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, 2009





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 whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes  ̈No  ̈





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 filero
            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 $ 6,909,570.46 as of
June 30, 2009, 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 $1.39 per share, as reported by NYSE Amex
Market.





As of
March 25, 2010, there were 27,974,514 shares of common stock of China Shen Zhou
Mining & Resources, Inc. outstanding.










TABLE
OF CONTENTS





PART
      IITEM
      1. BUSINESS
            
            3Corporate
      History
            
            4Our
      Industry
            
            4Current
      Business Operations
            
            5Description
      of Products
            
            5Sales
      and Marketing
            
            5Our
      Major Customers
            
            6Competition
            
            6Business
      Strategies
            
            7Resumption
      of Production Capacity to Meet Demand
            
            7Exploration
      Activities
            
            8Acquire
      More Mineral Resources
            
            8Competitive
      Advantages
            
            8Government
      Regulation
            
            9Employees
            
            10ITEM
      1A. RISK
      FACTORS
            
            11ITEM
      1B. UNRESOLVED
      STAFF COMMENTSITEM
      2. PROPERTIES
            
            19General
            
            19Sumochaganaobao
      Fluorite Mine (Xiangzhen Mining)
            
            20Mining
      Site No. 2 of Qingxing Copper Mine, in production Stage (Qingshan
      Metal)
            
            24Keyinbulake
      Cu-Zn Property in development stage (Xingzhen Mining)
            
            26Inner
      Mongolia Wulatehouqi Qianzhen Ore Processing Co., Ltd (Qianzhen
      Mining)
            
            28Kichi
      Chaarat Closed Company (Kuru-Tegerek Mine)
            
            29ITEM
      3. LEGAL
      PROCEEDINGS
            
            29ITEM
      4. SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            29PART
      IIITEM
      5. MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
            
            29Equity
      Compensation Plan Information


ITEM
      6. SELECTED
      FINANCIAL DATA
            
            30ITEM
      7. MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            
            30Business
            
            30Business
      Strategy
            
            32Results
      of Operation Business
            
            33ITEM
      8. FINANCIAL
      STATEMENTS
            
            37ITEM
      9. CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
            
            37ITEM
      9A. CONTROLS
      AND PROCEDURES
            
            37ITEM
      9B. OTHER
      INFORMATION
            
            38PART
      IIIITEM
      10. DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
            
            39Involvement
      in Certain Legal Proceedings
            
            40Compliance
      with Section 16(a) of the Securities Exchange Act of 1934
            
            41Code
      of Ethics
            
            41Director
      Nominees Recommended by Stockholders
            
            41Board
      Composition; Audit Committee and Financial Expert
            
            41ITEM
      11. EXECUTIVE
      COMPENSATION
            
            42Outstanding
      Equity Awards at Fiscal Year-End
            
            42Director
      Compensation
            
            43Retirement,
      Post-Termination and Change in Control
            
            43ITEM
      12. SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.
            
            43ITEM
      13. CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            
            44ITEM
      14. PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            
            44PART
      IVITEM
      15. EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
            
            45




2





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 was
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. 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 (5%) and an individual shareholder (5%).





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





Prior to
September 2009, the Company owned 100% of the registered capital of Tun-Lin
Limited Liability Company (“Tun-Lin”), which is a Kyrgyz Republic registered
company, which in turn owned 100% of Kichi Chaarat Closed Stock Company. On
September 21, 2009, the Company, through its wholly-owned subsidiary, Inner
Mongolia Xiangzhen Mining Group Co., Ltd., a company organized under the laws of
People’s Republic of China, entered into a Share Purchase Agreement with Fortune
Pegasus International Limited (“Fortune”), a company organized under the laws of
British Virgin Islands, pursuant to which the Company transferred to Fortune the
entire equity of Tun Lin in the Kyrgyz Republic.




3





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. As an extremely scarce and non-renewable resource,
fluorite has much wider applications. Under such background, China's State
Council issued the notification SCS [2010] No. 1" On Adoption of Comprehensive
Measures on Exploration and Production Control of the Refractory Clay and
Fluorite " in January 2010, The notification was issued mainly to restrict the
excessive exploitation of fluorite mineral resources through the integration of
small fluorite mines, and shutting down part of small-scale processing plants
and mines with poor resources, and to ensure the rational use of resources. In
addition, for a certain period of time no application to the survey and mining
of any new fluorite mines is permitted. This policy will play a role in the
control of fluorite supply, and will stimulate the domestic fluorspar price.
Because Xiangzhen Mining has the largest fluorite mine in northern China, while
the Company serves as the member of Vice Executive President of the China
Fluorite Industry Association, this new policy will have a positive effect to
Xiangzhen Mining operations.





China
produced 3.85 million metric tons of fluorite ore in 2007, 4.416 million metric
tons in 2008 and 3.83 million metric tons in 2009. In 2009, about 95.3% of the
annual output was consumed within China and 4.7% was exported, according to the
statistics of 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.




4




In 2009,
1.85 million metric tons of fluorite powder were consumed by the producers of
hydrofluoric acid and aluminum fluoride, 1.5 million metric tons by the
producers of steel, 0.3 million metric tons by others 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
    processing





Description
of Products





Fluorite:





We
extract and process fluorite ores or fluorspar in northern Inner Mongolia. In
2009, we extracted a total amount of 47,900 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 2009,
we extracted approximately 47,900 metric tons of fluorite ores and sold 28,100
metric tons of fluorite lumps with total sales of approximately US$2.54 million,
accounting for approximately 65% of the revenues of our fluorite business. We
also produced 15,300 metric tons of fluorite powder and sold 12,000 metric tons
for approximately US$1.38 million, which accounts for approximately 35% 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 Uygur 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.





In 2009,
we produced and sold zinc concentrates and copper concentrates equivalent to 178
metric tons of zinc metal, 10 metric tons of copper metal and also sold 3,041
metric tons of oxide zinc-copper ore, accounting for approximately 56%, 16% and
28%, respectively, of the total revenues of our nonferrous business of
approximately $0.27 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 fills these orders based on our actual production ability and delivers the
products to our customers through railways or trucks. We expect these
relationships with our customer to continue.





Major
Suppliers





During
the year 2009, 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.




5





Our
Major Customers





In 2009,
our revenues from our fluorite business and nonferrous metals business were
$3.92 million and $0.27 million, respectively.





The
following table shows our major customers (10% or more) for our nonferrous
business for the year ended 2009:





Number
            
            Customer
            
            Revenue*
              (In
      thousands)
            
            
            Percentage
              (%)1
            
            RuiPeng
      Mining Ltd
            
            $
            197
            
            
            
            72
            %2
            
            Xinjiang
      Chenguang Oxide-zinc Ltd
            
            
            76
            
            
            
            28
            %TOTAL
            
            
            
            $
            273
            
            
            
            100
            %




*
            The
      total revenue from our nonferrous segment is $0.27
  million





The
following table shows our major customers (10% or more) for our fluorite
business for the year ended 2009:





Number
            
            Customer
            
            Revenue*
              (In
      thousands)
            
            
            Percentage
              (%)1
            
            Handan
      Hongzhi Ltd
            
            $
            892
            
            
            
            23
            %2
            
            Ningxia
      Jinhe Ltd
            
            
            815
            
            
            
            21
            %3
            
            Laiwu
      Steel Ltd
            
            
            638
            
            
            
            16
            %4
            
            Inner
      Mongolia Huadesanli Trading Ltd
            
            
            621
            
            
            
            16
            %5
            
            Zibo
      Bofeng Ltd
            
            
            475
            
            
            
            12
            %TOTAL
            
            
            
            $
            3,441
            
            
            
            88
            %





*
            Total
      revenue from our fluorite segment is $3.92
  million.





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:





·
            Zhejiang
      Wuyi Shenlong Mining Co., Ltd., which produced 40,000 metric tons of
      fluorite lumps and 35,000 metric tons of fluorite powder in
      2009.





·
            Inner
      Mongolia Linxi County Jingyuan Mining Co., Ltd., which produced 30,000
      metric tons of fluorite lumps and 35,000 metric tons of fluorite powder in
      2009.





·
            Gansu
      Gaotai Hongyuan Mining Co., Ltd., which produced 65,000 metric tons of
      fluorite ore in 2009.





·
            Jinghua
      Huaying Mining Co., Ltd., which produced 20,000 metric tons of fluorite
      lumps and 28,000metric tons of fluorite powder in
  2009.





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.




6





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





Prospect
in 2010





From the
perspective of China’s overall micro-economic condition, China’s economic output
will increase gradually in 2010. Non-ferrous metals and fluorite industry will
have new development opportunities. The non-metallic mineral industry especially
will be an industry in the positive direction.





Resumption
of Production Capacity to Meet Demand





▼
Fluorite





In early
2006, we began a mining project at Xiangzhen Mining to produce 300,000 metric
tons of fluorite ore and the project was completed in November 2007. At the
same, at our mine site, we also started to build a plant with an annual
processing capacity of 200,000 metric tons of fluorite ore, and the project was
also completed in November 2007. We continued mining operations but the new
plant remained in trial production in 2009.





We
extracted approximately 47,900 metric tons of fluorite ore in 2009. We expect to
extract 130,000 metric tons of fluorite ore in 2010.





We
produced and sold approximately 12,000 metric tons of fluorite powder and 28,100
metric tons of fluorite lumps in 2009. We are planning to start the normal
production in April 2010 to process 45,000 tons of fluorite ore and produce
19,000 metric tons of fluorite powder. In addition, we plan to sell 55,000
metric tons of fluorite lumps and 19,000 tons of fluorite powder.





Xiangzhen
Mining has the largest fluorite ore reserves in Northern China. Xiangzhen is a
vice-president member in the China Fluorite Association. The new national policy
of tighter restriction for new entrants into the fluorite production will have
positive effect on Xiangzhen Mining. We expect the trend will continue for the
business to concentrate in large enterprises through the acquisition of smaller
enterprises.




▼
Zinc, Copper and Lead





No
production was planned at Qianzhen Mining in 2009 due to the low grade of the
ore supplied by Qingshan Metal and low copper price. Because the price of sulfur
concentrate decreased greatly in 2009, Qianzhen Mining did not go into produce
any sulfur products. We do not plan to produce at Qianzhen Mining and Qingshan
Metal in 2010 due to the potential asset reorganization activity.





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 ore
per year. On April 28, 2008, Xingzhen Mining completed a successful testing at
its first trial, and then went into production. In parallel with processing,
Xingzhen did exploration in the area. In 2009, Xingzhen stopped operations due
to price decrease of non-ferrous metals.





In 2009,
Xingzhen Mining produced and sold zinc concentrates and copper concentrates
equivalent to 178 metric tons of zinc and 10 metric tons of copper, and sold
3,041 metric tons of oxide zinc-copper ore. We continued excavating and mining
operations, and have been carrying out the operations until present time.
Subject to purchase orders and weather conditions, we plan to start processing
in May 2010. We plan to produce extracted ore of 70,000 tons, excavate tunnels
of 2,500 meters, process ores of 80,000 tons equivalent to 4,410 metric tons of
zinc and 241 metric tons of copper. We plan to sell out all the products to be
produced. In addition, we plan to sell 10,000 metric tons of oxide copper-zinc
ore.




7





Exploration
Activities





üKeyinbulake Cu-Zn
Mine





In 2009,
Xingzhen Mining made a great breakthrough in prospecting, though it did not
finish its processing plan. Based on previous exploration, especially according
to the results of the IP sounding work in geological prospecting carried out in
2009, the mineral formation conditions and the genesis of ore bodies shows that
Keyinbulake Copper-Zinc Mine belongs to the submarine volcanogenic sediments.
The analysis on the data of exploration shows that within the mineralized belt
the ore bodies continue along with the strike and distribute in parallel and en
echelon arrangement. The method of sounding indicates that the inclined
deepening of the ore-bodies in this area is longer than the length of their
strike prolongation. There are five high-polarization abnormal zones found
through IP sounding methods and they coincide in space and positions with the
known copper-zinc ore bodies controlled under current underground extraction,
which confirms that Keyinbulake Copper-Zinc Mine exists with high potential of
ore prospecting and the previous work greatly assists the Company to delimit the
accurate target area for further verification.





In the
first half of 2010, Xingzhen Mining will still focus on geophysical research, IP
sounding prospecting, verification drilling design, and carrying out
construction in strict accordance with design, as well as conducting the
necessary geophysical investigations in the mining area. Xingzhen Mining is
striving to explore further for more reserves as a public company before the end
of 2010, and achieving breakthroughs in further identifying mineral resources in
2011.





Following
the exploration in 2009, further exploration activities are planned in 2010 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
            
            2.5Drilling
            
            four
      medium/deep holes
            
            m
            
            3000Trenching
            
            -
            
            m
      3
            
            500Geophysical
      prospecting
            
            IP
      sounding
            
            points
            
            1108





The
exploration activities listed above will be completed by a Geophysical
Prospecting Team of Xinjiang Nonferrous Geophysical Prospecting Bureau at the
end of September 2010 with a total budget of approximately $0.88 million, which
will be funded by a shareholder (natural person) of Xingzhen
Mining.





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:





·
            All
      of our current businesses are 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.





·
            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 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. Regional human
      resources of labor and specialized professional mining teams are available
      to us at a low cost.




8





·
            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.








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





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.




9





Employees





As of
December 31, 2009, we employed 281 full-time employees, of whom approximately
6.1% are with our Beijing Representative Office, 25.6% are with Qianzhen Mining,
54.8% are with Xiangzhen Mining, 2.9% are with Qingshan Metal (copper and zinc
ore mining) and 10.6% are with Xingzhen Mining (holding exploration rights of
copper ore and zinc ore). Approximately 17% of our employees are management
personnel, and 6.5% are sales and procurement staff. In terms of education
level, approximately 18% 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-competition 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.





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 $51,104 for fiscal year
2009.





Risk
Factors





CAUTIONARY
STATEMENT REGARDING FORWARD - LOOKING INFORMATION AND CERTAIN IMPORTANT
FACTORS





In this
Annual Report on Form 10-K 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.




10





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





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 expired in June 2008. We don’t have a third party supplier now and
we may need third party suppliers in the future. 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.





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.




11





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;





·
            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;




12




·
            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.





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.




13





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.





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
Related to Doing Business in China





The
Company’s business may be adversely affected by political unrests such as the
one occurred in Xinjiang Uygur Autonomous Region.





On July
5, 2009 in Urumqi, the capital of the Xinjiang Uygur Autonomous region, a
political unrest erupted because of ethnic conflicts between the minority Uygur
and the Han Chinese. One of our mines, Xingzhen Mining, is locatedat Aletai Zone,
Xinjiang Uygur Autonomous Region. During this unrest, transportation in Xinjiang
was affected. Our purchased raw materials could not be timely moved into our
mining site and our products could not be moved out of the site for
sale. As a result, the Company's business had suffered. Our operations may
face adverse uncertainties and challenges in the future should such unrests
occur.




14





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.





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.




15





The
new merger and acquisition rules 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.





New
tax law may adversely affect our business


On March
16, 2007, China's parliament, the National People's Congress, adopted the
Enterprise Income Tax Law, which took 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. Our
subsidiaries were benefiting from the preferred tax rates for foreign invested
companies and are subject to the new tax rate of 25 percent. Our net income
margin and results of operations may be negatively affected.





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.





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.




16





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.





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




17




·
            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;





·
            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 88.9% 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.




18





ITEM
2.  DESCRIPTION OF PROPERTY





General





As of
December 31, 2009, China Shen Zhou Mining & Resources Inc. owns two
properties in the production in the Inner Mongolia Autonomous Region, the
People’s Republic of China (“PRC”), and one property under development in
Xinjiang Uygur Autonomous Region in the PRC.





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 one
property under development is:





-
Keyinbulake Cu-Zn Multi-metal Mine located in Buerjin County, Aletai, Xinjiang
Uygur Autonomous Region in the PRC (Xingzhen Mining).





No
            
            Name
      of property
            
            Type
            
            Ownership
            
            Status
            
            Location/Country1
            
            Sumochaganaobao
      Fluorite Mine
            
            Non-metal
      Fluorite
            
            100%
            
            Production
            
            Inner
      Mongolia, PRC2
            
            Qingxing
      Copper Mine
            
            Copper
      and zinc
            
            60%
            
            Production
            
            Inner
      Mongolia, PRC3
            
            Keyinbulake
      Multi-metal Mine
            
            Copper
      and zinc
            
            90%
            
            Development
            
            Xinjiang
      Uygur Autonomous Region , PRC









Figure
2-1: China Shen Zhou’s Properties in China





China
Shen Zhou Mining & Resources Inc. holds three mining licenses and two
exploration licenses at December 31 of 2009. 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;





-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;




19





Tables
2-1/2 present detailed information about the licenses.





Table
2-1: 3 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)
            
            Keyinbulake
      Cu-Zn Multi-metal MineLicense
      Number
            
            1500000820156
            
            1500000820421
            
            6500000712980Owner
            
            Inner
      Mongolia Xiangzhen Mining  Group Ltd.
            
            Qingshan
      Nonferrous Metal Development Co Ltd.
            
            Buerjin
      County Xingzhen Mining.Validated
      period
            
            April
      2008 to March 2011
            
            September
      2008 to September 2011
            
            August
      2007.to August 2013Area
            
            0.9088
      km2
            
            0.6495km2
            
            1.955km2Mining
      mode
            
            Underground
      mining
            
            Underground
      mining
            
            Underground
      miningMining
      scale
            
            150,000
      metric tons/annum
            
            100,000
      metric tons/ annum
            
            21,000
      metric tons/ annumOre
      types
            
            Fluorite
            
            Copper,
      Zinc and sulfur
            
            Copper
      and zincMining
      Level
            
            1075m-497m
            
            1455m-855m
            
            1420m-1516m





Table
2-2: 2 Exploration licenses held by the Company





Property
            
            Southern
      Region of
              Keyinbulake
      Zn Mine
            
            Northern
      Region of
              Keyinbulake
      Zn MineLicense
      Number
            
            650000061272
            
            650000061273Owner
            
            Xingzhen
      Mining
            
            Xingzhen
      MiningValidated
      period
            
            December
      2009 to December 2010
            
            December
      2009 to December 2010Area
            
            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





Sumochaganaobao Fluorite
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 2-2 is the index map of Sumochaganaobao Fluorite Mine.




20









Figure
2-2: 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
expires 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.





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 had invested USD$2,895,380 in underground
expansion and USD$7,760,300 in the new concentrator.




21





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%.





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




22




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.





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 materials
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 2009, we extracted a total amount of 47,900
metric tons of fluorite ore, which consumed 57,500 metric tons of the indicated
mineralized materials. There are 4.83 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.




23





Products
and Output:





The mine
produces fluorite ores which are classified into two commodities, one being high
grade fluorite lumps 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 of 2007-2009, Xiangzhen
Mining





Year
              
              Product
              
              Output
      (t)
              
              
              Average
      Price per Year (USD$/t)2007
              
              Fluorite
      lumps
              
              
              52,523.96
              
              
              
              84.62Fluorite
      concentrate
              
              
              22,447.23
              
              
              
              144.132008
              
              Fluorite
      lumps
              
              
              24,135.33
              
              
              
              106.54Fluorite
      concentrate
              
              
              6,747.16
              
              
              
              167.912009
              
              Fluorite
      lumps
              
              
              28,083.86
              
              
              
              91.65Fluorite
      concentrate
              
              
              11,972.52
              
              
              
              112.86





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.





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.










Figure
2-3: Mining Site No. 2 of Qingxing Copper Mine




24





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 tons per year. The
actual mining capacity is 50,000 metric tons of ores per year, of which copper
ores account for about 40,000 metric tons and the remaining pertains to 10,000
metric tons 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.





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%.




25





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





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 December 31, 2009, the total retained
indicated mineralized material is 1.81 million metric tons with the average
grade at 0.6%. Our plan for 2009 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 2009.





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 2009, 356
meters of drilling holes was completed in exploration.





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. The other 10% is owned by
Xinjiang Tianxiang New Technology Development Co., Ltd (5%) and an individual
shareholder (5%).





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 2-4 is the index map of the Keyinbulake Multi-Metal
Property.




26









Figure
2-4: 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 2009,
IP sounding work in geological prospecting was carried out. The information of
the mineral formation conditions and the genesis of ore bodies given by IP
sounding shows that Keyinbulake Copper-Zinc Mine belongs to the submarine
volcanogenic sediments. The analysis on the data of exploration shows that
within the mineralized belt the ore bodies continue along with the strike and
distribute in parallel and en echelon arrangement. The method of sounding
indicates that the inclined deepening of the ore-bodies in this area is longer
than the length of their strike prolongation. There are five high-polarization
abnormal zones found through IP sounding methods and they coincide in space and
positions with the known copper-zinc ore bodies controlled under current
underground extraction, which confirms that Keyinbulake Copper-Zinc Mine exists
with high potential of ore prospecting and the previous work greatly assists the
Company to delimit the accurate target area for further
verification.





Ore Processing:





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.





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:





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




27




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%.





Inner Mongolia Wulatehouqi
Qianzhen Ore Processing Co., Ltd (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 ofball
mills (3 sets, 2.1mx3m and 1.5mx3m), 4m3 flotation machines (24 sets),
2m3flotation machines (12 sets),Φ12m thickeners(1 set), classifiers (2 sets,
1.5mx10m), 20m2 filters, pumps, power transformers and power distribution panels
and so on. In 2005, Qianzhen Mining invested approximately $750,000 to
modernize the processing production line to increase its yearly capacity to
approximately 200,000 metric tons. The current equipment is new.





Qianzhen
Mining conducts the operation by purchasing zinc, copper and/or lead ore from
Qingshan Nonferrous Metal or other suppliers. The final products are in bulk.
The transportation 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
years.




28





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)2007
              
              Zn
      concentrate
              
              
              66,270
              
              
              
              5,582.5
              
              
              
              2,628.55Pb
      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)2009
              
              -
              
              
              -
              
              
              
              -
              
              
              No
      production in this year.





Kichi
Chaarat Closed Stock Company (Kuru-Tegerek Mine)





Prior to
September 2009, the Company owned 100% of the registered capital of Tun-Lin, a
Kyrgyz Republic registered company, which in turn owned 100% of Kichi Chaarat
Closed Stock Company. On September 21, 2009, the Company entered into a Share
Purchase Agreement with Fortune Pegasus International Limited, a company
organized under the laws of British Virgin Islands, pursuant to which the
Company transferred to Fortune the entire equity of Tun Lin in the Kyrgyz
Republic. Prior to the disposal of Kuru Tegerek in 2009, we had not made any
products from this mine.




ITEM
      3.
            LEGAL
      PROCEEDINGS





None.





ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None





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
            
            $
            0.59
            
            
            $
            0.44Third
      Quarter
            
            $
            1.97
            
            
            $
            1.11Fourth
      Quarter
            
            $
            1.75
            
            
            $
            0.71





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
            
            
            $
            0.30





Holders.
As of March 22, 2010, we had 673 holders of record of our common stock. Our
common stock had a closing bid price of $1.15 per share on March 22,
2010.





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.




29





Transfer Agent
and Registrar. Our transfer agent is Standard Registrar & Transfer,
Inc. located at 12528 South 1840, East Draper, Utah, 84020. Their telephone
number is (801) 571-8844.





Securities
Authorized for Issuance Under Equity Compensation Plans.





On
October 29, 2009, the shareholders and the board of directors have approved the
2009 Omnibus Long-term Incentive Plan. On February 4, 2010, 760,000 shares of
our common stock were issued to 42 officers, directors, employees, or consultant
under this 2009 Omnibus Long-term Incentive Plan. The number of shares of stock
award for each officer, director, employee or consultant was determined by
dividing the amount of back pay due such officer, director, employee or
consultant by $0.38, average daily trading price per share for the Company’s
common stock in December 2008.





Recent Sales of
Unregistered Securities





On
September 22, 2009, the Company entered into a Notes Repurchase Agreement with
Mountview Path Limited (“Mountview”), a corporation incorporated under the laws
of the British Virgin Islands, pursuant to which the Company repurchased the
entire 6.75% Senior Convertible Notes due 2012 of US $28,000,000 principal
amount from Mountview. The consideration payable in the transaction consists of
US $8,000,000 in cash and 5 million shares of the Company’s common stock. The
shares of the Company’s common stock are issued in a private transaction
pursuant to the “safe harbor” for the private offering exemption under Section
4(2) of the Securities Act of 1933 (the “Securities Act”) and Rule 506 of
Regulation D promulgated thereunder to accredited investors as defined under
Rule 501(a) of the Securities Act.




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 tons fluorite ore project at Xiangzhen Mining,
which was completed in November 2007. We extracted approximately 122,000 metric
tons of fluorite ores in 2008.




30





In early
2006, we started to build a 200,000 metric tons/year fluorite ore processing
plant at the mine site. The new processing plant was constructed and went into
trial production in November 2007 (the new processing plant). We produced
approximately 6,700 metric tons (“metric tons” hereinafter) of fluorite powder
in 2008.





2009 is
the second year of operation and production after the mining capacity of 300,000
metric tons per year and the processing capacity of 200,000 metric tons per year
were built up. Besides, Xiangzhen Mining owns an old production line with annual
fluorite powder production capacity of 60,000 metric tons (the old processing
plant). During 2009, mining continued, but processing did not operate as
planned. We are planning to start production at an appropriate time in April
2010.





In 2009,
47,900 metric tons of fluorite ore were extracted; 27,700 metric tons of
fluorite lump were produced and 28,100 metric tons of fluorite lump were sold.
43,800 metric tons of fluorite ore were processed and produced 15,300 metric
tons of fluorite powder and 12,000 metric tons of fluorite powder were
sold.





We did
not reach our projected targets for 2009 for the following reasons. First, we
re-started production in May 2009 and had only produced for eight months
throughout the year. Second, because downstream enterprises in steel and
fluorine chemical industry were greatly affected by the financial crisis, market
demand was weak. Third, the water supply around the mining area failed
temporarily to meet processing requirements for large-scaled
production.





In 2010,
Xiangzhen Mining will focus on solving the following problems to achieve a
breakthrough.




First,
the existing water resource of the mining area is able to sustain the production
of the old processing plant. We will try our best to explore new water resource
for the production of the new processing plant as early as possible. Second, we
will make an effort to develop new fluorite products
for  metallurgicalindustry, and thus
increase the sales percentage of the new fluorite products. Third, by our
leading position in the industry we will strive to acquire appropriate fluorite
projects.




Subject
to purchase orders and weather conditions, we plan to begin mining in the tunnel
and start processing in April 2010.We plan to extract fluorite ore of 130,000
metric tons, and process fluorite ore of 45,000 metric tons. In addition, we
plan to sell fluorite lump of 55,000 metric tons and fluorite powder of 19,000
metric tons in 2010.





▼Zinc,
Copper and Lead





Xingzhen
Mining





In July
2006, Xingzhen Mining started to build a 200,000 metric tons/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 Mining completed a successful testing at its first trial, and
then went into production. In parallel with processing, Xingzhen did exploration
in the area. In 2009, Xingzhen stopped operations due to a price decrease of
non-ferrous metals.





In 2009,
Xingzhen extracted ores of 14,300 metric tons, processed ores of 6,000 metric
tons, and produced zinc ore powder of 178.3 metric tons and copper ore powder of
9.76 metric tons. Xingzhen sold zinc ore powder of 178.3 metric tons, copper ore
powder of 9.76 metric tons and copper and zinc oxide ores of 3,000 metric
tons.





Xingzhen
did not reach projected targets in 2009 for the following
reasons.  First, due to inclement weather, Xingzhen re-started
production late. Xingzhen did not re-start production trial until June 2009.
Shortly after that, due to the Xinjiang Uygur violence in July 2009, materials
needed could not be delivered from outside Xinjiang to the mining area, and
production was delayed. Second, although the results of trial processing reached
requirements, the technological adjustment was not finished in time. Therefore,
the actual processing did not fully meet production requirements and needed
further adjustments and trials. Third, after technological readjustments,
Xingzhen did not undergo normal production, due to large price decreases of
non-ferrous metals because of  the low grade of ores available to
Xingzhen.





In 2010,
Xingzhen plans to focus on starting full production, and increase geophysical
prospecting efforts at the same time. The main products will be zinc
concentrates, copper concentrates, and zinc oxide ore (in the mining area there
were high-grade zinc oxide ore, which can be sold with no processing). As
weather conditions permit, we plan to start production in late April or early
May 2010. With production trials in 2009, Xingzhen has basically finished
technological readjustments and is able to re-start processing. In the mean
time, we never stopped excavating and mining operations, and have been carrying
out the operations to this day. We plan to produce extracted ores of 80,000
metric tons, process ores of 80,000 metric tons, and produce zinc ore powder of
4,410 metric tons and copper ore powder of 241.6 metric tons. We plan to sell
all the above products. Besides, we plan to sell copper and zinc oxide ores of
10,000 metric tons.




31





Qianzhen
Mining





Before
the end of 2007, Qianzhen Mining processed ores supplied by local mining
companies.  Since then, the supplier contracts expired.





No
production was planned at Qianzhen Mining in 2009 due to the low grade of the
ores supplied by Qingshan Metal and low copper price. Because the price of
sulfur concentrates dropped greatly in 2009, Qianzhen Mining did not go into
production of sulfur.





We do not
plan to produce at Qianzhen Mining in 2010 due to the potential asset
reorganization activity.





Qingshan
Metal





Due to
the decrease in the price of copper in 2008, Qingshan completed exploration only
and did not begin mining.





No
production was planned in 2009 at Qingshan due to the low copper
price.





We do not
plan to produce at Qingshan Metal in 2010 due to the potential asset
reorganization activity.





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, which 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.





Due to
the financial crisis, it was extremely difficult to raise funds. The mine was
not ready for mining at the same time. After careful consideration and
investigation, the Board of Directors of the Company decided to sell the entire
equity in Tun-Lin Co. Ltd. and the Kichi Chaarat Copper and Gold Mine on
September 21,2009.





On
September 21, 2009, Xiangzhen Mining and Fortune Pegasus International Limited
signed an equity transfer agreement. Xiangzhen Mining sold the entire equity in
Tun-Lin Co. Ltd to Fortune Pegasus International Limited. On November 20, 2009,
the sale of Tun-Lin was closed.





Exploration
Activities





Keyinbulake
Cu-Zn Mine





In the
first half of 2010, Xingzhen will focus on geophysical research and the electric
logging project, make drilling plans, carry out construction in strict
accordance with results given by our prospecting team, and conduct necessary
geophysical investigations in the mining area. Xingzhen Mining is striving to
explore further reserves as a public company before the end of 2010, and
achieving breakthroughs in further identifying mineral resources in
2011.





Acquiring
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 that have good extracting and operating conditions and
possess all necessary governmental licenses.





BUSINESS
STRATEGY





Prospect
in 2010





With
respect to China’s overall micro-economic situation, we believe that China’s
economy will gradually turn for better in 2010. Non-ferrous metal and fluorite
industry will face new development opportunities. we also believe that
non-metallic mineral industry is an industry with a bright future.




32





RESULTS
OF OPERATIONS - YEAR ENDED DECEMBER 31, 2009 AS COMPARED TO YEAR ENDED DECEMBER
31, 2008





Selected
information from the Consolidated Statements of Operations





For
      the years ended
              December
      31,2009
            
            2008(in
      thousands)
            
            (in
      thousands)Net
      revenue
            
            $
            4,192
            
            
            $
            7,137Gross
      profit
            
            
            258
            
            
            
            1,307-
      Gross profit margin
            
            
            6.15
            %
            
            
            18.31
            %General
      and administrative expenses
            
            
            5,853
            
            
            
            8,213Other
      income(expenses)
            
            
            11,068
            
            
            
            (3,491
            )Net
      income (loss)
            
            $
            3,014
            
            
            $
            (12,149
            )





REVENUES.
Net revenues for the year ended December 31, 2009 were $4.19 million,
representing a $2.95 million or 41% decrease as compared to $7.14 million of
2008. The decrease in net revenues is mainly attributable to Qianzhen Mining and
Qingshan Metal, which had no operations in 2009. In addition, Xingzhen Mining
did not achieve its targets in 2009.





Due to
the low price of nonferrous metals and the low grade of the ore supplied by
Qingshan Metal, Qianzhen Mining did not operate in fiscal year 2009. In 2008,
Qianzhen Mining sold sulfur concentrates of 18,000 metric tons. Qingshan did not
operate in 2009 due to its low grade of the ores produced.





Nonferrous
metals segment revenue for 2009 amounted to approximately $0.3 million,
representing a decrease of approximately $3.1million or 91% decrease compared to
2008.The revenue decrease is entirely attributable to Xingzhen Mining’s revenue
decrease in 2009.





For
fluorite production, Xiangzhen revenue increased by 5.4% from $3.7 million for
2008 to $3.9 million for 2009, For maintaining the revenue level, the Company
increased the production of our fluorite powder and lump when the price of the
fluorite powder and lump dropped in 2009.





GROSS
PROFIT AND GROSS PROFIT MARGIN. For the year ended December 31, 2009, gross
profit was $0.26 million, representing a decrease of approximately 80% as
compared to $1.31 million of 2008. Gross profit margin decreased from
approximately 18% in 2008 to approximately 6% in 2009. The gross profit margin
decrease was mainly due to the market price of the fluorite powder and fluorite
lump dropped in 2009.





GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased by
approximately $2.3 million to $5.9 million in 2009 from $8.2 million in 2008.
The significant decrease in general and administrative expenses was primarily
due to Xiangzhen Mining’s cutting down of the general and administrative
expenses on a large scale from $4.0 million in 2008 to $ 1.5million in 2009. In
2009, new mineral processing plant prepare cost was $0.01 million, a decrease of
approximately $1.91 million compared to $1.92 million in 2008, which was primary
factor of the cut down general and administrative expenses.





OTHER
INCOME


Other
income increased by approximately $14.6 million to $11.1 million in 2009 from a
net expense of $3.5 million in 2008 due to the $14.0 million income from the
gain of convertible debt extinguishment.





NET
INCOME. Net income for the year ended December 31, 2009 was $3.0 million, an
increase of $15.1 million compared to net loss of $12.1 million for 2008. Basic
earnings per share were $0.13 or $0.13 fully diluted for the year ended December
31, 2009.




33





SEGMENT
PERFORMANCE ANALYSIS





Segment
      revenue
                For year Ended December
      31,
              
              Segment
      profit (loss)
                For year Ended December
      31,(amounts
      in thousand)
              2009
              
              2008
              
              2009
              
              2008Fluorite
              
              $
              3,919
              
              
              $
              3,704
              
              
              $
              (2,293
              )
              
              $
              (3,898
              )Nonferrous
      metals
              
              $
              273
              
              
              $
              3,433
              
              
              $
              (1,832
              )
              
              $
              (3,058
              )





Fluorite





Fluorite
segment revenue increased by 5.4% from $3.7 million for 2008 to $3.9 million for
2009. The increase was primarily due to the increases in sales volume in both
fluorite powder and lumps. We did not operate at full capacity of our plant,
Xiangzhen Mining, due to low price of fluorite powder and lumps which both
decreased compared to 2008.





Xiangzhen
Mining sold a total of 11,972 metric tons of fluorite powder, representing an
increase of 77% compared to 2008. During this period, the average sales price
for fluorite powder decreased by 55% to $113 per metric tons compared to $168
per metric tons in 2008. The sales of fluorite lumps increased by 15% from
24,135 metric tons in 2008 to 27,663 metric tons in 2009. The Company did not
produce more fluorite powder and fluorite lumps due to the low market
price.





Revenue
contributed from our fluorite segment accounted for 94% of the Company’s total
revenue for the year ended December 31, 2009 as compared to 52% in
2008.





Our
fluorite segment reported a segment loss of $2.3 million for the year ended
December 31, 2009 compared to a segment profit of $3.9 million in
2008.





Nonferrous
metals





Nonferrous
metals segment revenue for 2009 amounted to $0.27 million, representing a
decrease of approximate $3.4 million or 91% compared to 2008. In addition, the
nonferrous metals segment has reported a significant change in segment loss to
$1.8 million in 2009 from segment loss of $3 million in 2008. The performance of
the nonferrous metals segment was materially impacted by (i) No production
occurred at Qianzhen Mining in 2009 due to the low grade of the ores supplied by
Qingshan Metal and low copper price. Also, no production occurred in 2009 at
Qingshan due to the low copper price and (ii) Xingzhen did not achieve projected
targets in 2009 for the aforementioned reasons. (iii) we sold a part
of inventory due to the price increase compared to 2008.





FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES





Cash and
cash equivalents were $0.3 million as of December 31, 2009, an increase of $0.1
million as compared to the balance at December 31, 2008 of $0.2 million. The
increase in cash position was mainly due to the decrease of capital expenditures
for mine developments, construction, and purchase of processing plants and
mining equipments at Xiangzhen Mining and Xingzhen Mining.





Net cash
used in operating activities for the year ended December 31, 2009 was $1.2
million, as compared to $2.2 million used for the year ended December 31, 2008.
The increase in operating cash flows was mainly due to the $3 million operating
net income in 2009 compared to net loss $12.1 million in 2008.





Net cash
provided by investing activities of $7.7 million for the year ended December 31,
2009, as compared to $1.9 million used for the year end December 31, 2008 , The
increase of the cash position in investing activities cash flows was mainly due
to the disposal of discontinued operations.





Net cash
used in financing activities for the year ended December 31, 2009 was $6.3
million, which was mainly due to repurchase of the convertible notes. For the
same period in 2008, net cash provided by financing activities were $1.0
million, which was mainly due to proceeds from short-term borrowings from banks
and relative parties.




34





The
Company has incurred net operating losses of approximately $5.7 million and
$7.1 million during the years ended December 31, 2009 and 2008,
respectively. The Company had cash used in operation of $1.1 million and
$2.2 million for the years ended December 31, 2009 and 2008, respectively. The
Company’s ability to continue as a going concern is dependent upon its ability
to obtain the necessary financing to meet its obligations and repay its
liabilities arising from normal business operations when they come due, to fund
possible future acquisitions, and to generate profitable operations in the
future. Management plans to continue to provide for its capital requirements by
issuing additional equity securities and debt in addition to executing their
business plan. The outcome of these matters cannot be predicted at this time and
there are no assurances that if achieved, the Company will have sufficient funds
to execute its business plan or generate positive operating results. These
financial statements do not include any adjustments to the amounts and
classification of assets and liabilities that may be necessary should the
Company be unable to continue as a going concern.








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, 2009 and
2008 Natural Resource Compensation Charges of $78,383 and $108,180,
respectively, were charged to operations and included in cost of
sales.





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 senior notes. The Notes have a maturity
of December 27, 2012.





Redemption
of Convertible Notes





On
September 22, 2009, the Company entered into a Notes Repurchase Agreement with
Mountview Path Limited (“Mountview”), a corporation incorporated under the laws
of the British Virgin Islands, pursuant to which the Company repurchased the
entire 6.75% Senior Convertible Notes due 2012 of US $28,000,000 principal
amount ( “Notes”), originally issued to Citadel. Mountview is the current legal
and beneficial owner of the entire amount of the Notes.





The
consideration payable in the transaction consists of US $8,000,000 in cash and 5
million shares of the Company’s common stock. The gain on convertible note
redemption is $14.0 million, or approximate 0.56 per share. Mountview were
entitled to any accrued and unpaid interest on the Notes. The closing of this
transaction occurred on December 23, 2009.





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.




35





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.





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.





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.





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.





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




36




CONCENTRATION
OF CUSTOMERS





We had
five main customers who contributed approximately $3,441,000 or 81% of the
Company’s consolidated net revenue for the year ended December 31, 2009. For the
same period of 2008, the Company had five main customers who contributed
approximately $5,330,000 or 76% 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, 2009:





Revenue
            
            
            PercentageCustomer
            
            (In
      thousands)
            
            
            (%)Handan
      Hongzhi Ltd
            
            $
            892
            
            
            
            21
            %Ningxia
      Jinhe Ltd
            
            
            815
            
            
            
            19
            %Laiwu
      Steel Ltd
            
            
            638
            
            
            
            15
            %Inner
      Mongolia Huadesanli Trading Ltd
            
            
            621
            
            
            
            15
            %Zibo
      Bofeng Ltd
            
            
            475
            
            
            
            11
            %$
            3,441
            
            
            
            81
            %





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





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




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.




37





ITEM
      9A.
            CONTROLS AND
      PROCEDURES.





Effectiveness
of Control Procedures





As
required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this report. Our disclosure controls and procedures
are designed to provide reasonable assurance that the information required to be
disclosed by us in reports that we file under the Exchange Act with the SEC is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms and that such information is accumulated and
communicated to our management, as appropriate, to allow such persons to make
timely decisions regarding required disclosures. Based upon the results of our
evaluation, our principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures were effective as of
December 31, 2009.





Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as such term is defined in Rules 13a-15(f) or
15d-15(f), under the Exchange Act.  Internal control over financial
reporting is a process designed by, or under the supervision of, our principal
executive and principal financial officers and affected by our Board of
Directors, management and other personnel, and to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (ii)provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on its financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Management
has assessed the effectiveness of our internal control over financial reporting
as of December 31, 2009.  In making this assessment, management used the
criteria set forth in the framework established by the Committee of Sponsoring
Organizations of the Treadway Commission Internal Control—Integrated Framework,
(COSO). Based on its assessment, management believes that, as of
December 31, 2009, our internal control over financial reporting is effective
based on those criteria.




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.




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,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.





ITEM
      9B.
            OTHER
      INFORMATION.





None




38





PART
III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(A) OF THE EXCHANGE ACT





Set forth
below is certain information concerning each of the directors and executive
officers of the Company as of March 31, 2010. None of our directors or executive
officers holds directorships in other public companies as of March 31, 2010
except Gene Michael Bennett who is also an independent director for Kunming
Shenghuo Pharmaceutical (NYSE Amex: KUN) and Konman Wong who is also an
independent director for Group Sense International Ltd. a company listed in Hong
Kong stock exchange (stock quote 601). The directors listed below will serve
until the Company’s next annual meeting of the stockholders:





Name
            
            Age
            
            PositionXiao-Jing
      Yu
            
            53
            
            Director,
      CEO and Chairman of the BoardHelin
      Cui
            
            54
            
            Director,
      President and Chief Operating OfficerXueming
      Xu
            
            49
            
            DirectorJiusheng
      Zhang
            
            46
            
            Chief
      Financial OfficerYouming
      Yang
            
            55
            
            Director,
      Chairman of Compensation CommitteeJian
      Zhang
            
            68
            
            Director,
      Chairman of Corporate Governance and Nominating
  CommitteeKonman
      Wong
            
            46
            
            DirectorLigang
      Wang
            
            49
            
            Vice
      President and President of Qianzhen MiningGene
      Michael Bennett
            
            62
            
            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 Wulatehou 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. Helin Cuihasserved as Director,
President and Chief Operating Officer. He has more than 20 years’ experience in
the mining industry. He is currently a director and deputy chairman of Inner
Mongolia Wulatehou 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. Xueming Xu hasserved as Director. He
has more than 20 years’ experience in the mining industry. He is currently
director and President of Inner Mongolia Wulatehou 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 Program run by Tsing Hua
University.





Mr. Youming Yanghasserved as Director. 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 1994 to
April 2000. Mr. Yang studied geology and graduated from Central South China
Mining and Metallurgy College.





Mr. Jian Zhanghas served 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. since August 2005. Prior to that, Mr. Zhang
was General Manager of China Nonferrous Mining Construction Group from September
2003 to August 2005. He served as General Manager 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.





Mr. Konman Wong hasserved as Director since
July 2009. He is currently Managing Director of Action Precision Ltd., a metal
casting manufacturer for the telecommunication industry. Mr. Wong is a member of
CPA in both U.S. and Hong Kong and has extensive experience in direct
investment, fund raising, financial management, auditing and forming strategic
alliances. From April 2000 to July 2009, he served as the managing director of
Fortune Capital Group Ltd. Fortune Capital Group provides venture capital and
investment fund services to enterprises.  Mr. Wong graduated in
December 1989 from the University of Hawaii at Manoa in the United States with a
bachelor’s degree in Accounting. Currently, he also serves as Independent and
non-executive director of Group Sense International Ltd. a company listed in
Hong Kong stock exchange (stock quote 601).




39





Mr. Jiusheng Zhang has served
as the Chief Financial Officer of the Company since March 2009. 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 Bennetthasserved
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. He was Independent Director of one
US-listed Chinese company: Kunming ShengHuo Pharmaceutical (AMEX: KUN).
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 Wanghas served 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.





As
directors of the Company, we elected them based on their experiences in
financial or industrial work. Most of our directors have over 25 years’
experience in the relevant industry, such as Messrs. Helin Cui, Xueming Xu, Jian
Zhang, Youming Yang, who all have over 20 years’ experience in the management of
nonferrous mining. They are qualified for being directors of the Company which
is mainly conducting the business of mining operation. As an Amex listed
company, we also hire some financial experts as the director of the Company, who
are Messrs. Gene Michael Bennett and Konman Wong.





Ms.
Xiaojing Yu has over 20 years’ experience in the mining and financing industry.
As the founder of the Company, she is a major shareholder (54.58%) of the
Company. To stabilize the experienced management team and for the long term
development of the Company, she has served as both the Chairwoman of Board and
CEO of the Company.





We do not
have a Lead independent Director. We consider the diversity in identifying
nominees for directors in two aspects: sufficient experiences in management of
mining operations and financing.





Involvement
in Certain Legal Proceedings





During
the past ten 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);





(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




40




(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.





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 the
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, Konman Wong 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, Konman Wong 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 3 meetings in 2009 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 Konman Wong, Jian Zhang and Youming
Yang, with Youming Yang as the chairman, all of whom are “independent”
directors.





Compensation Committeehas
not held any meeting in 2009.





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, Konman Wong, and Youming Yang with Jian Zhang as the
chairman.




41





Nominating and Corporate Governance
Committeehas not held any meeting in 2009.





In 2009,
the board of directors held five meetings and attendance rates for all board
members are 100%.





ITEM
      11.
            EXECUTIVE
      COMPENSATION





During
2009, no executive officer’s total annual salary and bonus exceeded
$100,000.





Summary
Compensation Table




Name
      and Principal
                Underlying
                Positions
      (a)
              
              Year
                (b)
              
              Salary
      Paid in Cash
                (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
              
              2009
              
              $
              70,287
              
              
              $
              0
              
              
              $
              0
              
              
              
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              70,2872008
              
              $
              179,985
              
              
              $
              0
              
              
              $
              0
              
              
              
              98,307
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              278,292Xueming
      Xu,
                President
      and COO*
              
              2009
              
              $
              39,550
              
              
              $
              0
              
              
              $
              0
              
              
              
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              39,5502008
              
              $
              82,494
              
              
              $
              0
              
              
              $
              0
              
              
              
              48,865
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              131,359Helin
      Cui, President and COO*
              
              2009
              
              $
              29,587
              
              
              $
              0
              
              
              $
              0
              
              
              
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              29,5872008
              
              $
              26,994
              
              
              $
              0
              
              
              $
              0
              
              
              
              3,323
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              30,317Hu
      Ye, CFO**
              
              2009
              
              $
              9,747
              
              
              $
              0
              
              
              $
              0
              
              
              
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              9,7472008
              
              $
              42,029
              
              
              $
              0
              
              
              $
              0
              
              
              
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              42,029Jiusheng
      Zhang, CFO**
              
              2009
              
              $
              22,980
              
              
              $
              0
              
              
              $
              0
              
              
              
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              22,9802008
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              
              76,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              76,000Ligang
      Wang, Vice President
              
              2009
              
              $
              10,538
              
              
              $
              0
              
              
              $
              0
              
              
              
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              10,5382008
              
              $
              23,764
              
              
              $
              0
              
              
              $
              0
              
              
              
              3,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              26,764











** Hu Ye
was CFO from May 2008 to February 2009. Jiusheng Zhang was appointed CFO in
March 2009 and his stock awarded in 2008 was issued for his service of financial
consultancy.





***
Common shares awarded under 2009 Omnibus Long-term Incentive Plan approved on
October 29, 2009. The number of shares of stock award for each officer or
director was determined by dividing the amount of back pay due such officer,
director, employee or consultant by $0.38 which was the average daily trading
price per share for the Company’s common stock in December 2008. The stock
awards are included in the total compensation in 2008. (The salary of 2008
amounting to $153,495 has not been paid, including Xiaojing Yu’s salary
amounting to $98,307, Xueming Xu’s salary amounting to $48,865, Helin Cui’s
salary amounting to $3,323 and Ligang Wang’s salary amounting to
$3,000.)




Outstanding
Equity Awards at Fiscal Year-End





2009
Omnibus Long-term Incentive Plan was approved both by Board of Directors of the
Company on October 29, 2009 and by shareholders of a majority of our voting
stock and upon the effectiveness of the Information Statement on Form 14C. The
shares of Stock issuable under the 2009 Plan are available either from
authorized but unissued shares or from shares reacquired by us on the open
market. The maximum number of shares of Stock available for issuance under the
2009 Plan shall be 2,000,000, and the maximum number of common stock that will
be awarded to any one Grantee (as defined) during any calendar year shall not
exceed 300,000.





On
February 4, 2010, 760,000 common shares were issued to 42 persons of employees,
consultants, officers and directors under 2009 Omnibus Long-term Incentive Plan.
The number of shares of stock award for each officer, director, employee or
consultant was determined by dividing the amount of back pay due such officer,
director, employee or consultant by $0.38 which was the average daily trading
price per share for the Company’s common stock in December 2008.




42




Director
Compensation





Compensation
for all directors in 2008-2009 as follows:





Name
      (a)
              
              Year
              
              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)Yonming
      Yang*
              
              2009
              
              $
              10,538
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              10,5382008
              
              $
              13,391
              
              
              
              4,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              17,391Jian
      Zhang*
              
              2009
              
              $
              10,538
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              10,5382008
              
              $
              13,391
              
              
              
              4,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              17,391Konman
      Wong*
              
              2009
              
              $
              5,269
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              5,269Gene
      Michael Bennett*
              
              2009
              
              $
              13,200
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              13,2002008
              
              $
              19,800
              
              
              
              4,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              23,800











** Common
shares awarded under 2009 Omnibus Long-term Incentive Plan approved on October
29, 2009. The number of shares of stock award for each director was determined
by dividing the amount of back pay due such officer, director, employee or
consultant by $0.38 which was the average daily trading price per share for the
Company’s common stock in December 2008. The stock awards are included in the
total compensation in 2008.





We
currently pay an independent director the compensation of $10,538 in 2009,
except the Chairman of Audit Committee, Gene Michael Bennett whose 2009
compensation was $13,200.





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 March 31, 2010 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 March 31, 2010, and (iv) all of our executive
officers and directors as a group.





Amount
      and Nature of Beneficial Ownership (1)Name
      and Address
              
              Number
      of
                Shares(2)
              
              
              Percentage
                Owned
      (3)Xiaojing
      Yu, CEO
              
              
              15,267,000
              
              
              
              54.58
              %Xueming
      Xu, COO & President
              
              
              1,990,000
              
              
              
              7.11
              %Helin
      Cui, COO & President
              
              
              208,800
              
              
              
              *Jiusheng
      Zhang, CFO
              
              
              200,000
              
              
              
              *Jian
      Zhang, Independent Director
              
              
              10,000
              
              
              
              *Youming
      Yang, Independent Director
              
              
              10,000
              
              
              
              *Gene
      Michael Bennett, Independent Director
              
              
              10,000
              
              
              
              *Konman
      Wong, Indepdent Director
              
              
              0
              
              
              
              *Ligang
      Wang, Vice President
              
              
              107,900
              
              
              
              *American
      Eastern Securities, Inc. (4)
              
              
              2,060,000
              
              
              
              7.36
              %Mountview
      Path Ltd.
              
              
              5,000,000
              
              
              
              17.87
              %Directors
      and executive officers as a group (9 persons)
              
              
              17,803,700
              **
              
              
              63.64
              %







*
            Less than 1%





**
            Including
      the common shares awarded under 2009 Omnibus Long-term Incentive Plan
      approved on October 29, 2009.





(1)
            As
      of March 31, 2010, there were 27,974,514 shares 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 by the 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.




43




(3)
            In
      determining the percent of common stock owned by a person (a) the
      numerator is the number of 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 the total
      of (i) the shares of common stock outstanding as of March 31, 2010, and
      (ii) any shares of common stock which the person has the right to acquire
      within 60 days upon the exercise of options or warrants 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 (“Tianxiang”), 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%.





Tianxiang
provided exploration services to Xingzhen Mining for service fees of $52,073 in
2008 and did not provide any service to Xingzhen Mining in 2009.





ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





Sherb
& Co. LLP (“Sherb”) has audited our financial statements for the 2009 and
2008 fiscal years. Grobstein, Horwath & Company, LLP (“Horwath”), has
reviewed our financial statements for the 2008 fiscal year. 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 for professional services rendered for the audit of the
Company’s financial statements and review services for interim quarterly
financial statements for the fiscal years ended December 31, 2009 and 2008 both
were $160,000 and $130,000, respectively. The aggregate fees billed by Horwath
for professional services rendered for the review services of the Company’s
interim quarterly financial statements for the fiscal year ended December 31,
2008 were $66,000 respectively.





Audit-Related Fees. There were
no fees for assurance and related services by Sherb and Horwath for the fiscal
year ended December 31, 2009 and 2008.





Tax Fees. We engage E-Fang
Accountancy Corp (“E-Fang”) to provide service for the income tax returns in the
U.S. The tax service fee for the fiscal year ended December 31, 2009 is
estimated to be $5,000, and the tax service fee for the fiscal year ended
December 31, 2008 was $5,742. There were no fees for tax compliance, tax advice
or tax planning services by Sherb and Horwath for the fiscal year ended December
31, 2009 and 2008.





All Other Fees. There were no
other fees for either audit-related or non-audit services billed by Sherb,
E-Fang and Horwath for the fiscal years ended December 31, 2009 and
2008.




44




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)


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)





45




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,
      2008.10.21
              
              Share
      Purchase Agreement by and between Inner Mongolia Xiangzhen Mining Group
      Co., Ltd. and Fortune Pegasus International Limited, dated September 21,
      2009 incorporated by reference to exhibit 10.1 of Form 8-K filed on
      September 25, 2009.10.22
              
              Notes
      Repurchase Agreement by and between China Shen Zhou Mining &
      Resources, Inc. and Mountview Path Limited, dated September 22, 2009
      incorporated by reference to exhibit 10.2 of Form 8-K filed on September
      25, 2009.14.1
              
              Code
      of Ethics, dated as of April 16, 2007 (Incorporated by reference to the
      Company’s Form 10-KSB filed on April 17, 2007.)*21.1
              
              Subsidiaries
      of the Company*
      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.











46





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:
      March 31, 2010
              
              /s/
      Xiaojing YuXiaojing
      YuDirector,
      Chief Executive Officer, and Chairman of the BoardDated:
      March 31, 2010
              
              /s/
      Jiusheng ZhangJiusheng
      ZhangChief
      Financial Officer
                (Principal
      Financial and Accounting Officer)




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
            
            Chairman
      of the Board and Chief Executive Officer
            
            March
      31, 2010Xiaojing
      Yu
            
            (Principal
      Executive Officer)/s/
      Helin Cui
            
            Director,
      Chief Operating Officer
            
            March
      31, 2010Helin
      Cui/s/
      Xueming Xu
            
            Director
            
            March
      31, 2010Xueming
      Xu/s/
      Gene Michael Bennett
            
            Director
            
            March
      31, 2010Gene
      Michael Bennett/s/
      Jian Zhang
            
            Director
            
            March
      31, 2010Jian
      Zhang/s/
      Konman Wong
            
            Director
            
            March
      31, 2010Konman
      Wong/s/
      Youming Yang
            
            Director
            
            March
      31, 2010Youming
      Yang





47





China
Shen Zhou Mining & Resources, Inc. and Subsidiaries




Index
to Consolidated Financial Statements





PageReport
      of Independent Registered Public Accounting Firm
            
            
            49Consolidated
      Balance Sheets
            
            
            50Consolidated
      Statements of Operations
            
            
            51Consolidated
      Statements of Changes in Stockholders’ Equity
            
            
            52Consolidated
      Statements of Cash Flows
            
            
            53Notes
      to Consolidated Financial Statements
            
            
            55-83





48





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 sheets of China Shen Zhou Mining
& Resources, Inc. and Subsidiaries (the “Company”) as of December 31, 2009
and 2008 and the related consolidated statements of operations and comprehensive
income, stockholders' equity and cash flows for the years ended December 31,
2009 and 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 audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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, audits of its 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
audits provide 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, 2009 and the results of their operations and their cash flows for the years
ended December 31, 2009 and 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


March 31,
2010





49




CHINA
SHEN ZHOU MINING & RESOURCES, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (Amounts
in thousands, except share data)
 
 December
      31,2009
              
              
              2008ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              
              $
              333
              
              
              $
              200Accounts
      receivable, net
              
              
              
              302
              
              
              
              561Other
      deposits and prepayments, net
              
              
              
              855
              
              
              
              1,111Inventories
              
              
              
              3,721
              
              
              
              2,958Restricted
      assets
              
              
              
              740
              
              
              
              -Assets
      - Discontinued operations
              
              
              
              -
              
              
              
              10,915Total
      current assets
              
              
              
              5,951
              
              
              
              15,745Prepayment
      for office rent
              
              
              
              280
              
              
              
              505Available
      for sale investment
              
              
              
              146
              
              
              
              146Property,
      machinery and mining assets, net
              
              
              
              34,902
              
              
              
              36,862Deferred
      debt issuance costs
              
              
              
              -
              
              
              
              1,755Total
      assets
              
              
              $
              41,279
              
              
              $
              55,013LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities
              
              
              $
              4,694
              
              
              $
              3,470Fair
      value of detachable warrants liability
              
              
              
              -
              
              
              
              33Short
      term bank loans
              
              
              
              3,603
              
              
              
              1,756Other
      payables and accruals
              
              
              
              6,667
              
              
              
              4,639Taxes
      payable
              
              
              
              333
              
              
              
              415Due
      to related parties
              
              
              
              -
              
              
              
              2,490Liabilities
      - Discontinued operations
              
              
              
              -
              
              
              
              328Total
      current liabilities
              
              
              
              15,297
              
              
              
              13,131Due
      to related parties
              
              
              
              2,297
              
              
              
              -Convertible
      notes payable
              
              
              
              -
              
              
              
              24,251Total
      liabilities
              
              
              
              17,594
              
              
              
              37,382STOCKHOLDERS’
      EQUITY:Common
      Stock ($0.001 par value; 50,000,000 shares authorized;27,214,514
      shares and 22,214,514 shares issued and outstandingas
      of December 31, 2009 and 2008, respectively
              
              
              $
              27
              
              
              $
              22Additional
      paid-in capital
              
              
              
              28,518
              
              
              
              25,251PRC
      statutory reserves
              
              
              
              1,672
              
              
              
              1,672Accumulated
      other comprehensive income
              
              
              
              3,839
              
              
              
              4,020Accumulated
      deficit
              
              
              
              (10,342
              )
              
              
              (13,356
              )Stockholders'
      equity - China Shen Zhou Mining & Resources, Inc. and
      Subsidiaries
              
              
              
              23,714
              
              
              
              17,609Noncontrolling
      interest
              
              
              
              (29
              )
              
              
              22Total
      stockholders’ equity
              
              
              
              23,685
              
              
              
              17,631Total
      liabilities and stockholders’ equity
              
              
              $
              41,279
              
              
              $
              55,013
  The
accompanying notes are an integral part of these consolidated financial
statements.
  50
  CHINA
SHEN ZHOU MINING & RESOURCES, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Amounts
in thousands, except per share data)
 
 For
      the Years EndedDecember 31,2009
              
              
              2008Net
      revenue
              
              
              $
              4,192
              
              
              $
              7,137Cost
      of sales
              
              
              
              3,934
              
              
              
              5,830Gross
      profit
              
              
              
              258
              
              
              
              1,307Operating
      expenses:Selling
      and distribution expenses
              
              
              
              94
              
              
              
              146General
      and administrative expenses
              
              
              
              5,853
              
              
              
              8,213Total
      operating expenses
              
              
              
              5,947
              
              
              
              8,359Net
      income (loss) from operations
              
              
              
              (5,689
              )
              
              
              (7,052
              )Other
      income (expense):Interest
      expense
              
              
              
              (2,989
              )
              
              
              (2,744
              )Gain
      on convertible debt extinguishment
              
              
              
              13,959
              
              
              
              -Impairment
      of goodwill
              
              
              
              -
              
              
              
              (1,127
              )Other,
      net
              
              
              
              98
              
              
              
              380Total
      other income (loss)
              
              
              
              11,068
              
              
              
              (3,491
              )Income
      (loss) from continuing operations before income taxes
              
              
              
              5,379
              
              
              
              (10,543
              )Provision
      of income taxes
              
              
              
              (200
              )
              
              
              (544
              )Income
      (loss) from continuing operations
              
              
              
              5,179
              
              
              
              (11,087
              )Discontinued
      operations (Note 3):Loss
      from operations of discontinued component
              
              
              
              (740
              )
              
              
              (1,192
              )Loss
      on disposal of discontinued subsidiary
              
              
              
              (1,476
              )
              
              
              -Loss
      from discontinued operations
              
              
              
              (2,216
              )
              
              
              (1,192
              )Net
      income (loss)
              
              
              
              2,963
              
              
              
              (12,279
              )Less:
      Noncontrolling interests attributable to the noncontrolling
      interests
              
              
              
              51
              
              
              
              130Net
      income (loss) - attributable to China Shen Zhou Mining & Resources,
      Inc. and Subsidiaries
              
              
              
              3,014
              
              
              
              (12,149
              )Other
      comprehensive  (loss) income:Foreign
      currency translation adjustments
              
              
              
              (181
              )
              
              
              1,908Comprehensive income
      (loss)
              
              
              $
              2,833
              
              
              $
              (10,241
              )Net
      income (loss) per common share – basic and dilutedFrom
      continuing operations
              
              
              $
              0.22
              
              
              $
              (0.50
              )From
      discontinued operations
              
              
              
              (0.09
              )
              
              
              (0.05
              )$
              0.13
              
              
              $
              (0.55
              )Weighted
      average common shares outstanding-
      Basic and Diluted
              
              
              
              24,743
              
              
              
              22,215
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  51
  CHINA SHEN ZHOU MINING & RESOURCES, INC AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
 (Amounts
in thousands)
  Common
      Stock
                Number
      of
              
              
              Additional
                Paid-in
              
              
              PRC
                Statutory
              
              
              Accumulated
              
              
              Accumulated
      Other Comprehensive
              
              
              Noncontrolling
              
              
              Total
      Stockholders'Shares
              
              
              Amount
              
              
              Capital
              
              
              Reserves
              
              
              Deficit
              
              
              Income
              
              
              Interest
              
              
              EquityBalance
      at January 1, 2008
              
              
              
              22,215
              
              
              $
              22
              
              
              $
              25,251
              
              
              $
              1,672
              
              
              $
              (1,207
              )
              
              $
              2,112
              
              
              $
              144
              
              
              $
              27,994Net
      income (loss) for the years ended December 31, 2008
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (12,149
              )
              
              
              -
              
              
              
              (130
              )
              
              
              (12,279
              )Foreign
      currency translation adjustment
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,908
              
              
              
              8
              
              
              
              1,916Balance
      at December 31, 2008
              
              
              
              22,215
              
              
              
              22
              
              
              
              25,251
              
              
              
              1,672
              
              
              
              (13,356
              )
              
              
              4,020
              
              
              
              22
              
              
              
              17,631Repayment
      of convertible debt
              
              
              
              -
              
              
              
              -
              
              
              
              (4,878
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (4,878
              )Issuance
      of shares for repurchase the convertible notes
              
              
              
              5,000
              
              
              
              5
              
              
              
              8,145
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,150Net
      income (loss) for the year ended December 31, 2009
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,014
              
              
              
              -
              
              
              
              (51
              )
              
              
              2,963Foreign
      currency translation adjustment
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (181
              )
              
              
              -
              
              
              
              (181
              )Balance
      at December 31, 2009
              
              
              
              27,215
              
              
              $
              27
              
              
              $
              28,518
              
              
              $
              1,672
              
              
              $
              (10,342
              )
              
              $
              3,839
              
              
              $
              (29
              )
              
              $
              23,685
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 52
 
 CHINA
SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Amounts
in thousands, except share data)
 For
      the years EndedDecember
      312009
              
              
              2008Cash
      flows from operating activities:Net
      income (loss)
              
              
              $
              3,014
              
              
              $
              (12,149
              )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Loss
      from operations of discontinued component
              
              
              
              740
              
              
              
              1,192Write
      off deferred tax abilities of discontinued
operations
              
              
              
              -
              
              
              
              (1,201
              )Loss
      on sale of discontinued operations, net of income taxes
              
              
              
              1,476
              
              
              
              -Gain
      on sale of repurchase convertible notes
              
              
              
              (13,959
              )
              
              
              -Provision
      for doubtful accounts
              
              
              
              -
              
              
              
              (2
              )Provision
      for deferred tax asset
              
              
              
              -
              
              
              
              685Impairment
      provision for inventories
              
              
              
              34
              
              
              
              -Impairment
      of goodwill
              
              
              
              -
              
              
              
              1,127Depreciation
      and amortization
              
              
              
              2,514
              
              
              
              4,343Write
      off of deferred tax abilities
              
              
              
              -
              
              
              
              -Loss
      from investments
              
              
              
              -
              
              
              
              -Deferred
      income tax benefits
              
              
              
              -
              
              
              
              (178
              )Fair
      value adjustment of warrants
              
              
              
              7
              
              
              
              (1,067
              )Loss
      on disposal of property, machinery and mining assets
              
              
              
              15
              
              
              
              -Accrual
      of coupon interests and accreted principal
              
              
              
              1,169
              
              
              
              1,489Amortization
      of deferred financing costs
              
              
              
              1,207
              
              
              
              1,576Amortization
      of debt issuance costs
              
              
              
              318
              
              
              
              415Noncontrolling
      interests
              
              
              
              (51
              )
              
              
              (122
              )Changes
      in operating assets and liabilities:Increase
      (decrease) in -Accounts
      receivable
              
              
              
              259
              
              
              
              1,922Other
      deposits and prepayments
              
              
              
              256
              
              
              
              40Prepayment
      for office rent
              
              
              
              225
              
              
              
              (505
              )Inventories
              
              
              
              (797
              )
              
              
              (1,319
              )Due
      from related companies
              
              
              
              -
              
              
              
              (625
              )Restricted
      assets
              
              
              
              (740
              )
              
              
              -Increase
      (decrease) in -Accounts
      payable and accrued liabilities
              
              
              
              1,224
              
              
              
              989Other
      payables and accruals
              
              
              
              2,028
              
              
              
              1,200Taxes
      payable
              
              
              
              (82
              )
              
              
              167Net
      cash used in operating activities from continuing
    operations
              
              
              
              (1,143
              )
              
              
              (2,023
              )Net
      cash used in operating activities from discontinued
    operations
              
              
              
              (33
              )
              
              
              (213
              )Net
      cash used in operating activities
              
              
              
              (1,176
              )
              
              
              (2,236
              )
 
 53
  CHINA
SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
 (Amounts
in thousands, except share data)
 
 For
      the year Ended
                December
      312009
              
              
              2008Cash
      flows from investing activities:Purchases
      of property, machinery and mining assets
              
              
              $
              (2,520
              )
              
              $
              (1,894
              )Sales
      of property, machinery and mining assets
              
              
              
              1,987
              
              
              
              -Net
      cash used in investing activities from continuing
    operations
              
              
              
              (533
              )
              
              
              (1,894
              )Net
      cash provided by disposal of discontinued operations
              
              
              
              8,200
              
              
              
              -Net
      cash provided by (used in) investing activities
              
              
              
              7,667
              
              
              
              (1,894
              )Cash
      flows from financing activities:Repayment
      at the convertible notes
              
              
              
              (8,000
              )
              
              
              -Due
      to related parties
              
              
              
              (193
              )
              
              
              604Repayment
      at short-term bank loans
              
              
              
              (2,518
              )Proceeds
      from short-term bank loans
              
              
              
              4,362
              
              
              
              442Net
      cash (used in) provided by financing activities
              
              
              
              (6,349
              )
              
              
              1,046Foreign
      currency translation adjustment
              
              
              
              (9
              )
              
              
              335Net
      increase (decrease) in cash and cash equivalents
              
              
              
              133
              
              
              
              (2,749
              )Cash
      and cash equivalents at the beginning of the year
              
              
              
              200
              
              
              
              2,949Cash
      and cash equivalents at the end of the year
              
              
              $
              333
              
              
              $
              200Non-cash
      investing and financing activitiesShares
      issued to repurchase debt (5 million shares)
              
              
              $
              8,150,000
              
              
              $
              -Supplemental
      disclosures of cash flow information:Cash
      paid for interest expenses
              
              
              $
              241
              
              
              $
              254Cash
      paid for income tax
              
              
              $
              -
              
              
              $
              -
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  54


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, 2009, 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 processing
      of nonferrous metals and 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
            %
            
            Exploration,
      extraction and processing of 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, processing and sales of mining
  products.





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.




55





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.





The
accompanying consolidated financial statements have been prepared on a going
concern basis. The Company has incurred net operating losses of
approximately $5.7 million and $7 million during the years ended
December 31, 2009 and 2008, respectively. The Company had cash used in
operations of approximately $1.2 million and $2.2 million for the years
ended December 31, 2009 and 2008, respectively. The Company’s ability to
continue as a going concern is dependent upon its ability to obtain the
necessary financing to meet its obligations and repay its liabilities arising
from normal business operations when they come due, to fund possible future
acquisitions, and to generate profitable operations in the future. Management
plans to continue to provide for its capital requirements by issuing additional
equity securities and debt in addition to executing their business plan. The
outcome of these matters cannot be predicted at this time and there are no
assurances that if achieved, the Company will have sufficient funds to execute
its business plan or generate positive operating results. These
consolidated financial statements do not include any adjustments to the amounts
and classification of assets and liabilities that may be necessary should the
Company be unable to continue as a going concern.





NOTE
3 - DISCONTINUED OPERATIONS





On
November 20, 2009, the Company completed the sale of all its ownership interest
in Tun-Lin Limited Liability Company (“Tun-Lin”), a subsidiary of the Company
within the nonferrous metals segment. The Company received cash proceeds of $8.2
million.





The
Company has recorded a loss from operations of discontinued component, net of
income taxes, of approximately $740,000, and a loss on disposal of discontinued
subsidiary, net of income taxes, of approximately $1,476,000. In accordance with
Accounting Standard Codification (“ASC”) 360 (Formerly FAS 144) of Financial
Accounting Standards Board (“FASB”), Accounting for Impairment or Disposal of
Long-Lived Assets, the Company has reflected Tun-Lin’s results of operations in
the consolidated statements of operations through the date of the sale as
discontinued operations for all periods presented. The assets and liabilities of
Tun-Lin in the Company’s consolidated balance sheet as of December 31, 2008 have
been reclassified. The cash flows of discontinued operations also have been
reclassified.




56




The
following table presents the revenue, net loss from discontinued operations and
on disposal of Tun-Lin for the periods presented:




Years
      Ended December 31,2009
              
              2008(In
      thousands)
              
              (In
      thousands)Revenue
              
              $
              -
              
              $ -Net
      loss from discontinued operations,
              
              $
              (740)
              
              $            
      (1,192)Net
      gain (loss) on disposal of subsidiary
              
              $
              (1,476)
              
              $
      Not Applicable





NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Use
of Estimates




The
Company’s consolidated financial statements have been prepared in accordance
with the accounting principles generally accepted in the United States of
America (“US GAAP”). 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 balance sheet date and the reported
amounts of revenues and expenses during the reporting periods. 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.





Certain
of the Company’s accounting policies require higher degrees of judgment than
others in their application. Management evaluates all of its estimates and
judgments on an on-going basis





Principles
of Consolidation




The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries (AFMG, Xiangzhen Mining, and Qianzhen Mining) and its
majority owned subsidiaries (Qingshan Metal and Xingzhen Mining).  All
inter-company balances and transactions have been eliminated.





Minority
interest in the net assets and earnings or losses of Xingzhen Mining have been
absorbed by the Company as minority interest holders in the subsidiary have no
basis in their investment in the subsidiary.




57





Basis
of preparation




The
accompanying consolidated financial statements have been prepared in conformity
with US GAAP. The basis of accounting differs from that used in the statutory
accounts of the Company, which are prepared in accordance with the accounting
principles of the PRC (“PRC GAAP”). The Company’s functional currency is the
Chinese Renminbi (“RMB”); however the accompanying consolidated financial
statements have been translated and presented in United States Dollars (“USD”).
All significant inter-company transactions and balances have been
eliminated





Cash
and Cash Equivalents




The
Company considers all highly liquid debt instruments purchased with a maturity
period of three months or less to be cash or cash equivalents. The carrying
amounts reported in the accompanying consolidated balance sheets for cash and
cash equivalents approximate their fair value. Substantially all of the
Company’s cash is held in bank accounts in the PRC and is not protected by FDIC
insurance or any other similar insurance. Restricted cash is excluded from
cash and cash equivalents and is included in restricted 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 FASB ASC 320. 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.




58





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.





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.




Estimated
useful lives of the Company’s assets are as follows:





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





Foreign
Currency




The
Company’s principal country of operations is the PRC and one of the subsidiaries
is located in Kyrgyz Republic. The financial position and results of
operations of the Company’s subsidiaries located in the PRC and
Kyrgyz Republic are recorded in Renminbi (“RMB”) and Kyrgyz
Som (“KGS”) as the functional currency, respectively. The results of
operations denominated in foreign currency are translated at the average rate of
exchange during the reporting period.





Assets
and liabilities denominated in foreign currencies at the balance sheet date are
translated at the market rate of exchange ruling at that date. The registered
equity capital denominated in the functional currency is translated at the
historical rate of exchange at the time of capital contribution. All translation
adjustments resulting from the translation of the financial statements into the
reporting currency (“US dollar”) are recorded in accumulated other comprehensive
income, a separate component within shareholders’ equity.




59





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





December
      31, 2009
            
            December
      31, 2008Balance
      sheet items, except for the registered and paid-up capital and retained
      earnings, as of year end
            US$1=RMB6.8282
              US$1=KGS42.6393
            
            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 years then
      end.
            US$1=RMB6.8321
              US$1=KGS42.7090
            
            US$1=RMB6.9351
              US$1=KGS36.6184





For the
years ended December 31, 2009 and 2008, foreign currency translation adjustment
of approximately ($181,000) and $1,908,000, 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.





Noncontrolling
Interest




Noncontrolling
interests in the Company’s subsidiaries are recorded in accordance with the
provisions of FASB ASC 810  and are reported as a component of
equity, separate from the parent’s equity.  Purchase or sale of equity
interests that do not result in a change of control are accounted for as equity
transactions.  Results of operations attributable to the noncontrolling
interest are included in our consolidated results of operations and, upon
loss of control, the interest sold, as well as interest retained, if any, will
be reported at fair value with any gain or loss recognized in
earnings.





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





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.




60





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.





(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.





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 as of December 31, 2008.




61





Financial
instruments




Effective
January 1, 2008, the Company adopted FASB ASC 820-Fair Value Measurements and
Disclosure or ASC 820 for assets and liabilities measured at fair value on a
recurring basis. ASC 820 establishes a common definition for fair value to be
applied to existing generally accepted accounting principles that require the
use of fair value measurements establishes a framework for measuring fair value
and expands disclosure about such fair value measurements. The adoption of ASC
820 did not have an impact on the Company’s financial position or operating
results, but did expand certain disclosures.





ASC 820
defines fair value as the price that would be received upon sale of an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Additionally, ASC 820 requires the use of
valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs. These inputs are prioritized below:





Level 1:
Observable inputs such as quoted market prices in active markets for identical
assets or liabilities





Level 2:
Observable market-based inputs or unobservable inputs that are corroborated by
market data





Level 3:
Unobservable inputs for which there is little or no market data, which require
the use of the reporting entity’s own assumptions.





The
Company values its financial instruments as required by estimating their fair
value. 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, restricted assets, available for sale investment, accounts
payable, warrant liability, other payables and accruals,, short-term bank
loans, other current liabilities.





Cash and
cash equivalents include money market securities and commercial paper that are
considered to be highly liquid and easily tradable. These securities are valued
using inputs observable in active markets for identical securities and are
therefore classified as Level 1 within the fair value hierarchy.





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.





Taxation





(a)
            Enterprise Income
      Tax




Taxation
on profits earned in the PRC are calculated on the estimated assessable profits
for the year at the rates of taxation prevailing in the PRC after taking into
effect the benefits from any special tax credits or “tax holidays” allowed in
the PRC.




62





The
Company provides for deferred income taxes using the asset and liability method.
Under this method, the Company recognizes deferred income taxes for tax credits
and net operating losses available for carry-forwards and significant temporary
differences. The Company classifies deferred tax assets and liabilities as
current or non-current based upon the classification of the related asset or
liability in the financial statements or the expected timing of their reversal
if they do not relate to a specific asset or liability. The Company provides a
valuation allowance to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of the deferred tax
assets will not be realized.





Income
taxes are accounted for under the Statement of FASB ASC 740, Income Taxes. Under
the asset and liability method of ASC 740, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to temporary
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases and tax loss carry forwards. Any
deferred tax assets and liabilities would be measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.





Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of December 31, 2009, is not
material to its results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax benefits as of
December 31, 2009, if recognized, would not have a material effect on its
effective tax rate. The Company further believes that there are no tax positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Company’s results of operations, financial condition or
cash flows.





(b) Value Added
Tax


The
Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the
State Council came into effect on January 1, 1994. Under these regulations and
the Implementing Rules of the Provisional Regulations of the PRC Concerning
Value Added Tax, value added tax is imposed on goods sold in or imported into
the PRC and on processing, repair and replacement services provided within the
PRC.





Value
added tax payable in the PRC is charged on an aggregated basis at a rate of 13%
or 17% (depending on the type of goods involved) on the full price collected for
the goods sold or, in the case of taxable services provided, at a rate of 17% on
the charges for the taxable services provided, but excluding, in respect of both
goods and services, any amount paid in respect of value added tax included in
the price or charges, and less any deductible value added tax already paid by
the taxpayer on purchases of goods and services in the same financial
year.





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.




63





Stock
Based Compensation




In
December 2004, the Financial Accounting Standards Board, or FASB, issued FASB
ASC 718-10-55 - Compensation-Stock Compensation, or ASC 718-10-55. Under ASC
718-10-55, companies are required to measure the compensation costs of
share-based compensation arrangements based on the grant-date fair value and
recognize the costs in the financial statements over the period during which
employees are required to provide services. Share-based compensation
arrangements include stock options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. In
addition, FASB ASC 825-10-50-10 – Financial Instruments – Overall – Disclosures,
or ASC 825-10-50-10, expresses views of the Securities and Exchange Commission,
or the SEC, staff regarding the interaction between ASC 718-10-55 and certain
SEC rules and regulations and provides the staff's views regarding the valuation
of share-based payment arrangements for public companies. The Company’s
compensation cost is measured on the date of grant at its fair value.Such compensation
amounts, if any, are amortized over the respective vesting periods or period of
service of the option grant





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 (loss)


Accumulated
other comprehensive income includes foreign currency translation adjustments.
Total comprehensive income (loss) for the years ended December 31,
2009 and 2008 was approximately $2,833,000 and $(10,241,000),
respectively.





Reclassifications


Certain
reclassifications have been made to the prior periods’ financial statements to
conform to the current year presentation. These reclassifications had no effect
on previously reported results of operations or the sum of retained earnings and
statutory reserve.





-
            In
      June 2009, the FASB issued authoritative guidance which eliminates the
      concept of a qualifying special-purpose entity, creates more stringent
      conditions for reporting a transfer of a portion of a financial asset as a
      sale, clarifies other sale-accounting criteria, and changes the initial
      measurement of a transferor’s interest in transferred financial assets.
      The guidance is applicable for annual periods beginning after November 15,
      2009 and interim periods therein and thereafter. The Company does not
      expect the adoption of this standard to have a material effect on its
      financial position or results of
operations.





-
            In
      August 2009, the FASB issued guidance on measuring liabilities at fair
      value. This guidance amends the fair value measurements and disclosures by
      providing additional guidance clarifying the measurement of liabilities at
      fair value. This new accounting guidance is effective for reporting period
      ending after December 15, 2009. The Company is evaluating this new
      guidance and the possible impact that the adoption of this new accounting
      guidance will have on their consolidated financial
    statements.




64




Recent
accounting pronouncements




Recent
accounting pronouncements applicable to the Company are summarized
below.




-
            In
      June 2009, the FASB issued authoritative guidance which eliminates the
      exemption for qualifying special-purpose entities from consolidation
      requirements, contains new criteria for determining the primary
      beneficiary of a variable interest entity, and increases the frequency of
      required reassessments to determine whether a company is the primary
      beneficiary of a variable interest entity. The guidance is applicable for
      annual periods beginning after November 15, 2009 and interim periods
      therein and thereafter. The Company does not expect the adoption of this
      standard to have a material effect on its financial position or results of
      operations.





-
            EITF
      Issue No. 07-5 (ASC 815), “Determining Whether an Instrument (or embedded
      Feature) is Indexed to an Entity’s Own Stock” (EITF 07-5) was issued in
      June 2008 to clarify how to determine whether certain instruments or
      features were indexed to an entity’s own stock under EITF Issue No. 01-6
      (ASC 815), “The Meaning of “Indexed to a Company’s Own Stock” (EITF 01-6)
      (ASC 815),. EITF 07-5(ASC 815), applies to any freestanding financial
      instrument (or embedded feature) that has all of the characteristics of a
      derivative as defined in FAS 133, for purposes of determining whether that
      instrument (or embedded feature) qualifies for the first part of the
      paragraph 11(a) scope exception. It is also applicable to any freestanding
      financial instrument (e.g., gross physically settled warrants) that is
      potentially settled in an entity’s own stock, regardless of whether it has
      all of the characteristics of a derivative as defined in FAS 133 (ASC
      815), for purposes of determining whether to apply EITF 00-19 (ASC 815).
      EITF 07-5(ASC 815) does not apply to share-based payment awards within the
      scope of FAS 123(R), Share-Based Payment (FAS 123(R) (ASC 718)). However,
      an equity-linked financial instrument issued to investors to establish a
      market-based measure of the fair value of employee stock options is not
      within the scope of FAS 123(R) and therefore is subject to EITF 07-5(ASC
      815).





-
            In
      January 2009, the FASB issued FSP EITF 99-20-1 (ASC 325), to amend
      the impairment guidance in EITF Issue No. 99-20 (ASC 325) in order to
      achieve more consistent determination of whether an other-than-temporary
      impairment (“OTTI”) has occurred. This FSP amended EITF 99-20 (ASC
      325) to more closely align the OTTI guidance therein to the guidance in
      Statement No. 115 (ASC 320, 10-35-31). Retrospective application to a
      prior interim or annual period is prohibited. The guidance in this FSP was
      considered in the assessment of OTTI for various securities at
      December 31, 2008.





-
            On
      June 5, 2003, the United States Securities and Exchange Commission (“SEC”)
      adopted final rules under Section 404 of the Sarbanes-Oxley Act of 2002
      (“Section 404”), as amended by SEC Release No. 33-9072 on October 13,
      2009. Commencing with its annual report for the year ending December 31,
      2010, the Company will be required to include a report of management on
      its internal control over financial reporting. The internal control report
      must include a statement of:





·
            Management’s
      responsibility for establishing and maintaining adequate internal control
      over its financial reporting;




·
            Management’s
      assessment of the effectiveness of its internal control over financial
      reporting as of year- end; and




·
            The
      framework used by management to evaluate the effectiveness of the
      Company’s internal control over financial
  reporting.




65




Furthermore,
it is required to file the auditor’s attestation report separately on the
Company’s internal control over financial reporting on whether it believes that
the Company has maintained, in all material respects, effective internal control
over financial reporting.





-
            In
      August 2009, the FASB issued the FASB Accounting Standards Update No.
      2009-04 “Accounting for Redeemable Equity Instruments - Amendment to
      Section 480-10-S99” which represents an update to section 480-10-S99,
      distinguishing liabilities from equity, per EITF Topic D-98,
      Classification and Measurement of Redeemable Securities. The Company does
      not expect the adoption of this update to have a material impact on its
      consolidated financial position, results of operations or cash flows. In
      August 2009, the FASB issued the FASB Accounting Standards Update No.
      2009-05 “Fair Value Measurement and Disclosures Topic 820 – Measuring
      Liabilities at Fair Value”, which provides amendments to subtopic 820-10,
      Fair Value Measurements and Disclosures – Overall, for the fair value
      measurement of liabilities. This update provides clarification that in
      circumstances in which a quoted price in an active market for the
      identical liability is not available, a reporting entity is required to
      measure fair value using one or more of the following techniques: 1. A
      valuation technique that uses: a. The quoted price of the identical
      liability when traded as an asset b. Quoted prices for similar liabilities
      or similar liabilities when traded as assets. 2. Another valuation
      technique that is consistent with the principles of topic 820; two
      examples would be an income approach, such as a present value technique,
      or a market approach, such as a technique that is based on the amount at
      the measurement date that the reporting entity would pay to transfer the
      identical liability or would receive to enter into the identical
      liability. The amendments in this update also clarify that when estimating
      the fair value of a liability, a reporting entity is not required to
      include a separate input or adjustment to other inputs relating to the
      existence of a restriction that prevents the transfer of the liability.
      The amendments in this update also clarify that both a quoted price in an
      active market for the identical liability when traded as an asset in an
      active market when no adjustments to the quoted price of the asset are
      required are Level 1 fair value measurements. The Company does not expect
      the adoption of this update to have a material impact on its consolidated
      financial position, results of operations or cash
  flows.





-
            In
      September 2009, the FASB issued the FASB Accounting Standards Update No.
      2009-08 “Earnings Per Share – Amendments to Section 260-10-S99”,which
      represents technical corrections to topic 260-10-S99, Earnings per share,
      based on EITF Topic D-53, Computation of Earnings Per Share for a Period
      that includes a Redemption or an Induced Conversion of a Portion of a
      Class of Preferred Stock and EITF Topic D-42, The Effect of the
      Calculation of Earnings per Share for the Redemption or Induced Conversion
      of Preferred Stock. The Company does not expect the adoption of this
      update to have a material impact on its consolidated financial position,
      results of operations or cash
flows.





-
            In
      September 2009, the FASB issued the FASB Accounting Standards Update No.
      2009-09 “Accounting for Investments-Equity Method and Joint Ventures and
      Accounting for Equity-Based Payments to Non-Employees”. This update
      represents a correction to Section 323-10-S99-4, Accounting by an Investor
      for Stock-Based Compensation Granted to Employees of an Equity Method
      Investee. Additionally, it adds observer comment Accounting Recognition
      for Certain Transactions Involving Equity Instruments Granted to Other
      Than Employees to the Codification. The Company does not expect the
      adoption to have a material impact on its consolidated financial position,
      results of operations or cash
flows.




66




-
            In
      September 2009, the FASB issued the FASB Accounting Standards Update No.
      2009-12 “Fair Value Measurements and Disclosures Topic 820 – Investment in
      Certain Entities That Calculate Net Assets Value Per Share (or Its
      Equivalent)”, which provides amendments to Subtopic 820-10, Fair Value
      Measurements and Disclosures-Overall, for the fair value measurement of
      investments in certain entities that calculate net asset value per share
      (or its equivalent). The amendments in this update permit, as a practical
      expedient, a reporting entity to measure the fair value of an investment
      that is within the scope of the amendments in this update on the basis of
      the net asset value per share of the investment (or its equivalent) if the
      net asset value of the investment (or its equivalent) is calculated in a
      manner consistent with the measurement principles of Topic 946 as of the
      reporting entity’s measurement date, including measurement of all or
      substantially all of the underlying investments of the investee in
      accordance with Topic 820. The amendments in this update also require
      disclosures by major category of investment about the attributes of
      investments within the scope of the amendments in this update, such as the
      nature of any restrictions on the investor’s ability to redeem its
      investments at the measurement date, any unfunded commitments (for
      example, a contractual commitment by the investor to invest a specified
      amount of additional capital at a future date to fund investments that
      will be made by the investee), and the investment strategies of the
      investees. The major category of investment is required to be determined
      on the basis of the nature and risks of the investment in a manner
      consistent with the guidance for major security types in U.S. GAAP on
      investments in debt and equity securities in paragraph 320-10-50-1B. The
      disclosures are required for all investments within the scope of the
      amendments in this update regardless of whether the fair value of the
      investment is measured using the practical expedient. The Company does not
      expect the adoption to have a material impact on its consolidated
      financial position, results of operations or cash
  flows.





-
            In
      October 2009, the FASB issued guidance for amendments to FASB Emerging
      Issues Task Force on EITF Issue No. 09-1 “Accounting for Own-Share Lending
      Arrangements in Contemplation of a Convertible Debt Issuance or Other
      Financing” (Subtopic 470-20) “Subtopic”. This accounting standards update
      establishes the accounting and reporting guidance for arrangements under
      which own-share lending arrangements issued in contemplation of
      convertible debt issuance. This Statement is effective for fiscal years,
      and interim periods within those fiscal years, beginning on or after
      December 15, 2009. Earlier adoption is not permitted. The Company does not
      expect the adoption to have a material impact on its consolidated
      financial position, results of operations or cash
  flows.





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
5 -ACCOUNTS RECEIVABLE





Accounts
receivable consisted of the following:





December
      312009
            
            2008(In
      thousands)
            
            (In
      thousands)Accounts
      receivable
            
            $
            368
            
            
            $
            612Less:
      Allowance for doubtful accounts
            
            
            (66
            )
            
            
            (51
            )$
            302
            
            
            $
            561




67




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





December
      312009
            
            2008(In
      thousands)
            
            (In
      thousands)Balance
      at the beginning of the year
            
            $
            51
            
            
            $
            53Add:
      provision during the year
            
            
            15
            
            
            
            (2
            )Balance
      at the end of the year
            
            $
            66
            
            
            $
            51





NOTE
6 - OTHER DEPOSITS AND PREPAYMENTS





Other
deposits and prepayments consist of the following:




December
      312009
            
            2008(In
      thousands)
            
            (In
      thousands)Prepayments
      and advances
            (a)
            $
            628
            
            
            $
            955Other
      receivables
            
            
            227
            
            
            
            156$
            855
            
            
            $
            1,111





(a)
      Prepayments and advances as of December 31, 2009 and 2008 include payments
      of $461,199 and $936,237 to mining service providers,
      respectively.





NOTE
7 - INVENTORIES





Inventories
consisted of the following:




December
      312009
            
            2008(In
      thousands)
            
            (In
      thousands)Raw
      materials
            
            $
            586
            
            
            $
            737Unprocessed
      ore
            
            
            1,391
            
            
            
            1,276Consumables
            
            
            103
            
            
            
            41Finished
      goods and semi-manufactured goods
            
            
            1,641
            
            
            
            904$
            3,721
            
            
            $
            2,958





NOTE
8 - RESTRICTED ASSETS





Restricted
assets are the deposits saved in China Citic bank account of Xiangzhen Mining as
collateral for the Company to issue bank drafts. As of December 31, 2009 and
2008, the Company has restricted assets of approximately $740,000 and $0,
respectively.




68




NOTE9- PROPERTY, MACHINERY AND MINING
ASSETS, NET





Property,
machinery and mining assets consisted of the following:




December
      312009
            
            
            2008(In
      thousands)
            
            
            (In
      thousands)Land
      use rights
            
            $
            1,702
            
            
            $
            1,700Buildings
            
            
            12,986
            
            
            
            12,957Machinery
            
            
            10,838
            
            
            
            10,140Mining
      assets
            
            
            9,890
            
            
            
            8,205Motor
      vehicles
            
            
            1,318
            
            
            
            1,343Equipment
            
            
            332
            
            
            
            331Extraction
      rights
            
            
            8,242
            
            
            
            8,235Exploration
      rights
            
            
            -
            
            
            
            1,683Construction
      in progress
            
            
            269
            
            
            
            2,11545,577
            
            
            
            46,709Less:Accumulated
      depreciation and amortization
            
            
            (10,570
            )
            
            
            (9,742
            )Impairment
      provision
            
            
            (105
            )
            
            
            (105
            )$
            34,902
            
            
            $
            36,862





Depreciation
and amortization




Depreciation
and amortization expense in aggregate for the years ended December 31, 2009 and
2008 was approximately $2,514,000 and $4,343,000 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.





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.





69





NOTE
10 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





At
December 31, 2009 and 2008, accounts payable and accrued liabilities were
approximately $4,694,000 and $3,470,000, respectively. Accounts payable and
accrued liabilities are primarily payments due to suppliers and vendors for
mining and transportation services.





NOTE11  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. This Warrant should be vest and be
exercisable at any time, or from time to time during the period commencing
from the date hereof, and expiring at 5:00 p.m., Eastern Standard Time on
January 1, 2010 (the “Termination Date”)exercisable on or before 3 years
from the date of grant. The Company has had the fair value of the put warrant
computed by using the Black-Scholes model. As of December 31, 2009, the fair
value of the put warrant is zero due to the Company’s common share market price
being lower than exercise price. As of December 31, 2008, the put warrant had a
fair value of approximately$33,000. No warrant has been exercised due by
January 1, 2010 and the warrant was expired then.




70




NOTE 12  SHORT-TERM BANK
LOANS




Short-term
bank loans consisted of the following:




December
      31,2009
            
            2008(in
      thousands)
            
            (in
      thousands)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.
            
            $
            -
            
            $
            22010.85%
      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.
            
            
            -
            
            
            1028.50%
      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.
            
            
            -
            
            
            3519.99%
      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.
            
            
            -
            
            
            8788.22%
      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.
            
            
            -
            
            
            1176.37%
      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 Ms. Helin Cui, a
      director of the Company.
            
            
            -
            
            
            886.37%
      note payable to Baiyin Credit Union matures on December 28, 2010 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. Helin Cui, a
      director of the Company.
            
            
            88
            
            
            -6.37%
      note payable to Baiyin Credit Union matures on August 18, 2010 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
            
            
            -8.50%
      note payable to Baiyin Credit Union matures on December 29, 2010 with
      interest due on the 20th
      day of each quarter and principal due at date of maturity, guaranteed by
      Xiangzhen Mining.
            
            
            878
            
            
            -8.50%
      note payable to Baiyin Credit Union matures on February 13, 2010 with
      interest due on the 20th
      day of each quarter and principal due at date of maturity, guaranteed by
      Qianzhen Mining.
            
            
            220
            
            
            -8.50%%
      note payable to Baiyin Credit Union matures on February 13, 2010 with
      interest due on the 20th
      day of each quarter and principal due at date of maturity, guaranteed by
      Qianzhen Mining
            
            
            103
            
            
            -8.50%
      note payable to Baiyin Credit Union matures on March 23, 2010 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 and guaranteed by Xiangzhen
Mining.
            
            
            322
            
            
            -7.65%
      note payable to China Citic Bank matures on May 21, 2010, guaranteed
      by Xiangzhen Mining (a).
            
            
            1,465
            
            
            -12.21%
      note payable to Wulatehouqi Credit Union matures on March 11, 2010 , which
      is in the name of a related party and guaranteed by Qianzhen
      Mining
            
            
            410
            
            
            -$
            3,603
            
            $
            1,756










71




NOTE 13 - OTHER PAYABLES AND
ACCRUALS





Other
payables and accruals consisted of the following:




December
      31,2009
              
              
              2008(In
      thousands)
              
              
              (In
      thousands)Accrued
      debt issuance costs(a)
              
              $
              46
              
              
              $
              53Receipts
      in advance
              
              
              1,788
              
              
              
              1,142Accruals
      for payroll, bonus and other operating expenses
              
              
              1,380
              
              
              
              281Payables
      for construction service vender
              
              
              882
              
              
              
              1,047Others
      payables
              
              
              2,571
              
              
              
              2,116$
              6,667
              
              
              $
              4,639




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




NOTE 14- DUE TO RELATED
PARTIES





Due to
related parties consisted of the following:




December
      31,2009
            
            
            2008(In thousands)
            
            
            (In thousands)Due
      to directors of the Company:Ms.
      Xiaojing Yu, CEO of the Company (a)
            
            $
            145
            
            
            $
            94Mr.
      Xueming Xu, COO of the Company (b)
            
            
            27
            
            
            
            239Mr.
      Helin Cui , Director of the Company(c)
            
            
            1
            
            
            
            73Due
      to Mr. Xiao Ming Yu, General Manager of Xiangzhen (d)
            
            
            305
            
            
            
            621Due
      to Wulatehouqi Mengxin Co., Ltd, the former minority shareholder of
      Xingzhen Mining (e)
            
            
            479
            
            
            
            1463Mr.
      Mao Huang the minority shareholder of Xingzhen Mining (f)
            
            
            1,340
            
            
            
            -$
            2,297
            
            
            $
            2,490





On
December 8, 2009, the Company entered into agreements with all their related
parties, that their advances are  interest-free, unsecured and have no
fixed terms of repayment until December 8, 2012. Amount due to related parties
as of December 31, 2008 are interest-free, unsecured and with 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 Company.





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




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





(f)
            Mr.
      Huang the minority shareholder of Xingzhen Mining





NOTE 15- 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.




72





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.




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





(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.




73





Repurchase




On
September 22, 2009, the Company entered into a Notes Repurchase Agreement with
Mountview Path Limited (“Mountview”), a corporation incorporated under the laws
of the British Virgin Islands, pursuant to which the Company repurchased the
entire 6.75% Senior Convertible Notes due 2012 of US $28,000,000 principal
amount ( “Notes”), originally issued to Citadel Equity Fund Ltd (“Citadel”).
Mountview was the legal and beneficial owner of the entire amount of the Notes
at that time.





In
connection with the Notes Repurchase Agreement, Mountview agreed to waive all
defaults for the Company’s failure to duly observe and perform covenants set
forth in the indenture entered into between the Company and Bank of New York as
trustee and forebear to take any action against the Company for the
defaults. The Company and Mountview also agreed to take all actions necessary in
order for the Bank of New York, to cancel the entire Notes and promptly release
the pledged security interest created pursuant to the share pledge agreement
dated December 27, 2006 and entered into by and among Ms. Xiao Jing Yu and Mr.
Xue Ming Xu, the Bank of New York, as collateral agent and Citadel.





Mountview
is not an affiliate of the Company or any of the Company’s directors or
officers. The consideration payable in the transaction consisted of US
$8,000,000 in cash and 5 million shares of the Company’s common stock. Mountview
shall not be entitled to any accrued and unpaid interest on the
Notes.  This transaction was completed on December 23,
2009





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. This Warrant should be vest and be exercisable at any time, or from
time to time during the period commencing from the date hereof, and
expiring at 5:00 p.m., Eastern Standard Time on January 1, 2010
(the “Termination Date”)exercisable on or before 3 years from the date of
grant.  As of December 31, 2009, the put warrant had a fair value of $0. As
of December 31, 2008, the put warrant had a fair value of
approximately$33,000. No warrant has been exercised due by January 1, 2010
and the warrant was expired then.





Deferred
debt issuance cost




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 the convertible notes were all repurchased by the Company in
2009, the remaining of the issuance costs was all amortized in 2009. As of
December 31, 2009 and December 31, 2008, the deferred debt issuance costs were
approximately $0 and $1,755,000, respectively.





NOTE16- 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.




74





NOTE17- 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.





NOTE18- 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, 2009 and 2008 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.





NOTE19- 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 and Xingzhen Mining were charged at net revenue
* 2%* 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 2009. As such, they are not subject to the
charge.





For the
years ended December 31, 2009 and 2008, Natural Resource Compensation
Charges of approximately $78,000 and $108,000 respectively, were charged to
operations and included in cost of sales.




75




NOTE20- 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 21- COMMITMENTS AND
CONTINGENCIES





General




The
Company accounts for contingencies, using FASB issued guidance, 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.




76





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.





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 unpaid purchase which have not
been received as of:




December 31,2009
            
            
            2008(In thousands)
            
            
            (In thousands)Purchase
      of machinery - within one year
            
            $
            75
            
            
            $
            456Acquisition
      or construction of buildings-within one year
            
            
            -
            
            
            
            9$
            75
            
            
            $
            465




77




NOTE 22- CONCENTRATION OF CUSTOMERS AND
SUPPLIERS





Substantially
all of the Company’s bank accounts in banks located in the PRC are not covered
by any type of protection similar to that provided by the FDIC on funds held in
U.S banks. The Company does not maintain fund in U.S. banks as of December 31,
2009 and 2008.





The
Company is operating in China, which may give rise to significant foreign
currency risks from fluctuations and the degree of volatility of foreign
exchange rates between the U.S. dollar and the RMB.





Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash and trade receivables, the balances of which are
stated on the balance sheet. The Company places its cash in high credit quality
financial institutions; however, such funds are not insured in the
PRC.





The
Company had five main customers who contributed approximately $3,441,000 or
81% of the Company’s consolidated net revenue for the year ended December 31,
2009. For the same period of 2008, the Company had five main customers
who contributed approximately $5,330,000 or 76% 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, 2009:




Revenue
              
              
              PercentageCustomer
              
              (In
      thousands)
              
              
              (%)Handan
      Hongzhi Ltd
              
              $
              892
              
              
              21
              %Ningxia
      Jinhe Ltd
              
              
              815
              
              
              
              19
              %Laiwu
      Steel Ltd
              
              
              638
              
              
              
              15
              %Inner
      Mongolia Huadesanli Trading Ltd
              
              
              621
              
              
              
              15
              %Zibo
      Bofeng Ltd
              
              475
              
              
              11
              %$
              3,441
              
              
              
              81
              %





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





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





As of
December 31, 2009, accounts receivable total approximately $302,000, net of
allowance of doubtful accounts, which consists of receivables from 15
customers.




78





The
following table shows the receivable distribution of the Company’s major
customers (10% or more of consolidated accounts receivable) as of December 31,
2009:





Receivables
              
              
              PercentageCustomer
              
              (In thousands)
              
              
              (%)Ningxia Jinhe Chemistry
      Ltd.
              
              $
              135
              
              
              
              45
              %Laiwu Steel,
      Ltd.
              
              
              88
              
              
              
              26
              %Handan Hongzhi
      Ltd.
              
              
              75
              
              
              
              15
              %$
              298
              
              
              
              86
              %





As of
December 31, 2008, accounts receivable total approximately $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
            
            
            PercentageCustomer
            
            (In
      thousands)
            
            
            (%)Laiwu
      Steel, Ltd
            
            $
            219
            
            
            
            36
            %Handan
      Hongzhi Ltd
            
            
            152
            
            
            
            25
            %Ningxia
      Jinhe Chemistry Ltd
            
            
            69
            
            
            
            11
            %$
            440
            
            
            
            72
            %





In the
years of 2009 and 2008, the Company had no concentrated suppliers.




NOTE 23- 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. No related service fee was
paid by the Company in 2009.





NOTE 24- SEGMENT
INFORMATION





The
Company follows FASB ASC 280-Segment Reporting, 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.





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




79





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




Year
      ended December 31,2009
              
              Fluorite
              
              
              Nonferrous
      metals
              
              
              ConsolidatedSegment
      revenue
              
              $
              3,919
              
              
              $
              273
              
              
              $
              4,192Inter-segment
      revenue
              
              
              -
              
              
              
              -
              
              
              
              -Revenue
      from external customers
              
              $
              3,919
              
              
              $
              273
              
              
              $
              4,192Segment
      loss
              
              $
              (2,293
              )
              
              $
              (1,832
              )
              
              $
              (4,125
              )Unallocated
      corporate income (loss)
              
              
              
              
              
              
              
              
              
              $
              9,504Income
      before income taxes and minority interests
              
              
              
              
              
              
              
              
              
              $
              5,379Total
      segment assets
              
              $
              34,194
              
              
              $
              26,982
              
              
              $
              61,176Inter-segment
      receivables
              
              
              (11,789
              )
              
              
              (8,127
              )
              
              
              (19,916
              )$
              22,405
              
              
              $
              18,855
              
              
              $
              41,260Other
      unallocated corporate assets
              
              
              
              
              
              
              
              
              
              
              19$
              41,279Other
      segment information:Depreciation
      and amortization
              
              $
              1,680
              
              
              $
              833
              
              
              $
              2,514Expenditure
      for segment assets
              
              $
              2,432
              
              
              $
              89
              
              
              $
              2,520





Year
      ended December 31,2008
              
              Fluorite
              
              
              Nonferrous
      metals
              
              
              ConsolidatedSegment
      revenue
              
              $
              3,704
              
              
              $
              3,433
              
              
              $
              7,137Inter-segment
      revenueRevenue
      from external customers
              
              $
              3,704
              
              
              $
              3,433
              
              
              $
              7,137Segment
      loss
              
              $
              (3,898
              )
              
              $
              (3,058
              )
              
              $
              (6,956
              )Unallocated
      corporate expenses
              
              
              
              
              
              
              
              
              
              $
              (3,587
              )Income
      (loss) from continuing operations before income taxes and minority
      interests
              
              
              
              
              
              
              
              
              
              $
              (10,543
              )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
              
              
              $
              1,844
              
              
              $
              4,343Expenditure
      for segment assets
              
              $
              1,605
              
              
              $
              289
              
              
              $
              1,894




80




The
following summarizes identifiable assets by geographic area:


December 
      31,
                2009
              
              
              December
      31,
                2008(In
      thousands)
              
              
              (In
      thousands)China
              
              $
              41,260
              
              
              $
              42,342Discontinued
      operation - Kyrgyzstan
              
              
              -
              
              
              
              10,915Unallocated
      corporate assets
              
              
              19
              
              
              
              1,756$
              41,279
              
              
              $
              55,013





The
following summarizes operating losses before provision for income
tax:


Year Ended
      December 31,2009
            
            2008(In
      thousands)
            
            (In
      thousands)China
            
            $
            (4,905
            )
            
            $
            (7,500
            )Discontinued
      operation - Kyrgyzstan
            
            
            (2,216
            )
            
            
            (1,192
            )Unallocated
      corporate operating income (loss)
            
            
            10,084
            
            
            
            (3,587
            )$
            2,963
            
            
            $
            (12,279
            )





NOTE 25- OTHER INCOME, NET




Years
      ended December 31,2009
            
            
            2008(In
      thousands)
            
            
            (In
      thousands)Exchange
      gain
            
            $
            103
            
            
            $
            536Gain
      (loss) on disposal of fixed assets
            
            
            (15
            )
            
            
            -Subsidies
            
            
            23
            
            
            
            -Tax
      imposition
            
            
            -
            
            
            
            (54
            )Penalty
      and late fee
            
            
            (9
            )
            
            
            (52
            )Donation
            
            
            (4
            )
            
            
            (44
            )Impairment
      of assets
            
            
            -
            
            
            
            (6
            )$
            98
            
            
            $
            380




81




NOTE 26 - 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:




For
      the Year ended December 31,2009
            
            
            2008(In
      thousands)
            
            
            (In
      thousands)Current:-
      PRC
            
            $
            -
            
            
            $
            (544
            )-
      US
            
            
            (200
            )
            
            
            -Deferred:-
      PRC
            
            
            -
            
            
            
            -$
            (200
            )
            
            $
            (544
            )




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:




For
      the Year ended December 31,2009
            
            
            2008(In
      thousands)
            
            
            (In
      thousands)Pre-tax
      income (loss) from continuing operations
            
            $
            5,379
            
            
            $
            (10,543
            )United
      States statutory corporate income tax rate
            
            
            35
            %
            
            
            35
            %Income
      tax benefit (expense) computed at United States statutory
              corporate
      income tax rate
            
            $
            (1,882
            )
            
            $
            3,690Reconciling
      itemsNet
      loss from China subsidiaries
            
            
            (927
            )
            
            
            (576
            )Rate
      differential for PRC or Kyrgyz earnings
            
            
            (372
            )
            
            
            (1,938
            )Non-deductible
      expense
            
            
            (377
            )
            
            
            (1,720
            )Utilization
      of net operating loss
            
            
            3,558
            
            
            
            -Alternative
      minimum tax expense
            
            
            (200
            )
            
            
            -Effective
      tax (expense) benefit
            
            $
            (200
            )
            
            $
            (544
            )





As of
December 31, 2009 and 2008, the Company’s deferred income tax assets mainly
arose from the temporary difference in depreciation and amortization under PRC
GAAP and U.S. GAAP.





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 continue to enjoy the tax exemption benefit during their tax
holidays.




The
Company’s parent, China Shen Zhou Mining & Resources, Inc., and their
subsidiary AFMG, are incorporated in the United States and has incurred an
aggregate net operating loss of approximately $1,000,000 for income tax purposes
through December 31, 2009, subject to the Internal Revenue Code Section 382,
which places a limitation on the amount of taxable income that can be offset by
net operating losses after a change in ownership.  The net operating
loss carries forward for United States incometaxes, and may be available to reduce future years’ taxable
income. These carryforwards will expire, if not utilized, through 2029.
Management believes that the realization of the benefits from these losses
appears not more than likely due to the Company’s limited operating history and
continuing losses for United States income tax purposes. Accordingly, the
Company has provided a 100% valuation allowance on the deferred tax asset
benefit of approximately $350,000 to reduce the asset to zero. Management will
review this valuation allowance periodically and make adjustments as
warranted.




82





NOTE27- 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 31,2009
            
            
            2008(In
      thousands, except per share data)
            
            
            (In
      thousands, except per share data)Income
      (loss) from continuing operations available to common
      shareholders:-Basic
      and Diluted
            
            $
            5,179
            
            
            $
            (11,087
            )Income
      (loss) from discontinued operations available to common
      shareholders:-Basic
      and Diluted
            
            $
            (2,216
            )
            
            $
            (1,192
            )Weighted
      average number of shares:-Basic
      and Diluted
            
            
            24,743
            
            
            
            22,215Earnings
      (loss) per share from continuing operations-Basic
      and Diluted
            
            $
            0.22
            
            
            $
            (0.50
            )Earnings
      (loss) per share from discontinued operations-
      Basic and Diluted
            
            $
            (0.09
            )
            
            $
            (0.05
            )





NOTE28- SUBSEQUENT EVENT





In
accordance with ASC 855, “Subsequent Events”
the Company evaluated subsequent events after the balance sheet date of December
31, 2009 through March 31, 2010, which is the date the financial statements were
issued.





On
February 4, 2010, the Company issued 760,000 shares to its employees as share
based compensation. The share based compensation is declared and approved by the
board of directors in October 29, 2009 and had been accrued as payroll payable
of approximately $750,200 on December 31, 2009.





83