized on the sale of products when title has transferred to the customer
in accordance with the specified terms of each product sales agreement and all
the following four revenue criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred, the selling price is fixed or
determinable, and collectibility is reasonably assured. Generally, the Company’s
product sales agreements provide that title and risk of loss pass to the
customer when the quantity and quality of the products delivered are certified
and accepted by the customer.





Sales
revenue is recognized, net of PRC business taxes, sales discounts and returns at
the time when the merchandise is sold to the customer. Based on historical
experience, management estimates that sales returns are immaterial and has not
made allowance for estimated sales returns.





Income
taxes


The
Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes". SFAS No. 109 requires an asset and liability approach for
financial accounting and reporting for income taxes and allows recognition and
measurement of deferred tax assets based upon the likelihood of realization of
tax benefits in future years. Under the asset and liability approach, deferred
taxes are provided for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company  is able to realize their benefits, or that future
deductibility is uncertain.





On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, Accounting for Uncertainty
in Income Taxes(“FIN 48”). FIN 48 prescribes a more-likely-than-not
threshold for financial statement recognition and measurement of a tax position
taken (or expected to be taken) in a tax return. This Interpretation also
provides guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods and income tax disclosures. The adoption of
FIN 48 has not resulted in any material impact on the Company’s financial
position or results.


81


Transportation
charges


Transportation
charges represent costs to deliver the Company’s inventory to point of sale.
 Transportation costs are expensed and charged to cost of sales as
incurred





Foreign
Currency





The
Company uses the United States dollar (“US Dollar” or “US$” or “$”) for
financial reporting purposes. The functional currency for the majority of the
Company’s operations is the Renminbi (“RMB”). The functional currency for
Tun-Lin and Kichi-Chaarat, the Company’s foreign subsidiaries in Kyrgyz
Republic, is the Kyrgyz Som (“KGS”). The financial statements of the Company’s
foreign subsidiaries have been translated into U.S. dollars in accordance with
SFAS No. 52, “Foreign Currency Translation”. All asset and liability accounts
have been translated using the exchange rate in effect at the balance sheet
date. Equity accounts have been translated at their historical exchange rates
when the capital transaction occurred. Statements of operations amounts have
been translated using the average exchange rate for the year.   Adjustments
resulting from the translation of the Company’s financial statements are
recorded as accumulated other comprehensive income.





The exchange rates used to translate
amounts in RMB and KGS intoU.S. Dollars for the purposes of
preparing the consolidated financial statements were as follows:-





December
      31, 2007
                      
                      December
      31, 2008Balance
      sheet items, except for the registered and paid-up capital and retained
      earnings, as of year end
                      US$1=RMB7.3046
                        US$1=KGS35.4988
                      
                      US$1=RMB6.8346
                        US$1=KGS39.4181Amounts
      included in the statements of operations, statements of changes in
      stockholders’ equity and statements of cash flows for the
    year
                      US$1=RMB7.5652
                        US$1=KGS35.0079
                      
                      US$1=RMB6.9351
                        US$1=KGS36.6184





For the
years ended December 31, 2008 and 2007, foreign currency translation adjustment
of approximately $1,908,000 and $1,512,000, respectively, have been
reported as comprehensive income in the consolidated statement of stockholders’
equity and comprehensive income.





Although
government regulations now allow convertibility of RMB and KGS for current
account transactions, significant restrictions still remain.  Hence, such
translations should not be construed as representations that RMB or KGS could be
converted into U.S. dollars at that rate or any other rate.





The value
of RMB and KGS against the U.S. dollars and other currencies may fluctuate and
is affected by, among other things, changes in China and Kyrgyz Republic’s
political and economic conditions.  Any significant revaluation of RMB and
KGS may materially affect the Company’s financial condition in terms of U.S.
dollar reporting.


82


Stock
Based Compensation


On
December 16, 2004, the FASB issued SFAS No. 123R, Share-Based Payment(“SFAS
No. 123R”) , which requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on the grant date fair value of the award. Under SFAS No. 123R, the
Company must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and restricted stock at the
beginning of the first quarter of adoption of SFAS No. 123R, while the
retroactive methods would record compensation expense for all unvested stock
options and restricted stock beginning with the first period restated. The
Company has adopted the requirements of SFAS No. 123R for the fiscal year
beginning on January 1, 2006, and recorded compensation expenses for all
restricted stocks offered prior to the adoption.





Net
income per common share


Basic and
diluted earnings per share are presented for net income and for income from
continuing operations. Basic earnings per share is computed by dividing net
income by the weighted-average number of outstanding common shares for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts that may require the issuance of common
shares in the future were converted. Diluted earnings per share is computed by
increasing the weighted-average number of outstanding common shares to include
the additional common shares that would be outstanding after conversion and
adjusting net income for changes that would result from the conversion. Only
those securities or other contracts that result in a reduction in earnings per
share are included in the calculation.





Comprehensive
Income





SFAS
No.130, “Reporting Comprehensive Income,” establishes standards for reporting
and displaying comprehensive income and its components in the consolidated
financial statements. Accumulated other comprehensive income includes foreign
currency translation adjustments. Total comprehensive loss for the years ended
December 31, 2008 and 2007 was $10,241,0000 and $1,134,000,
respectively.





Adoption
of New Accounting Pronouncements


In
September 2006, the FASB issued SFAS No. 157, Disclosures about Fair Value
Instruments(“SFAS 157”). SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value instruments.  SFAS 157 does not require any new fair value
measurements, but applies under other accounting pronouncements that require or
permit fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 (our
fiscal 2008). SFAS 157 establishes a fair value hierarchy as follows that
prioritizes the inputs to valuation techniques used to measure fair
value:




Level
      1
            —
      quoted prices (unadjusted) in active markets for identical asset or
      liabilities that the Company has the ability to access as of the
      measurement date. Financial assets and liabilities utilizing Level 1
      inputs include active exchange-traded securities and exchange-based
      derivatives.





Level
      2
            —
      inputs other than quoted prices included within Level 1 that are directly
      observable for the asset or liability or indirectly observable through
      corroboration with observable market data. Financial assets and
      liabilities utilizing Level 2 inputs include fixed income securities,
      non-exchange-based derivatives, mutual funds, and fair-value
      hedges.





Level
      3
            —
      unobservable inputs for the asset or liability only used when there is
      little, if any, market activity for the asset or liability at the
      measurement date. Financial assets and liabilities utilizing Level 3
      inputs include infrequently-traded,non-exchange-based derivatives and
      commingled investment funds, and are measured using present value pricing
      models.


83





The
Company’s detachable warrants liability (as further described in Note 12) is
measured and recorded at fair value on a recurring basis on the Company’s
Consolidated Balance Sheets and their levels within the fair value hierarchy
during the year ended December 31, 2008 are presented in the following
tabular form:





(In
      thousands)
                      
                      Fair
      ValueAs
      of December 31, 2008
                      
                      Level
      1
                      
                      
                      Level
      2
                      
                      
                      Level
      3
                      
                      
                      TotalWarrants
      liability
                      
                      $
                      —
                      
                      
                      $
                      33
                      
                      
                      $
                      —
                      
                      
                      $
                      33




The
following is the reconciliation of the fair value of the warrants liability
between December 31, 2007 and December 31, 2008:





Balance
      of warrants liability at December 31, 2007
                    
                    $
                    1,100Gain
      on fair value adjustments to warrants liability
                    
                    
                    (1,067
                    )Balance
      at December 31, 2008
                    
                    $
                    33





The fair
value of the warrants liability can be obtained by using generally accepted
models such as the Black Scholes Model. See Note 11 for more information on the
valuation methods used.





Recent
accounting pronouncements


.


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




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB Statement No.
115. This statement permits, but does not require, entities to measure
many financial instruments at fair value. The objective is to provide entities
with an opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The Company does not believe that this
standard will significantly affect the Company’s financial position or results
of operations.




In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations,
(“SFAS 141(R)”). This standard will significantly change the accounting for
business combinations. Under SFAS 141(R), an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. Acquisition-related
costs, which are the costs an acquirer incurs to effect a business combination,
will be accounted for as expenses in the periods in which the costs are incurred
and the services are received, except that costs to issue debt or equity
securities will be recognized in accordance with other applicable GAAP. SFAS
141(R) also includes a substantial number of new disclosure requirements. SFAS
141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. We believe that there would be no material impact
on our financial statements upon adoption of this standard.




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51(“SFAS
160”), which establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company is evaluating the impact
that this statement will have on its consolidated financial
statements.


84


In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - An Amendment of FASB Statement No. 133(“SFAS 161”), which changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. This statement will be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. This standard does not currently affect the Company. The
Company will adopt this standard when it purchases derivative instruments and is
engaged in hedging activities.





A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to our consolidated financial statements.





NOTE
6 ACCOUNTS RECEIVABLE





Accounts
receivable consisted of the following:





December
      31,
                          2008
                        
                        December
      31,
                          2007(In
      thousands)
                        
                        (In
      thousands)Accounts
      receivable
                        
                        $
                        612
                        
                        
                        $
                        2,534Less:
      Allowance for doubtful accounts
                        
                        
                        (51
                        )
                        
                        
                        (53
                        )$
                        561
                        
                        
                        $
                        2,481





The
activities in the Company’s allowance for doubtful accounts is summarized as
follows:





December
      31,
                          2008
                        
                        December
      31,
                          2007(In
      thousands)
                        
                        (In
      thousands)Balance
      at the beginning of the year
                        
                        $
                        53
                        
                        
                        $
                        14Add:
      provision during the year
                        
                        
                        (2
                        )
                        
                        
                        39Balance
      at the end of the year
                        
                        $
                        51
                        
                        
                        $
                        53


85


NOTE7  DEPOSITS AND
PREPAYMENTS





Deposits
and prepayments consist of the following:





December
      31,
                              2008
                            
                            
                            December
      31,
                              2007(In
      thousands)
                            
                            
                            (In
      thousands)Prepayments
      and advances
                            (a
      )
                            
                            $
                            963
                            
                            
                            $
                            840Tax
      recoverable
                            
                            
                            
                            -
                            
                            
                            
                            62Other
      receivables
                            
                            
                            
                            204
                            
                            
                            
                            352$
                            1,167
                            
                            
                            $
                            1,254





(a)
              Prepayments
      and advances as of December 31, 2008 include payments of $936,237 to two
      mining service providers.Prepayments
      and advances as of December 31, 2007 included a deposit of $330,469 paid
      to Wulatehouqi Zijin Mining Co., Ltd., the Company’s largest supplier, for
      purchases of raw materials. The deposit was repaid in
  2008.





NOTE8  INVENTORIES





Inventories
consisted of the following:





December
      31,
                          2008
                        
                        
                        December
      31,
                          2007(In
      thousands)
                        
                        
                        (In
      thousands)Raw
      materials - Unprocessed ore
                        
                        $
                        2,013
                        
                        
                        $
                        34Consumables
                        
                        
                        41
                        
                        
                        
                        564Finished
      goods and semi-manufactured goods
                        
                        
                        904
                        
                        
                        
                        1,041$
                        2,958
                        
                        
                        $
                        1,639





86




NOTE9  PROPERTY, MACHINERY AND MINING
ASSETS, NET





Property,
machinery and mining assets consisted of the following:





December
      31,
                            2008
                          
                          
                          December
      31,
                            2007(In
      thousands)
                          
                          
                          (In
      thousands)Land
      use rights
                          
                          $
                          1,700
                          
                          
                          $
                          1,591Buildings
                          
                          
                          12,995
                          
                          
                          
                          4,218Machinery
                          
                          
                          10,140
                          
                          
                          
                          5,543Mining
      assets
                          
                          
                          8,205
                          
                          
                          
                          3,962Motor
      vehicles
                          
                          
                          1,401
                          
                          
                          
                          1,155Equipment
                          
                          
                          350
                          
                          
                          
                          249Extraction
      rights
                          
                          
                          19,004
                          
                          
                          
                          19,675Exploration
      rights
                          
                          
                          1,683
                          
                          
                          
                          1,574Construction
      in progress
                          
                          
                          2,115
                          
                          
                          
                          15,02057,593
                          
                          
                          
                          52,987Less:Accumulated
      depreciation and amortization
                          
                          
                          (9,772
                          )
                          
                          
                          (5,833
                          )Impairment
      provision
                          
                          
                          (105
                          )
                          
                          
                          (60
                          )$
                          47,716
                          
                          
                          $
                          47,094





Depreciation
and amortization


Depreciation
and amortization expense in aggregate for the year ended December 31, 2008 and
2007 was approximately $4,367,000 and $2,415,000 respectively.





Impairment
provision


An
impairment provision of $105,000 for the year ended December 31,2008 was
recorded for the equipment of Qingshan Metal, a subsidiary of the Company within
the nonferrous metals segment.





Write-down
of abandoned long-lived assets





The
Company has abandoned various low-yield assets to reallocate its cash flows for
better opportunities. The carrying value of abandoned mining assets and
respective land use rights being written-down and charged to cost of sales for
the year ended December 31, 2007 was $108,928.





Exploration
and extraction rights


As in
most jurisdictions, mineral rights in China are divided into two types:
extraction rights and exploration rights. Extraction rights refer to the rights
obtained in accordance with the law for exploitation of mineral resources and
market control of mineral products. In nearly every jurisdiction in the world,
mineral rights are absolutely exclusive. In China, however, there are no clear
stipulations regarding the exclusivity of mineral rights. The Amendment of China
Mining Regulation stressed the security of mineral rights and its Article 6
stated that “upon discovery of mineral resources, the exploration licensees have
the privileged priority to obtain mining rights to the mineral resources within
the exploration area.”  According to the Ministry of Land and Resources,
this privileged priority will be guaranteed under further amendments to be made
in the near future.





Exploration
rights refer to the right obtained in accordance with the law for exploring for
mineral resources within the areas authorized by the exploration license.
 The Company has been granted mineral exploration permits.  These
exploration rights enable the Company to explore selected prospective mines for
possible economic value to mine and develop.   Under Chinese mining
laws and regulations, generally an exploration license is valid for no more than
3 years and extension of the exploration license shall not exceed two years and
two extensions.


87


NOTE
10 DEBT ISSUANCE COSTS





The
issuance costs directly associated with the convertible notes. The amount was
capitalized as deferred debt issuance costs, and is being amortized using the
effective interest rate method over the term of the convertible loan, with the
amounts amortized being recognized as interest expense. Any unamortized debt
issuance costs remaining at the date of conversion of the loan will be
recognized as interest expense in the period the conversion takes place. As of
December 31, 2008 and December 31, 2007, the deferred debt issuance costs were
approximately $1,755,000 and $2,170,000, respectively.





NOTE11GOODWILL




(In thousands)Arising
      from acquisition of Qingshan Metal, a subsidiary within the nonferrous
      metals segment, in 2006Balance
      as of December 31, 2006
                            
                            $
                            1,001Exchange
      realignment
                            
                            
                            69Balance
      as of December 31, 2007
                            
                            
                            1,070Impairment
      of goodwill
                            
                            $
                            (1,127)Exchange
      realignment
                            
                            
                            57Balance
      as of December 31, 2008
                            
                            $
                            -





Goodwill
of $1,001,000 arose from the Company’s acquisition of Qingshan Metal within its
nonferrous metals segment on April 27, 2006. Impairment of goodwill is tested at
least annually at the reporting unit. The test consists of two steps. First, we
identify potential impairment by comparing the fair value of the reporting
unit to its carrying amount, including goodwill. If the fair value of the
reporting unit is greater than its carrying amount, goodwill is not considered
impaired. Second, if there is impairment identified in the first step, an
impairment loss is recognized for any excess of the carrying amount of the
reporting unit’s goodwill over the implied fair value of goodwill. The implied
fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation, in accordance
with SFAS No 141, “ Business Combinations.” The
Company’s performed financial valuation indicated impairment on the
goodwill.





NOTE12  WARRANTS
LIABILITY





In
connection with the issuance of the convertible notes (as further described in
Note 16), the Company issued a put warrant to one of the Company’s financial
advisors for the purchase of 875,000 shares of the Company’s common stock at an
exercise price of $3.20 per share, exercisable at any time, or from time to
time, during the period commencing from January 1, 2007 through January 1, 2010
(the “Termination Date”). The Company has had the fair value of the put warrant
computed by using the Black Scholes model. As of December 31, 2008, the fair
value of the put warrant is approximately $33,126 with the following significant
assumptions used in the Black-Scholes model:




2008
                
                
                2007Risk-free
      interest rate
                
                
                0.343
                %
                
                
                4.05
                %Expected
      volatility
                
                
                159.23
                %
                
                
                57.22
                %Term
                
                1
      years
                
                
                2
      years


88


In the
event that the warrant holder elects not to exercise the warrant, the Company
shall repurchase this warrant for cash at an aggregate purchase price of
$50,000.





NOTE 13  SHORT-TERM BANK
LOANS





Short-term
bank loans consisted of the following:





December
      31,
                        2008
                      
                      
                      December
      31,
                        2007(in
      thousands)
                      
                      
                      (in
      thousands)10.37%
      note payable to Baiyin Credit Union matures on February 16, 2008 with
      interest due on the 20th day of each quarter and principal due at date of
      maturity, guaranteed by Qianzhen Mining
                      
                      $
                      -
                      
                      
                      $
                      9610.37%
      note payable to Baiyin Credit Union matures on February 16, 2008 with
      interest due on the 20th day of each quarter and principal due at date of
      maturity, guaranteed by Qianzhen Mining
                      
                      
                      -
                      
                      
                      
                      2058.22%
      note payable to Baiyin Credit Union matures on August 15, 2009 with
      interest due on the 20th day of each quarter and principal due at date of
      maturity, guaranteed by Qianzhen Mining and secured by the time deposit
      of  Ms. Xiaojing Yu , a director of the Company
                      
                      
                      117
                      
                      
                      
                      1109.99%
      note payable to Baiyin Credit Union matures on May 21, 2009 with interest
      due on the 20th day of each quarter and principal due at date of maturity,
      guaranteed by Xiangzhen Mining
                      
                      
                      878
                      
                      
                      
                      8216.37%
      note payable to Baiyin Credit Union matures on December 26, 2009 with
      interest due on the 20th day of each quarter and principal due at date of
      maturity, guaranteed by Qianzhen Mining and secured by the time deposit of
      Mr. Helin Cui , a director of the Company
                      
                      
                      88
                      
                      
                      
                      8210.85%
      note payable to Baiyin Credit Union matures on February 14, 2009 with
      interest due on the 20th day of each quarter and principal due at date of
      maturity, guaranteed by Qianzhen Mining(1)
                      
                      
                      220
                      
                      
                      
                      -10.85%
      note payable to Baiyin Credit Union matures on February 14, 2009 with
      interest due on the 20th day of each quarter and principal due at date of
      maturity, guaranteed by Qianzhen Mining(2)
                      
                      
                      102
                      
                      
                      
                      -8.50%
      note payable to Baiyin Credit Union matures on March 26, 2009 with
      interest due on the 20th day of each quarter and principal due at date of
      maturity, which is in the name of a related party(3)
                      
                      
                      351
                      
                      
                      
                      -$
                      1,756
                      
                      
                      $
                      1,314





(1)The
loan was extended starting from February 14, 2009 to February 14,
2010


(2)The
loan was extended starting from February 14, 2009 to February 14,
2010


(3)The
loan was extended starting from March 26, 2009 to March 26,
2010


89




NOTE 14
              OTHER PAYABLES AND
      ACCRUALS





Other
payables and accruals consisted of the following:




December31,
                    2008
                  
                  
                  December31,
                    2007(In
      thousands)
                  
                  
                  (In
      thousands)Accrued
      debt issuance costs(a)
                  
                  $
                  53
                  
                  
                  $
                  116Receipts
      in advance
                  
                  
                  1,142
                  
                  
                  
                  408Accruals
      for payroll, bonus and other operating expenses
                  
                  
                  343
                  
                  
                  
                  892Payables
      for construction service vender
                  
                  
                  1,047
                  
                  
                  
                  481Payable
      for extraction rights
                  
                  
                  -
                  
                  
                  
                  1,014Others
      payables
                  
                  
                  2,209
                  
                  
                  
                  558$
                  4,794
                  
                  
                  $
                  3,469




(a)
            The
      balance mainly represents outstanding legal service fees payable in
      connection with the issuance of the convertible
  notes.




NOTE 15
            DUE TO RELATED
      PARTIES





Due to
related parties consisted of the following:




December31,
                        2008
                      
                      
                      December31,
                        2007(In
      thousands)
                      
                      
                      (In
      thousands)Due
      to directors of the Company:Ms.
      Xiao Jing Yu, CEO of the Company (a)
                      
                      $
                      270
                      
                      
                      $
                      166Mr.
      Xue Ming Xu, COO of the Company (b)
                      
                      
                      239
                      
                      
                      
                      1Mr.
      Cui He Lin , Director of the Company(c)
                      
                      
                      73
                      
                      
                      
                      -Due
      to Wulatehouqi Mengxin Co., Ltd, the minority shareholder of Xingzhen
      Mining (d)
                      
                      
                      1,463
                      
                      
                      
                      1,369Due
      to Mr. Xiao Ming Yu, General Manager of Xiangzhen (e)
                      
                      
                      621
                      
                      
                      
                      -Due
      to Xinjiang Tianxiang New Technology Development Co., Ltd, the minority
      shareholder of Xingzhen Mining (f)
                      
                      
                      -
                      
                      
                      
                      526$
                      2,666
                      
                      
                      $
                      2,062





Amounts
due to related parties are interest-free, unsecured and have no fixed terms of
repayment.


(a)
            Ms.Yu
      is the CEO of the Company.





(b)
            Mr.Xu
      is the COO of the Company.





(c)
            Mr.Cui
      is a director of the Compay.




90


(d)
            Wulatehouqi
      Mengxin Co., Ltd is the minority shareholder of Xingzhen
      Mining.




(e)
            Mr.Yu
      is the General Manager of Xiangzhen
Mining.





(f)
            Xinjiang
      Tianxiang New Technology Development Co., Ltd is the minority shareholder
      of Xingzhen Mining.





NOTE 16
            CONVERTIBLE NOTES
      PAYABLE





On
December 27, 2006, the Company entered into a Notes Purchase Agreement with
Citadel Equity Fund Ltd. (“Citadel”), under the terms of which Citadel purchased
a total of US$28,000,000 (“Original Principal Amount”) in convertible senior
notes (“Notes”). The Notes have a Maturity Date of December 27, 2012. The Bank
of New York is the trustee (“Trustee”), between whom and the Company there is a
indenture (“Indenture”) for the Notes dated December 27, 2006.





Conversion
Feature


The Notes
are convertible at the option of the holders, at any time on or prior to
maturity, into common shares of the Company. Pursuant to Second Supplemental
Indenture entered into between the Company and the Trustee on September 28,
2007, the conversion price has been revised from $3.20 to $2.25 per share and is
subject to adjustment in certain circumstances but shall in no event fall below
$2.00 per share.  In no event shall the number of conversion shares
issuable upon conversion of all the outstanding Notes exceed 49.9% of all
outstanding shares upon the conversion of all of the outstanding
Notes.




Consistent
with EITF 98-05, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, the intrinsic value of the beneficial
conversion feature (“BCF”) on the commitment date, i.e. the Second Supplementary
Indenture Date of September 28, 2007, has been recalculated: the change of
conversion price in the Second Supplemental Indenture resulted in a BCF. The BCF
was recognized on the effective date of September 28, 2007 as a discount and
will be amortized using the effective interest rate method from September 28,
2007 to the maturity date.





Redemption


The Notes
contain a feature reflected in the Accreted Principal Amount based on which the
redemption or repurchase price of the Notes is determined.  The Accreted
Principal Amount is determined as follows: the Accreted Principal Amount on
December 27, 2009 shall be 116.0% of the Original Principal Amount, and the
Accreted Principal Amount at the Maturity Date shall be 134.5% of the Original
Principal Amount. The Company can redeem all of the Notes on or after December
27, 2009 at 110% of the then Accreted Principal Amount, plus accrued and unpaid
interest to, but excluding, the redemption date. The Notes holders have the
right to require the Company to repurchase the Notes at a price in cash equal to
104% of the then Accreted Principal Amount plus accrued and unpaid interest to
the repurchase date if there is a change of control of the Company.  From
and after December 27, 2009, the Notes holders have the right to require the
Company to repurchase the Notes for 100% of the then Accreted Principal Amount
plus accrued and unpaid interest to the repurchase date.





Interest
Rate


The Notes
initially bore interest at 6.75% per annum, which were subject to upward
adjustments and were payable semi-annually. Pursuant to Second Supplemental
Indenture entered into between the Company and the Trustee on September 28, 2007
and Third Supplemental Indenture entered into between the Company and the
Trustee on December 21, 2007, the interest rate has been revised as
follows:





(a) at
the rate of 6.75% per annum of the Original Principal Amount of the Notes, from
and including the Issue Date to and including September 30, 2007;





(b) at
the rate of 0.00% per annum of the Original Principal Amount of the Notes, from
and including October 1, 2007 to and excluding January 31, 2008;
and




91




(c) at
the rate of 0.00% per annum of the Original Principal Amount of the Notes, from
and including January 31, 2008 to but excluding the Maturity Date, if the Public
Listing has occurred on or prior to January 31, 2008 and if the Company
maintains such listing.





Default
Risk


The
company entered into the Second Supplemental Indenture dated September 28, 2007
with the Bank of New York (the “Trustee”), which amended an Indenture dated
December 27, 2006 under which our 6.75% Senior Convertible Notes Due 2012
initially purchased by Citadel Equity Fund Ltd were issued.  Under the
Second Supplemental Indenture the Company covenants to achieve certain
quarterly EBITDA targets for 2008 and 2009. If the Company fails to achieve such
quarterly targets and does not cure it within fourteen days after it receives a
written notice of default from the Trustee or the Convertible Notes Holders,
such failure will constitute a default. The Company did not achieve the targets
for the first three fiscal quarter of 2008. So far, neither the Trustee nor the
Convertible Note Holders have sent a written notice of default to the Company.
However, the Trustee or the Convertible Note Holders could send a written notice
of default any time in the future when the Company misses its quarterly target.
The Company believes that it is very likely to miss its EBITDA target again and
will unlikely be able to cure it within fourteen days.





Detachable
warrants


Together
with the issuance of the Notes, the Company issued a put warrant to one of the
Company’s financial advisors in the transaction for the purchase of 875,000
shares of the Company’s common stock at an exercise price of $3.20 per share,
exercisable on or before 3 years from the date of grant.  As of December
31, 2008, the fair value of the put warrant was $33,126. Further details of the
warrants are disclosed in Note 12.





Debt
issuance costs


The
issuance costs directly associated with the Notes and the put warrant aggregated
$2,522,497.  The amount was capitalized as deferred debt issuance costs,
and is being amortized using the effective interest rate method over the term of
the convertible loan, with the amounts amortized being recognized as interest
expense. Any unamortized debt issuance costs remaining at the date of conversion
of the loan will be recognized as interest expense in the period the conversion
takes place. As of December 31, 2008 and December 31, 2007 the deferred debt
issuance costs were approximately $1,755,000 and $2,170,000
respectively.




NOTE 17
            MINORITY
      INTERESTS





The
activities of the equity of the minority interests during the year ended
December 31, 2007 and 2008 are summarized as follows:




Years Ended December 31,2008
                    
                    
                    2007(In
      thousands)
                    
                    
                    (In
      thousands)Balance
      at beginning of year
                    
                    $
                    144
                    
                    
                    $
                    258Arising
      from acquisitions
                    
                    
                    -
                    
                    
                    
                    (14
                    )Minority
      interests in loss
                    
                    
                    (122
                    )
                    
                    
                    (100
                    )Balance
      at end of year
                    
                    $
                    22
                    
                    
                    $
                    144




92




NOTE 18
            DEFINED CONTRIBUTION RETIREMENT
      PLANS





As
stipulated by the regulations of the PRC government, companies operating in the
PRC have defined contribution retirement plans for their employees. The PRC
government is responsible for the pension liability to these retired employees.
Commencing from January 1, 2002, the Company was required to make specified
contributions to the state-sponsored retirement plan at 20% of the basic salary
cost of their staff. Each of the employees of the PRC subsidiaries is required
to contribute 6% of his/her basic salary.





NOTE 19
            PRC STATUTORY
      RESERVES





In
accordance with the PRC Companies Law, the Company’s PRC subsidiaries were
required to transfer 10% of their profit after tax, as determined in accordance
with accounting standards and regulations of the PRC, to the statutory surplus
reserve and a percentage of not less than 5%, as determined by management, of
the profit after tax to the public welfare fund. With the amendment of the PRC
Companies Law which was effective from January 1, 2006, enterprises in the PRC
are no longer required to transfer any profit to the public welfare fund. Any
balance of public welfare fund brought forward from December 31, 2005 should be
transferred to the statutory surplus reserve. The statutory surplus reserve is
non-distributable.




NOTE 20
            ASSET RETIREMENT
      OBLIGATIONS





According
to the “Rules on Mineral Resources Administration” and “Rules on Land
Rehabilitation” of the PRC, mining companies causing damages to cultivated land,
grassland or forest are required to restore the land to a state approved by the
local governments. The local governments administering the “Rules on Mineral
Resources Administration” and “Rules on Land Rehabilitation” on the Company’s
two mines, “Sumochaganaobao Fluorite Mine” and “Mining site No. 2”, have
confirmed that the Company is not required to restore or rehabilitate the two
mining sites because those two mining sites are located at distant areas and the
Company’s mining and extraction activities have not affected the surrounding
environment. The Company’ property, machinery and mining assets related to those
two mining sites at December 31, 2008 and 2007 were not subject to an asset
retirement obligation.





The
Company has identified but not recognized the asset retirement obligations
related to the Company’s other mining sites for which the Company is applying
the extraction rights. These sites are still at the exploration stage. The asset
retirement obligations related to these sites are not estimable until extraction
rights and licenses are granted. Upon the approval and issuance of the
extraction licenses, the Company will be able to reasonably estimate the
settlement dates of, and apply an expected present value technique to determine
and recognize the asset retirement obligations related to these mining
sites.





NOTE 21
            ENVIRONMENTAL
      CHARGES





The
Company’s mining and exploration activities are subject to various PRC laws and
regulations governing the protection of the environment. These laws and
regulations are continually changing and are generally becoming more
restrictive. The Company conducts its operations so as to protect the public
health and environment and believes its operations are in compliance with
applicable laws and regulations in all material respects.





The
Company’s mining operations are subject to “Natural Resource Compensation
Charges”, but the charging rate varies in different cities in the
PRC. Xiangzhen Mining was charged at net revenue * 2%* a special index
solely determined by the local government. Xingzhen Mining was charged at $0.73
per ton a special index solely determined by the local government. Qingshan
Metal and Qianzhen Mining was engaged in refinery of metals and no involved in
any mining activities in 2008. As such, they are not subject to the
charge.





For the
years ended December 31, 2008 and 2007, Natural Resource Compensation
Charges of $108,180 and $156,784 respectively, were charged to operations and
included in cost of sales.




93




NOTE 22
            OPERATING
      RISK




Country
risk


Currently,
the Company’s revenues are mainly derived from sales in the PRC. The Company
hopes to expand its operations in the PRC, however, there are no assurances that
the Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company’s financial condition.




Products
risk


The
Company competes with larger companies, who have greater funds available for
expansion, marketing, research and development and the ability to attract more
qualified personnel. There can be no assurance that the Company will remain
competitive with larger competitors.




Exchange
risk


The
Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of PRC Renminbi
(RMB) converted to U.S. dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without
notice.




Political
risk


Currently,
the PRC is in a period of growth and is openly promoting business development in
order to bring more business into the PRC. Additionally, the PRC allows a PRC
corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company’s ability to operate
in the PRC could be affected.




Key
personnel risk


The
Company’s future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.





Non-compliance
with financing requirements


The
Company might need to obtain future financing that require timely filing of
registration statements, and have declared effective those registration
statements, to register the shares being offered by the selling stockholders in
future financing. The Company might be subject to liquidated damages and other
penalties if they continue to obtain future financing requiring registration
statements, and not having those registration statements filed and declared
effective in a prompt manner.




NOTE 23
            COMMITMENTS AND
      CONTINGENCIES





General


The
Company follows FAS No. 5, “Accounting for Contingencies,” in determining
its accruals and disclosures with respect to loss contingencies. Accordingly,
estimated losses from loss contingencies are accrued by a charge to income when
information available prior to issuance of the financial statements indicates
that it is probable that a liability could have been incurred and the amount of
the loss can be reasonably estimated. Legal expenses associated with the
contingency are expensed as incurred. If a loss contingency is not probable or
reasonably estimable, disclosure of the loss contingency is made in the
financial statements when it is at least reasonably possible that a
material loss could be incurred.





Mining
industry in PRC and Kyrgyz


The
Company's mining operations are and will be subject to extensive national and
local governmental regulations in China or Kyrgyz, which regulations may be
revised or expanded at any time. A broad number of matters are subject to
regulation.  Generally, compliance with these regulations requires the
Company to obtain permits issued by government, state and local regulatory
agencies.  Certain permits require periodic renewal or review of their
conditions.  The Company cannot predict whether it will be able to obtain
or renew such permits or whether material changes in permit conditions will be
imposed.  The inability to obtain or renew permits or the imposition of
additional conditions could have a material adverse effect on the Company's
ability to develop and operate its properties.




94




Environmental
matters


Environmental
laws and regulations to which the Company is subject as it progresses from the
development stage to the production stage mandate additional concerns and
requirements of the Company.   Failure to comply with applicable laws,
regulations and permits can result in injunctive actions, damages and civil and
criminal penalties.  The laws and regulations applicable to the Company's
activities change frequently and it is not possible to predict the potential
impact on the Company from any such future changes.





Although
management believes that the Company is in material compliance with the
statutes, laws, rules and regulations of every jurisdiction in which it
operates, no assurance can be given that the Company’s compliance with the
applicable statutes, laws, rules and regulations will not be challenged by
governing authorities or private parties, or that such challenges will not lead
to material adverse effects on the Company’s financial position, results of
operations, or cash flows.




The
Company is not involved in any legal matters arising in the normal course of
business. While incapable of estimation, in the opinion of the management, the
individual regulatory and legal matters in which it might be involved in the
future are not expected to have a material adverse effect on the Company’s
financial position, results of operations, or cash flows.





Capital
commitment





The
following table shows the Company Contracted but not provided:





December31,
                    2008
                  
                  
                  December31,
                    2007(In
      thousands)
                  
                  
                  (In
      thousands)Purchase
      of machinery - within one year
                  
                  $
                  456
                  
                  
                  $
                  606Acquisition
      or construction of buildings-within one year
                  
                  
                  9
                  
                  
                  
                  4,133$
                  465
                  
                  
                  $
                  4,739





NOTE 24
            CONCENTRATION OF CUSTOMERS AND
      SUPPLIERS





The
Company had five main customers who contributed approximately $5,300,000 or
75% of the Company’s consolidated net revenue for the year ended December 31,
2008. For the same period of 2007, the Company had five main customers
who contributed approximately $10,936,000 or 75% of the Company’s
consolidated net revenue.





The
following table shows the Company’s major customers (10% or more of consolidated
net revenue) for the year ended December 31, 2008:





Revenue
                      
                      
                      PercentageNumber
                      Customer
                      
                      (In
      thousands)
                      
                      
                      (%)1
                      RuiPeng
      Mining Ltd
                      
                      $
                      2,185
                      
                      
                      
                      31
                      %2
                      Laiwu
      Steel Ltd
                      
                      
                      925
                      
                      
                      
                      13
                      %3
                      Inner
      Mongolia Huadesanli Trading Ltd
                      
                      
                      781
                      
                      
                      
                      11
                      %Handan
      Hongzhi Ltd
                      
                      
                      754
                      
                      
                      
                      11
                      %4
                      Ningxia
      Jinhe Chemistry Ltd
                      
                      
                      685
                      
                      
                      
                      10
                      %TOTAL
                      
                      
                      $
                      5,330
                      
                      
                      
                      76
                      %




95




The
following table shows the Company’s major customers (10% or more of consolidated
net revenue) for the year ended December 31, 2007:




Revenue
                  
                  
                  PercentageNumber
                  Customer
                  
                  (In
      thousands)
                  
                  
                  (%)1
                  Bayannaoer
      Zijin Nonferrous Metals Ltd
                  
                  $
                  3,465
                  
                  
                  
                  24
                  %2
                  Baiyin
      Nonferrous Metals Ltd
                  
                  
                  2,555
                  
                  
                  
                  17
                  %3
                  Ningxia
      Jinhe Chemistry Ltd
                  
                  
                  2,607
                  
                  
                  
                  18
                  %4
                  Taiyuan
      Steel Ltd
                  
                  
                  1,357
                  
                  
                  
                  9
                  %5
                  Laiwu
      Steel Ltd
                  
                  
                  952
                  
                  
                  
                  7
                  %TOTAL
                  
                  
                  $
                  10,936
                  
                  
                  
                  75
                  %




As of
December 31, 2008, accounts receivable total $612,000 which consists of
receivables from 19 customers.





The
following table shows the receivable distribution of the Company’s major
customers (10% or more of consolidated accounts receivable) as of December 31,
2008:





Receivables
                  
                  
                  PercentageNumber
                  Customer
                  
                  (In
      thousands)
                  
                  
                  (%)1
                  Laiwu
      Steel, Ltd
                  
                  $
                  219
                  
                  
                  
                  36
                  %2
                  Handan
      Hongzhi Ltd
                  
                  
                  152
                  
                  
                  
                  25
                  %3
                  Ningxia
      Jinhe Chemistry Ltd
                  
                  
                  69
                  
                  
                  
                  11
                  %TOTAL
                  
                  
                  $
                  440
                  
                  
                  
                  72
                  %




In the
year of 2008, the Company had no concentrated suppliers.




NOTE 25
            RELATED PARTY
      TRANSACTION





Xinjiang
Tianxiang New Technology Development Co., Ltd, the minority shareholder of
Xingzhen Mining, provided exploration services to Xingzhen Mining for a related
service fee paid by the Company of $52,073 in 2008 and $974,621 in
2007.





NOTE 26
            SEGMENT
      INFORMATION





The
Company follows SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information”, which requires that companies disclose segment data based
on how management makes decision about allocating resources to segments and
evaluating their performance. The Company has two operating segments identified
by product, “fluorite” and “nonferrous metals”. The fluorite segment consists of
our fluorite extraction and processing operations conducted through the
Company’s wholly-owned subsidiary, Xiangzhen Mining. The nonferrous metals
segment consists of the Company’s copper, zinc, lead and other nonferrous metal
exploration, extraction and processing activities conducted through the
Company’s wholly-owned subsidiaries, Qianzhen Mining, Xingzhen Mining and
Qingshan Mining.




96




The
Company primarily evaluates performance based on income before income taxes and
excluding non-recurring items.





The
segment data presented below were prepared on the same basis as the Company’s
consolidated financial statements.





YearEndedDecember31,2008
                
                Fluorite
                
                
                Nonferrous
                  metals
                
                
                ConsolidatedSegment
      revenue
                
                $
                3,704
                
                
                $
                3,433
                
                
                $
                7,137Inter-segment
      revenue
                
                
                -
                
                
                
                -
                
                
                
                -Revenue
      from external customers
                
                $
                3,704
                
                
                $
                3,433
                
                
                $
                7,137Segment
      profit
                
                $
                (3,898
                )
                
                $
                (4,250
                )
                
                $
                (8,148
                )Unallocated
      corporate expenses
                
                
                
                
                
                
                
                
                
                $
                (3,587
                )Income
      from continuing operations before income taxes and minority
      interests
                
                
                
                
                
                
                
                
                
                $
                (11,735
                )Total
      segment assets
                
                $
                50,273
                
                
                $
                88,034
                
                
                $
                138,307Inter-segment
      receivables
                
                
                (25,647
                )
                
                
                (59,403
                )
                
                
                (85,050
                )$
                24,626
                
                
                $
                28,631
                
                
                $
                53,257Deferred
      debt issuance costs
                
                
                
                
                
                
                
                
                
                $
                1,755Other
      unallocated corporate assets
                
                
                
                
                
                
                
                
                
                
                1$
                55,013Other
      segment information:Depreciation
      and amortization
                
                $
                2,499
                
                
                $
                1,868
                
                
                $
                4,367Expenditure
      for segment assets
                
                $
                1,605
                
                
                $
                1,490
                
                
                $
                3,095




97




YearEndedDecember31,2007
                
                Fluorite
                
                
                Nonferrous
                  metals
                
                
                ConsolidatedSegment
      revenue
                
                $
                6,605
                
                
                $
                7,746
                
                
                $
                14,351Inter-segment
      revenue
                
                
                -
                
                
                
                -
                
                
                
                -Revenue
      from external customers
                
                $
                6,605
                
                
                $
                7,746
                
                
                $
                14,351Segment
      profit (loss)
                
                $
                418
                
                
                $
                422
                
                
                $
                840Unallocated
      corporate expenses
                
                
                
                
                
                
                
                
                
                
                (4,862
                )Income
      from continuing operations before income taxes and minority
      interests
                
                
                
                
                
                
                
                
                
                $
                (4,022
                )Total
      segment assets
                
                $
                45,673
                
                
                $
                52,503
                
                
                $
                98,176Inter-segment
      receivables
                
                
                (24,111
                )
                
                
                (18,711
                )
                
                
                (42,822
                )$
                21,562
                
                
                $
                33,792
                
                
                
                55,354Investment
      depositDeferred
      debt issuance costs
                
                
                
                
                
                
                
                
                
                
                2,170Other
      unallocated corporate assets
                
                
                
                
                
                
                
                
                
                
                1,777$
                59,301Other
      segment information:Depreciation
      and amortization
                
                $
                1,175
                
                
                
                1,240
                
                
                $
                2,415Impairment
      of fixed assets
                
                
                
                
                
                $
                109
                
                
                $
                109Expenditure
      for segment assets
                
                $
                8,870
                
                
                
                10,762
                
                
                $
                19,632




The
following summarizes identifiable assets by geographic area:





December31,
                        2008
                      
                      
                      December31,
                        2007(In
      thousands)
                      
                      
                      (In
      thousands)China
                      
                      $
                      44,098
                      
                      
                      $
                      45,199Kyrgyzstan
                      
                      
                      10,914
                      
                      
                      
                      12,395Unallocated
      corporate assets
                      
                      
                      1
                      
                      
                      
                      1,707$
                      55,013
                      
                      
                      $
                      59,301




98
  The
following summarizes operating losses before provision for income
tax:





Year EndedDecember31,2008
                    
                    
                    2007(In
      thousands)
                    
                    
                    (In
      thousands)China
                    
                    $
                    6,955
                    
                    
                    $
                    (967
                    )Kyrgyzstan
                    
                    
                    1,192
                    
                    
                    
                    125Unallocated corporateoperating
      losses
                    
                    
                    3,588
                    
                    
                    
                    4,864$
                    11,735
                    
                    
                    $
                    4,022




NOTE 27
            OTHER INCOME,
      NET




Years ended December 31,2008
                  
                  
                  2007(In
      thousands)
                  
                  
                  (In
      thousands)Exchange
      gain
                  
                  $
                  383
                  
                  
                  $
                  495Gain
      (loss) on disposal of fixed assets
                  
                  
                  -
                  
                  
                  
                  (109
                  )Investment
      income (loss)
                  
                  
                  -
                  
                  
                  
                  (86
                  )Tax
      imposition
                  
                  
                  (54
                  )
                  
                  
                  -Penalty
      and late fee
                  
                  
                  (52
                  )
                  
                  
                  -Donation
                  
                  
                  (44
                  )
                  
                  
                  (27
                  )Impairment
      of assets
                  
                  
                  (6
                  )
                  
                  
                  (60
                  )Others
                  
                  
                  -
                  
                  
                  
                  184$
                  227
                  
                  
                  $
                  397





NOTE
      28
            INCOME
      TAXES





The PRC
and Kyrgyz subsidiaries within the Company are subject to PRC or Kyrgyz income
taxes on an entity basis on income arising in or derived from the tax
jurisdiction in which they operate.




The
Company’s income tax benefit (expenses) consists of:




Years ended December 31,2008
                  
                  
                  2007(In
      thousands)
                  
                  
                  (In
      thousands)Current:-
      PRC
                  
                  $
                  (544
                  )
                  
                  $
                  (96
                  )Deferred:-
      PRC
                  
                  
                  -
                  
                  
                  
                  51$
                  (544
                  )
                  
                  $
                  (45
                  )




99




A
reconciliation of the provision for income taxes determined at the statutory
average state and local income tax to the Company’s effective income tax rate is
as follows:




Years
      ended December 31,2008
                      
                      
                      2007(In
      thousands)
                      
                      
                      (In
      thousands)Pre-tax
      income (loss) before minority interests
                      
                      $
                      (11,735
                      )
                      
                      $
                      (4,022
                      )United
      States statutory corporate income tax rate
                      
                      
                      35
                      %
                      
                      
                      35
                      %Income
      tax benefit (expense) computed at United States statutory corporate
      income tax rate
                      
                      $
                      4,107
                      
                      
                      $
                      1,408Reconciling
      items
                      
                      
                      -
                      
                      
                      
                      -Rate
      differential for PRC or Kyrgyz earnings
                      
                      
                      (993
                      )
                      
                      
                      (12
                      )Impact
      of tax holiday of PRC subsidiaries
                      
                      
                      -
                      
                      
                      
                      1,186Adjustment
      of deferred tax asset valuation allowance for loss
    carryovers
                      
                      
                      (1,938
                      )
                      
                      
                      (873
                      )Non-deductible
      expense and non-reportable income
                      
                      
                      (1,720
                      )
                      
                      
                      (1,677
                      )Under
      provision in prior year
                      
                      
                      -
                      
                      
                      
                      (77
                      )Effective
      tax expense
                      
                      $
                      (544
                      )
                      
                      $
                      (45
                      )




In March
2007, the Chinese government enacted new tax law which took effect beginning
January 1, 2008. Under the new tax law of China, all domestic and foreign
invested enterprises are generally subject to a unified tax rate of 25%. The new
tax law provide for a five-year transition period from its effective date for
those enterprises which were established before the promulgation date of the new
tax law and which were entitled to preferential tax treatments under the
previous tax laws and regulations. Therefore, Xiangzhen Mining and Qianzhen
Mining will enjoy the 50% tax exemption benefit from 2008.




During
the year ended December 31, 2007, the Company recorded a deferred tax liability
of $1,201,000 pursuant to certain extraction rights acquired during the year. At
December 31, 2008, the Company wrote off the deferred tax liability against the
extraction rights asset. This write off occurred due to substantial doubt of the
Company ever realizing the actual tax benefit estimated during
2007.




100




NOTE 29
            EARNINGS PER
      SHARE





The
following table is a reconciliation of the weighted average shares used in the
computation of basic and diluted earnings per share from continuing and
discontinued operations for the periods presented (amounts in thousands, except
per share data):




Years
      ended December 31,2008
                    
                    
                    2007(In
      thousands,
                      except
      per share
                      data)
                    
                    
                    (In
      thousands,
                      except
      per share
                      data)Income
      (loss) from continuing operations available to common
      shareholders:-Basic
      and Diluted
                    
                    $
                    (12,149
                    )
                    
                    $
                    (3,953
                    )Income
      (loss) from discontinued operations available to common
      shareholders:
                    
                    
                    
                    
                    
                    
                    1,307-Basic
      and Diluted
                    
                    $
                    
                    
                    
                    $Weighted
      average number of shares:-Basic
      and Diluted
                    
                    
                    22,215
                    
                    
                    
                    21,959Earnings
      (loss) per share from continuing operations-Basic
      and Diluted
                    
                    $
                    (0.55
                    )
                    
                    $
                    (0.18
                    )Earnings
      (loss) per share from discontinued operations-Basic
      and Diluted
                    
                    $
                    -
                    
                    
                    $
                    0.06





As the
convertible notes, warrants and options have anti-dilutive effect on the
earnings per share for 2008 and 2007.





NOTE 30
            SUBSEQUENT
      EVENT




On March
7, 2009, Mr. Hu Ye resigned from the position of Chief Financial Officer of
China Shen Zhou Mining & Resources, Inc. (the “Company”). Mr. Ye did
not have any disagreements with the Company prior to his resignation. On March
7, 2009, Mr. Jiusheng Zhang was appointed Interim Chief Financial Officer
(“Interim CFO”) of the Company.




101