We may face significant constraints on our ability to implement our business strategies or to carry out or expand our business operations. Our business may also be materially and adversely affected by future changes in certain regulations and policies of the PRC Government in respect of the coal industry. New legislation or regulations may be adopted that may materially and adversely affect our coal operations, our cost structure or the demand for our products. In addition, new legislation or regulations or different or more stringent interpretation of existing laws and regulations may also require us to substantially change our existing operations or incur significant costs.

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of theour Company

We,The Company, Yanzhou Coal Mining Company Limited, werewas established on September 25, 1997 as a PRC joint stock company with limited liability under the Company Law of the PRC (the “Company Law”). The Predecessor, formerly known as Yanzhou Mining Bureau, was established in 1973. In 1996, upon receipt of approval from the former State Economic and Trade Commission and the former Ministry of Coal Industry (“MOCI”), the Predecessor was incorporated and renamed Yanzhou Mining (Group) Corporation Limited and subsequently renamed as Yankuang Group Corporation Limited after reorganization in 1999.

In April 2001, we were approved by the Minister of Foreign Trade and Economic Cooperation, the predecessor of the Ministry of Commerce, to convert from a joint stock company with limited liability to a Sino-foreign joint stock company with limited liability under the Company Law and the Sino-Foreign Joint Venture Law of the PRC. Our H Shares accounted for 39.82% of our outstanding shares as of December 31, 2005.2006.

Our contact information is:

We principally engage in underground mining, preparation and sale of coal, and railway transportation for coal transportation.products. We were one of the largest coal producers and coal exporters in Eastern China within 2006. In 2006, we had raw coal production of approximately 34.736.1 million tonnes, in 2005. We were also one of the largest coal exporters in the PRC in terms of sales volume with approximately 7.3including 35.5 million tonnes in exportby the Company, 0.4 million tonnes by Yancoal Australia and 0.1 million tonnes by Shanxi Nenghua. We also exported 6.3 million tonnes of coal, including 6.1 million tonnes by the Company and 0.2 million tonnes by the overseas sales in 2005.of coal by Yancoal Australia.

We haveThe Company has six coal mines located in China: Nantun, Mine, Xinglongzhuang, Mine, Baodian, Mine, Dongtan, Mine, Jining II Mine and Jining III, Mine, which commenced production in 1973, 1981, 1986, 1989, 1997 and 2000, respectively. As of December 31, 2005, our2006, the six domestic coal mines of the Company had a total in-place proven and probable reserve of approximately 1968.41,933.0 million tonnes.

In 2004, we acquired the entire interest in the Southland coal mine located in New South Walestonnes and Shanxi Nenghua had recoverable reserves of Australia (“Southland”) from independent third parties30.1 million tonnes, and completed the transfer on December 24, 2004. We subsequently renamed Southland coal mine as Austar Coal Mine. We have also established two wholly-owned subsidiaries in Australia, namely Yancoal Australia Pty Limited (“Yancoal”) and Austar Coal Mine Pty Limited (“Austar”), in 2004 for our future operationsprobable reserves of Southland. We expect to complete the upgrade of the coal mining and production system as well as the testing and commissioning of the relevant coal mining and production system in Austar Coal Mine and to begin production in the third quarter of 2006.

In 2005, we acquired 95.67% equity interest in Yankuang Heze Power Chemical Company Limited (“Heze Nenghua”) from the Parent Company. The principal activities of Heze Nenghua are to conduct the initial mining preparation of the Zhaolou, Wanfu and other coal mines at the Juye Coalfield including obtaining the approvals for the coal mine projects, applying for the necessary exploration rights for coal and preparing for the construction of the coal mines. As at December 31, 2005, Heze Nenghua has commenced construction works for the Zhaolou coal mine. Pursuant to a supplemental agreement dated June 28, 2005 entered between us and the Parent Company, the Parent Company irrevocably undertook that we shall have the right to acquire the mining rights of Zhaolou coal mine and Wanfu coal mine from the Parent Company within twelve months from the respective dates on which such mining rights are obtained by the Parent Company for a consideration to be determined based on valuations conducted by independent qualified PRC valuers. The valuations should also be endorsed by the applicable PRC government authorities.66.1 million tonnes.

We have successfully developed a mechanized comprehensive caving method and have developed mining equipment suitable for medium to thick coal seam extraction. The patented mechanized comprehensive caving method is one of the most advanced mining technologies in the world. We continue to improve our proprietary caving method for internal use or for license to third party mining companies.

The location of a coal mine affects its competitiveness due to the significant costs of coal transport. We believe that our mines are well-situated given the rapid economic growth of Eastern China, the insufficient supply of coal produced in this region and the substantial costs involved in transporting coal to Eastern China from major coal-producing provinces such as Shaanxi Province, Shanxi Province and Inner Mongolia Autonomous Region. In 2003, 2004, 2005 and 2005, 35.2%2006, 47.4%, 47.4%49.5% and 49.5%54.5%, respectively, of our total net sales were derived from sales to customers within Shandong Province. Our largest end-user, Huadian’s Zouxian Electric Power Plant, accounted for 9.6%9.5%, 9.5%13.2% and 13.2%11.2% of our total net sales in 2003, 2004, 2005 and 2005,2006, respectively. Net sales to customers located in the rapidly growing Yangtze delta region, encompassing Shanghai Municipality, Jiangsu Province and Zhejiang Province, were 20.3%comprised 16.9%, 16.9%15.1% and 15.1%13.6% of our total net sales in 2003, 2004, 2005 and 2005,2006, respectively. Exports,Our overseas sales, including the export sales of the Company and the overseas sales of Yancoal Australia, principally to Japan, accounted for 35.4%27.9%, 27.9%25.5% and 25.5%20.5% of our total net sales in 2003, 2004, 2005 and 2005,2006, respectively. We did not record any sales from Austar Coal Mine for this reporting period as it was still under reconstruction and upgrade.

The principal coal reserves in our mines consist of prime quality, low-sulphur coal, capable of yielding a product with an ash content as low as 6%. We sell thermal coal, which is suitable for large-scale electric power generation, as well as semi-soft coking coal, which is used in metallurgical production. Our primary customers include electric power plants and metallurgical mills located in Eastern China and the areas along the Beijing-Hangzhou Grand Canal, which are generally more economically developed than other areas of China, and foreign enterprises located in East Asia. Of our total net sales in 2003, 2004, 2005 and 2005, 20.5%2006, 20.1%, 20.1%20.4% and 20.4%22.5%, respectively, were sales to PRC electric utility customers, with the remainder representing sales principally to metallurgical companies, chemical manufacturing companies and fuel supply companies. Our major domestic customers include Huadian, Shandong Luneng, Shanghai Baosteel Group Corporation and Dongguan Shijie Fuel Company. Relationships between us and our key customers are stable.

In 2005,2006, we generated total net sales of RMB12,007.3 million, and net income attributable to our equity holders of the Company of RMB11,516.9 million and RMB2,881.5 million, respectively.was RMB2,373.0 million.

Share Reform PlanSetting up Yulin Nenghua

As background, beginningIn 2004, we established Yulin Nenghua in May 2005, the PRC government and the PRC securities regulatory and supervisory authorities started to implement share reforms for shares of domestically listed companiesYulin City in Shaanxi Province in the PRC by injecting RMB776 million of capital. The registered capital of Yulin Nenghua is RMB800 million. The main business of Yulin Nenghua is the operation and construction of a methanol facility with 600,000 tonnes of annual capacity. It is currently expected that the methanol facility of Yulin Nenghua will commence operations in order2008.

Acquisition of Austar Coal Mine

On December 24, 2004, we acquired the entire interest in the Southland Coal Mine located in New South Wales of Australia. Southland Coal Mines was subsequently renamed Austar Coal Mine. In 2004, we also established two wholly-owned subsidiaries in Australia, namely Yancoal Australia and Austar Coal Mine Pty Limited (“Austar”). Austar Coal Mine was put into operation on October 16, 2006.

Acquisition of Heze Nenghua

On December 7, 2005, we acquired 95.67% equity interest in Heze Nenghua. The principal activities of Heze Nenghua are to eliminateexploit coal resources at the split share treatment of shares of listed companiesJuye coalfield in Shandong Province in the PRC. Under such split share system, domestic shares are either tradable or non-tradable. In adoptingAs of December 31, 2006, Heze Nenghua has commenced construction works for the share reforms, the PRC government and the PRC securities regulatory and supervisory authorities have implemented an interest-balanced mechanism between the holdersZhaolou Coal Mine.

Implementation of non-tradable shares and tradable shares. Pursuant to the share reform policies in the PRC, holders of non-tradable shares could, subject to approvals by the relevant government authorities and consents by the holders of domestically listed and tradable shares, convert their non-tradable shares into shares freely tradable on the domestic stock exchanges in the PRC. In return for approving such share conversion, the holders of the tradable shares will receive certain numbers of shares and relevant commitments made by holders of non-tradable shares. Upon consummation of the share reforms, all non-tradable shares, issued in the PRC, of PRC domestically listed companies will be freely tradable on the PRC domestic stock exchanges.Share Reform

We have tradable shares issued in the PRC, or A Shares, which are listed on the Shanghai Stock Exchange as well as non-tradable shares which are held by our Parent Company, our controlling shareholder.Controlling Shareholder. We also have overseas listed foreign invested shares, or H Shares, which are listed on the Hong Kong Stock Exchange as well as ADSs, representing the H Shares, which are listed on the New York Stock Exchange. At present, or under the PRC governmentGovernment policies, the A Shares and the non-tradable shares issued in the PRC are a separate class of shares and at present are not freely convertible into H Shares or ADSs.

On January 24, 2006, the Company, on behalf of the Controlling Shareholder, announced a proposed share reform plan to the holders of the Company’s A Shares whereas all the Controlling Shareholder’s non-tradable shares would be converted into A Shares (the “Proposed Share Reform Plan”). Under the Proposed Share Reform Plan, the Controlling Shareholder, as the only holder of the Company’s non-tradable shares, would pay, as consideration for the Proposed Share Reform Plan, 2.5 non-tradable shares for every 10 shares held by any holder of the Company’s A Shares whose name appeared on the register of members of A Shares on March 30, 2006. Pursuant to relevant regulations relating toPRC share reforms in the PRCreform regulations and the relevant PRC securities laws and regulations, only holders of the share reform plan only involves the tradability of non-tradable shares into tradable shares in the PRCCompany’s A Shares and the only shareholders who areControlling Shareholder were entitled to participate in the shareholders’ meeting to approve the proposed share reform plan proposed by our Parent Company are the Holders of A shares and our Parent Company.

Our share reform plan was implemented on March 31, 2006. Our Parent Company paid a consideration of 2.5 non-tradable shares to each Holder of A Shares for every ten A Shares held by such Holder of A Shares whose name appeared on the register of member of A Shares on March 30, 2006 in exchange for the right to list and trade the non-tradable shares of the Parent Company on the Shanghai Stock Exchange. Our Parent CompanyProposed Share Reform Plan. The Controlling Shareholder did not offer a similar consideration to the Holders of H Shares and Holders of ADSsholders of the Company. For more details ofH shares.

The Proposed Share Reform Plan was subsequently implemented by our Company on March 31, 2006 after approvals from the changes of our shareholding structure as a result of implementation ofrelevant shareholders at the share reform plan, see “Item 9 – Offeringshareholders’ meeting and Listing.”

In addition to the statutory undertakings, our Parent Company also undertook that (1) thePRC government authorities were obtained. The original non-tradable Sharesshares held by the Parent Company would be subject to a trading moratorium of 48 months from the date of the implementation of the share reform plan; (2) it will, in accordance with the relevant governmental procedures, assign part of its operations including coal and electricity operations together with new projects which are in line with our Company’s development strategies to us in 2006 and support our Company in the implementation of such assignment to enhance the operational results of the Company and to minimize the connected transaction and competition between Yankuang Group and us. We will be invited to invest in the coal liquefaction project which is being developed by Yankuang Group for co-development; and (3) all related expenses arising from the share reform plan would be borne by our Parent Company.

Controlling Shareholder have been floated since April 3, 2006. Our assets, liabilities, ownership interest, total share capital and net profit remain unchanged upon implementation of the share reform plan.Proposed Share Reform Plan.

Special undertakings pursuant to the Share Reform Plan made by Yankuang Group and the performance of such undertakings are detailed as follows:

Special Undertakings						Performance of Undertakings
(2)		Yankuang Group will, in accordance with the relevant governmental procedure, transfer part of its operations, including coal and electricity operations, together with new projects which are in line with the Company’s development strategies to the Company in 2006 to enhance the operational results of the Company and to minimize connected transactions and competition between Yankuang Group, and the Company. Further, the Company will be invited to invest in a coal liquefaction project which is being developed by Yankuang Group for co-development.				Yankuang Group has transferred part of its coal operations to the Company. Please refer to the section headed “Acquisition of Connected Asset” for details of this transfer. Yankuang Group has also started relevant preliminary works for the assignment of other projects. The Company will make disclosures as and when appropriate in accordance with the supervisory regulations.
(3)		The Yankuang Group will be responsible for all the costs incurred in connection with the implementation of the Share Reform Plan.				The undertaking has been fulfilled.

Acquisition of Shanxi Nenghua

In November 2006, we acquired 98% equity interest in Yankuang Shanxi Power Chemical Co., Ltd. (“Shanxi Nenghua”) from the Yankuang Group. In February 2007, we acquired the remaining 2% equity interest in Shanxi Nenghua from Lunan Fertilizer Plant, a subsidiary of Yankuang Group, and became the sole owner of Shanxi Nenghua. Shanxi Nenghua owns 81.31% equity interest in Shanxi Heshun Tianchi Energy Company Limited (“Shanxi Tianchi”) and approximately 99.85% equity interest in Shanxi Tianhao Chemical Company Limited (“Shanxi Tianhao”). The main business of Shanxi Tianchi is the operation of Tianchi Coal Mine, which commenced production by November 2006. The main business of Shanxi Tianhao is operation and construction of a methanol facility with 100,000 tonnes annual capacity, which is currently being constructed.

Setting up Shaanxi Yulin Yushuwan Coalmine Company Limited

We have entered into a joint venture on August 16, 2006 to set up the Shaanxi Yulin Yushuwan Coalmine Company Limited (“Yushuwan Coalmine Company”) with Chia Tai Energy Chemical Limited (“Chia Tai Company”) and Yushen Coal Company Limited (“Yushen Company”) of Yulin City. The registered capital of Yushuwan Coalmine Company is RMB480 million. Our Company holds 41% equity interest by contributing RMB196.8 million and accounts for the investment of Yushuwan Coalmine Company by using the equity method. Chia Tai Company contributed capital of RMB192 million, and holds 40% of the equity interest in Yushuwan Coalmine Company; and Yushen Company contributed capital of RMB91.2 million, and holds 19% equity interest.

Yushuwan Coalmine Company will be responsible for the construction and operation of the Yushuwan Coalmine. Yushuwan Coalmine is located in Yushen coal mining area in Yulin City, Shaanxi Province in the PRC and the main coal products are gas coal and thermal coal. Its designed annual capacity is 8 million tonnes. Since Yushen Company had commenced the earlier development of the Yushuwan Coalmine, including obtaining the relevant approvals for the project and the commencement of the construction works, the parties of the joint venture have agreed, after negotiations, that our Company and Chia Tai Company would collectively pay Yushen Company RMB150 million as compensation. In accordance with the proportion of equity holding in Yushuwan Coalmine Company, our Company will pay a total of RMB75.9 million and Chia Tai Company will pay RMB74.1 million. As of the date of this Annual Report, relevant application for the incorporation of Yushuwan Coalmine Company is still being processed.

Capital Expenditures / Recent Developments

Our principal sources of cash in 2006 have been cash from operations, the proceeds from issuance of new Shares and bank loans.operations. Our principal capital expenditures have been for operational expenses, the acquisition of property, plant and equipment.equipment, paying shareholders’ dividends, and the acquisition of equity interest in Shanxi Nenghua. During 2003, 2004, 2005 and 2005,2006, our total capital expenditures were RMB1,328.1 million, RMB1,057.5 million, RMB1,290.5 million and RMB1,290.5RMB3,363.4 million, respectively. For more information, please see “Item 5 – Operating and Financial Review and Prospects – B. Liquidity and Capital Resources.”

We commenced the reconstruction, expansion of production capacity and technology upgrade at Austar Coal Mine in 2005 and we expect to resume production at the Austar Coal Mine in the third quarter of 2006. The reconstruction, expansion and technology upgrade at the Austar Coal Mine is expected to cost approximately AUD161.0 million. As of December 31, 2005, we have spent an aggregate total of approximately AUD76.6 million on the reconstruction, expansion and technology of Austar Coal Mine. For more details of Austar Coal Mine, see “– D. Property, Plants and Equipment – Austar Coal Mine.” On December 31, 2005, the noon buying rate for AUD was U.S.$1.00 = AUD0.7342.

We also commenced the construction at Zhaolou Coal Mine in 2004 and we expect to complete the construction of the Zhaolou Coal Mine in December 2007. The construction at the Zhaolou Coal Mine is expected to cost approximately RMB 2,364.7 million and we have spent an aggregate total of approximately

RMB476.6 million on the construction and development of Zhaolou Coal Mine as at December 31, 2005. For more details of Zhaolou Coal Mine, see “—D. Property, Plants and Equipment—Zhaolou Coal Mine.”Resources”.

B. Business Overview

Principal Products and Services

We are engaged in underground mining, preparingpreparation and sellingsale of coal and provision of railway transportation services.services for coal products.

Coal Production

We produce prime quality, low-sulphur coal capable of yielding a product with an ash content as low as 6%. Our products consist principally of thermal coal, which is suitable for large-scale electric power generation, as well as semi-soft coking coal, which is used in metallurgical production. The following table sets out the ash and sulphur content, calorific value and principal applications of the various types of coal produced by us:

The following table sets out our principal coal products based on sales volume and net coal sales in the years ended December 31, 2003, 2004, 2005 and 2005.2006.

Our coal production in 20052006 was approximately 34.736.1 million tonnes, a decreasean increase of 4.51.4 million tonnes or 11.5%4.0%, as compared with our production forin 2005. In particular, (1) the same period in 2004. The decrease was mainly duesix coal mines of the Company produced 35.5 million tonnes of raw coal, an increase of 0.8 million tonnes, or 2.4%, as compared to the delay in relocation2005; (2) Yancoal Australia produced 0.4 million tonnes of certain villages located within the coal fieldsraw coal; and (3) Shanxi Nenghua produced 0.1 million tonnes of our Company. Because we had to relocate these 6 villages, 6 of our 12 coal production systems including long-wall workfaces and other mining equipment did not maintain normal productivity in the third quarter of 2005. Upon the relocation of 2 villages in the fourth quarter of 2005, 3 coal production systems have resumed normal productivity. The remaining 4 villages were relocated in the first quarter of 2006, 6 of our coal production systems have resumed their normal productivity in April 2006.raw coal.

Railway Transportation Services

OurIn 2002, we acquired from our Controlling Shareholder our local railway transportation network (the “Railway Assets”) consists, consisting of a total of 184 kilometers of track connecting our coal mines with the national railway system, nearby distribution points and in some cases, directly with large customers’ facilities. Ownership of the railway networkRailway Assets enables us to charge customers for transportation, and thereby achieve a return on our investment in the Railway Assets; to enhance cost controls by increasing coordination of coal production, transportation and sales; and to assume a greater degree of control over the main channels of sales transportation, adds another source of income, and helps us to achieve our goals of consolidating the operations of coal which is especially important duringproduction, transportation and sales in order to benefit from the peak seasons.potential synergies.

We offer railway transportation services to third parties,customers including the Parent Company.Controlling Shareholder. In 2005,2006, we transported a total of 20.219.5 million tonnes of goods, representing ana decrease of 10.10.7 million tonnes, or 33.4%3.3%, as compared with that of 2004.2005. External net sales of our railway transportation services represent the amount charged to customers for the transportation of coal purchased on an ex-mine basis, where the customer pays the cost of transportation. External sales from our railway transportation service in 20052006 was RMB163.4RMB160.4 million, representing ana decrease of RMB57.3RMB3 million, or 26%1.9%, as compared with that of 20042005 due primarily to the decrease in totalof sales of coal sales.where the customers directly bears the transportation costs.

Sales and Marketing

Consistent with PRC coal industry practice, aA substantial portion of our domestic sales isin 2006 was made pursuant to sales contracts and letters of intent signed during the annual national coal trading convention.convention which is consistent with PRC coal industry practice. These sales contracts and letters of intent generally specify the quantities and timing of purchases planned over a time period generally no longer than one year. Prices with respect tofor purchases made under the letters of intent are generally determined at the time of sale. The remaining portion of our sales are made to customers who have further demand.demand for our products.

We have a flexible credit policy for different categories of customers. Depending upon the customer, we may allow open accounts, or require acceptance bills, and delivery against cash. Generally, we extend credit (generally(typically for periods not exceeding 180 days) to major customers with long-term relationships and require other customers to pay for their products before delivery.

Most of our domestic coal sales are made to electric power plants, metallurgical mills, chemical engineering companies, and fuel trading companies. Over the years, we have established long-term and stable relationships with many of these companies. In addition, we sell some of our coal to overseas customers. Our export sales are made through the Export Sales Companies. According to the export sales agency contracts, we pay agency fees to the agents, who in turn enter into export sales contracts on our behalf with foreign customers. We are currently in the process of applying to the PRC central government,Central Government, with the assistance of the Shandong provincial government, for direct export rights. If we are successful in securing direct export rights, we will be able to negotiate and reach agreements directly with foreign customers.

Effective from January 1, 2004, the VAT export refund for export sales of our coal products decreased from 13% to 11% from 13%. The VAT export refund further decreased to 8% effective from May 1, 2005.2005, and was completely abolished as of September 15, 2006. The decrease incancellation of VAT export refund for export coal sales will in turn increase the cost of our export sales. According to the Notice of the Customs Tariff Committee of the State Council on Revising the Provisional Tariff Rates on the Import and Export of Certain Goods (Issued by the Customs Tariff Committee of the State Council as document Shui Wei Hui [2006] No. 30), from November 1, 2006, the State will impose a 5% export tariff on certain exported coal. Such export tariff is not applicable to the coal exported by us, therefore we are not required to pay any such export tariff on our exported coal. The state policy, therefore, has no direct effect on us.

Net coal sales represent the invoiced value of coal sold and is net of returns, discounts, sales taxes, and transportation costs, port fees and various miscellaneous fees relating to sales if the invoiced value includes transportation costs to the customers. Sales taxes consist primarily of athe resource taxes imposed by Shandong and Shanxi Provinces. According to the Notice of the Ministry of Finance and State Administration of Taxation on Revising the Standard Tariff Rates for Coal and Resources Tax in Shandong Province (issued by the Ministry of Finance and State Administration of Taxation as document Cai Shui [2005] No. 86), effective from May 1, 2005, the applicable resource tax whichrate for our coal mines located in Shandong Province was increased from RMB2.4 to RMB3.60 from RMB2.40RMB3.6 per tonne of the imputed quantity of raw coal. According to the Notice of the Ministry of Finance and State Administration of Taxation on Revising the Standard Tariff Rates for Coal and Resources Tax in Shanxi Province etc. (issued by the Ministry of Finance and State Administration of Taxation as document Cai Shui [2004] No. 187), the applicable resource tax rate of our coal sold effective from May 1, 2005. Salesmines in Shanxi Province is RMB3.2 per tonne. These taxes are paid to the local tax bureau.

The following table sets out our net coal sales by our customers’ industries for the years ended December 31, 2003, 2004, 2005 and 2005:2006:

Our domestic coal sales are concentrated in Eastern China, particularly in Shandong Province. The following table sets out our net coal sales by geographic region for the years ended December 31, 2003, 2004, 2005 and 2005:2006:

The following table sets out our major domestic and overseas customers:customers of the Company:

As of December 31, 2005,2006, Huadian was our largest domestic customer. For the year ended December 31, 2005,2006, we supplied a total of 5.64.9 million tonnes to Huadian, representing 13.4%11.3% of our total net sales in 2005, to our largest domestic customers.2006. A substantial portion of Huadian’s coal purchases was supplied to Zouxian Electric Power Plant. Our sales of coal to Zouxian Electric Power Plant accounted for 9.6%9.5%, 9.5%13.2% and 13.2%11.2% of our total net sales in 2003, 2004, 2005 and 2005. The2006. Zouxian Electric Power Plant’s total coal requirements were approximately 6.65.2 million tonnes in 2005.2006. We estimated that we supplied approximately 77.0%92.3%, 92.3%83.6% and 83.6%92.9% of the Zouxian Electric Power Plant’s coal requirements in 2003, 2004, 2005 and 2005,2006, respectively.

In 2003, 2004, 2005 and 2005,2006, net sales to our five largest domestic customers accounted for 18.5%15.3%, 15.3%20.0% and 20.0%18.6%, respectively, of our total net sales.

We exported 13.6 million, 10.0 million, 7.3 million and 7.36.3 million tonnes of coal in 2003, 2004, 2005 and 2005,2006, respectively, after deducting the overseas sales of Yancoal Australia, accounting for approximately 14.5%11.6%, 11.6%10.2% and 10.2%9.9% of the PRC’s total coal export sales in the respective periods. Export sales primarily consist of sales of our No. 2 and No. 3 Clean Coal to Japan. OurCoal. The Company’s net export sales in 2005 decreased from 27.9%as a percentage of total net sales decreased from 25.5% in 20042005 to 25.5% because we sold more coal domestically due to higher domestic coal pricing compared to export coal pricing.19.5% in 2006. Most of our major overseas end-users are located in East Asian countries and regions, such as Japan and Korea, with Japan being the largest market. We have established close relationships with overseas customers, notwithstanding that allour export sales (except for the overseas sales by Yancoal Australia) were made through the Export Sales Companies.

Our sales and marketing department conducts routine customer visits and customer satisfaction surveys. In addition, we hire independentcollect market consultantsinformation throughout the Eastern China and Southern China regions to collect market information. Information gathered from these sources, together with general market information from other sources, is included in our market data center.China.

Product Pricing

The prices for our products are generally based ondetermined by market price or are determinedbased on a contract basis.contractual terms. However, the price for certain thermal coal used for power generation is determined among coal suppliers and power plant buyers in accordance with the pricing guidance published by the PRC Government.

Currently, we make pricing decisions by taking into account: (i) prices in the relevant local coal markets (inclusive of transportation costs); (ii) grade and quality of the coal; and (iii) relationships with customers. Most of the transportation costs for domestic sales of our products are borne by the customers. Our sales and marketing department has access to domestic and international market information through our data center, enabling us to closely monitor pricing developments in our principal markets. Although we do not have direct export rights, export prices are ultimately determined among us, our agents,the Exports Sales Companies, and our final customers through negotiation.after negotiations.

Product Delivery

Most of our major domestic customers are located in Eastern China and, to a lesser extent,the remaining are located in Southern and Northern China. We principally use railways and the highways to transport our coal. We also use, to a lesser extent, road transport and riverwater transport.

We use ourThe Company uses its railway network to deliver coal products directly to ourits largest end-user customer, Zouxian Electric Power Plant. Our railway network also connects to the national railway to deliver products directly to other customers.consumers.

We also deliver our coal products through the national railway to Rizhao, Qingdao or Lianyungang ports from which we transship coal products to customers. Rizhao port is our main port for shipping.

We also use the Beijing-Hangzhou Grand Canal to ship coal on barges to customers located in the area serviced by the canal. In 2003, we funded the construction of the Jining Siheco Coal Port to develop the market near the Beijing – Hangzhou Grand Canal. Jining Siheco Coal Port came into operation in the first quarter of 2004.

In the Shanxi Province, we use the Yangshe Railway that cuts across our Tianchi Coal Mine area to directly deliver coal to the Hebei Province and nearby areas, and link to various national railways.

In Australia, in order to transport Yancoal Australia’s coal products to Newcastle Port, we lease other transportation providers’ railway networks and use the Australian State railways.

Mining Processes

Our mining operations involve four main processes: tunneling, extracting, conveying and coal preparation. The tunneling process is a necessary procedure for the construction of conveyors, underground roadways and longwall work-faces.mining equipment. A majority of our tunneling is conducted by high-powered heading machines where conditions permit tunnels to be driven within the coal seam. When the geological conditions do not

permit the use of heading machines, we use explosives to dig tunnels. All the coal extracted from these tunnels is sent by conveyor belts to our underground storage bunkers to be stored together with the coal extracted from the longwall coal faces. The rock produced from the development roadways is segregated and conveyed out of the mine separately.

The extracting process is conducted by a standard, fully mechanized longwall system, which includes a coal-cutting machine that cuts and transports the coal away from the longwall work-faces. When the thickness of the coal seams is less than 3.5 meters, we use a shearer with rotating drums to extract coal from the face of the longwall work-face. When the coal seams are thicker than 3.5 meters, we use the caving method, which collects the coal from the caved areas behind the hydraulic roof supports. Coal is then transported away from the longwall work-faces by a conveyor located at the rear of the roof supports. The hydraulic roof supports provide continuous support and cover along the length of the face and also facilitate the advance of the face conveyor through operating horizontal hydraulic rams positioned in the base of each support. These longwall hydraulic roof supports are manufactured in China.

The shaft hoist system equipment we use at most of our mines is imported. Coal is conveyed from the coal shaft either to the ground storage or to the respective coal preparation plant via an overland conveyor system. In addition to the main coal shaft, each mine also has a service shaft, which elevates equipment and workers into and out of the mines. There are roadway and railwayroadway systems that provide underground transportation for workers and equipment.

After the raw coal is brought to the ground, it first undergoes a simple selection and machine-operated process to separate coal from rocks and other impurities.gangue materials. A small portion of such selected coal is directly sold to customers and the remainder is all processed by our coal preparation plants for further purification and classification. Each of ourthe six mines of the Company and the Austar Coal Mine has a coal preparation plant. In general, the coal-washing processes conducted by our coal preparation plants comprise a water bed washing and separation process by jig machines, a sink-and-float separation process and a final floating separation process. With the exception of the equipment in the Xinglongzhuang coal preparation plant, mostCertain of the equipment used in all of our coal preparation plants is manufactured in the PRC.imported. Most of the equipment used in our coal preparation plants is automated, which enables our personnel to exercise precise control over the ash content and grades of the coal. The aggregate recovery rate of our coal preparation plants was 88.5%77.9%, 77.9%72.9% and 72.9%75.9% in 2003, 2004, 2005 and 2005,2006, respectively.

Materials, Water and Energy Supply

We purchase certain materials to conduct our coal mining and processing operations, consisting principally of: (i) steel for support of the work-faces and underground tunnels, andtunnels; (ii) cement for the underground tunnels and ground structures.structures; and (iii) water required in the production process. We source our steel principally from Shanghai Baosteel Corporation Ltd and Anhui Maanshan Iron & Steel Co. Ltd and Jinan Steel Holdings Co., Ltd. etc. We source our cement and water principally from the Parent CompanyControlling Shareholder pursuant to the

Materials and Services Supply Agreement and the supplemental agreements thereto. There is no governmental regulation of theThe price of materials. The pricesmaterials are set at market raterates or determined through negotiations. We believe that we have established stable cooperative relationships with our suppliers, which enable us to obtain a reliable supply of most of the materials required in our production process. We believe that many alternative suppliers exist for most of the materials we purchase, and, therefore, we do not foresee any difficulty in obtaining an adequate supply of these materials.

In 2003, 2004, 2005 and 2005, 4.6%2006, 6.0%, 6.0%1.8% and 1.8%3.3%, respectively, of our total cost of sales were attributable to purchases from our largest supplier. In 2003, 2004, 2005 and 2005, 12.3%2006, 11.2%, 11.2%7.5% and 7.5%6.6%, respectively, of our total cost of sales were attributable to purchases from our five largest suppliers.

We use electricity in our operations. Electricity prices in China are under governmental control. The total costs of electricity amounted to RMB291.7 million, RMB307.4 million, RMB294.8 million and RMB294.8RMB345.2 million (inclusive of the electricity power used in the operation of our railway network) in 2003, 2004, 2005 and 2005,2006, respectively. We have not experienced any material disruption in electricity supply in recent years.

The main source of our water is underground water. Each of our mines has obtained a license to use underground water. We have not experienced any material disruption in water supply in recent years.

Our costs for materials, water and electricity supplies amounted to a total of RMB1,441.5RMB1,680.2 million in 2005,2006, representing an increase of RMB41.5RMB238.7 million, or 3.0%16.6%, from RMB1,400.0RMB1,441.5 million in 2004.2005. Our costs for materials, water and electricity supplies in 20052006 accounted for 27.3%27.1% of our total cost of sales, decreaseda decrease of 0.2% from 30.8%27.3% in 2004.2005.

Quality Control

Coal Production

WeEach of the six mines of the Company and our Tianchi Coal Mine in Shanxi Province have implemented a quality assurance program pursuant to which we exercise strict quality control throughout the production and transportation processes. Utilizing advanced processing technology and management techniques, our coal preparation plants are able to separate both metal impurities, such as blasting caps, and non-metal impurities, such as scraps of wood and plastic, from the coal. Our sales and marketing department has a quality inspection division, which conducts random inspections of our coal and provides the information collected from the inspections to our production units and management to facilitate quality improvement.

The Company’s six mines: Nantun, Xinglongzhuang, Baodian, Dongtan, Jining II and Jining III mines have all obtained ISO 9002 quality recognition and ISO 14000 environmental management recognition.

Yancoal Australia has hired CCI Australia Pty Ltd. to supervise and inspect the coal quality from the mining process of Austar Coal Mine to ensure quality control and improve quality.

Railway networkAssets

We endeavor to ensure that the quality of our railway network is consistent with the quality of our coal production. Our railway networkCompany (including the Railway Assets) has obtained ISO 9001 quality accreditation and ISO 14001 environmental management recognition.

Safety Control

We have implemented a safety control program based on our specific requirements and in compliance with the Coal Law, the National Mining Safety Law and other safety regulations promulgated by relevant governing authorities. The safety records of our administrative or production division directly affect the compensation levels of the officers and managers of such division. Each of our mines has a safety inspection unit which is responsible for the supervision and inspection of our mining activities. We also use the Parent Company’sControlling Shareholder’s safety training center to provide systematic training to our personnel. We provide rewards to employees who report potential unsafe conditions to us so as to prevent potential accidents.

As a result of our safety control program, we have been able to maintain a good safety record. The workers’ fatality rate for our mines was 0.077 fatalities per million tonnes of raw coal produced in 2004, and 0.087 fatalities per million tonnes of raw coal produced in 2005. These rates are substantially lower than the average rate for coal mines2005 and 0.11 fatalities in the PRC.2006.

Environmental Protection

We are subject to PRC environmental protection laws and regulations which currently impose fees for the discharge of waste substances, require the payment of fines for serioussevere pollution and provide for the discretion of the PRC Government to close any facility which fails to comply with orders requiring us to cease or cure operations causing environmental damage. We believe all of our facilities are in compliance with the requirements of the relevant PRC environmental protection laws and regulations. In addition, our Yancoal Australia operation in Australia has been in compliance with relevant Australian environmental protection laws and regulations.

EachAccording to the labor and services agreement approved at the extraordinary general meeting of our mines has an underground water processing station.Company held on March 24, 2006, the Controlling Shareholder provides environmental services to our Company. In 2006, we paid the aggregate, we can process 18.7 million tonnesControlling Shareholder a total of underground water each year. Such underground water, after processing, is used for production, coal washing and landscape maintenance. We also have six waste water treatment plants, which have an aggregate annual waste water treatment design capacity of 10.5 million tonnes. The rocks produced during our production are mainly used for landfill and to produce construction materials.

In the years ended December 31, 2003, 2004 and 2005, we spent RMB4.8 million, RMB3.8 million and RMB4.8RMB26.7 million for services fees related to environmental protection, respectively. These expenses consisted principally of capital expenditures, equipment operating expenses and discharge fees paid to the PRC Government.services.

Insurance

In accordance with what we believe is the customary practice for PRC coal mining entities, we do not currently maintain fire, casualty or other property insurance covering our properties, equipment or inventory other than with respect to vehicles. In addition, we do not maintain any business interruption insurance or any third party liability insurance to cover claims in respect of personal injury, property or environmental damage arising from accidents on our properties or relating to our operations, other than third party liability insurance with respect to vehicles. We do not maintain any insurance policy to cover our railway network or its operation. We have, in accordance with relevant laws, set aside approximately 2.0% of employees’ total remuneration for employees’ injury insurance. We currently maintain personal injury insurance for our employees.

Competition

Coal Production

China’sThe coal industry is characterized by the unevendiverse distribution of coal reserves and the existence of a large number of small scale enterprises. However, the number ofthere are relatively few large scale coal producing production enterprises is limited.enterprises. According to the statistics published in theChina Coal News published on April 3, April, 2006, there were 5,206 state-owned coal production enterprises and non-state-owned coal producing production enterprises were considered as to be above-average enterprises that andwhich had an annual coal sales revenues of over RMB5.0revenue exceeding RMB0.5 million as of December 31, 2005. Of these, only 31 of those enterprises had an annual output of more than 10 million tones tonnes with and a total an aggregate production volume close to 900.0 million tonnes, accounting for 42.3% of the total coal production in China.

Please see the table below for the top ten coal production enterprises in the PRC in 2006:

Source: Information of Coal Industry 2006

We principally compete in two markets: the PRC domestic market and the East Asian export market. The PRC domestic coal market is characterized by a very large number of coal suppliers, with no individual dominant nationwide supplier. The domestic coal market is segmented principally by: (i) location, given the significant costs associated with coal transport and (ii) coal quality, which includes ash and sulphur levels, calorific value and degree of washing. We compete principally on the basis of price, coal quality, availability and costs of transportation, reliability of delivery and payment terms.

Our domestic competitors primarily include a number of coal mines located in Shanxi Province, Shaanxi Province and Inner Mongolia Autonomous Region. Certain of our competitors from these regions have substantial reserves and favorable geological conditions. However, these competitors encounter highincur significant transportation costcosts as they are farther away from the end customers located in Eastern China. In addition to coal mines located in Shanxi Province, Shaanxi Province and Inner Mongolia Autonomous Region, we also compete to a certain extent with local mines located in proximity to our customers.

The following table sets out the top ten coal producers in China in 2005, their 2005 production and principal seaports:

Coal mining companies generally have long-term, established relationships with their customers, particularly in the case of electric power plants. PRC electric power plants typically specify their future coal suppliers in their feasibility study, with their power generation equipment usually designed based on the type and quality of coal sourced from a particular supplier. A change in coal suppliers may requireresult in the concerned power plant concerned makingincurring additional expenditures to modify its power generation equipment, thereby raising the costs and risks associated with a change in suppliers.

We export coal to several countries in East Asia, including Japan and Korea. These countries are generally characterized by high energy consumption levels and limited coal reserves, creating a significant demand for imported coal. With respect to export sales, we compete with certain major overseas coal mining companies, most of which are located in Australia and Indonesia.

Railway Operation

Our railway network is connected to the major national railway system and to the Zouxian Electric Power Plant, our largest end-user customer, to provide railway transportation services for our internal use, the Parent CompanyControlling Shareholder and other customers. We do not encounter any material competition from other railway operators. However, we may compete with other surface transportation services.

Seasonality

Our business is not seasonal.

Regulatory Overview

Coal Law

On August 29, 1996, the PRC Government promulgated the People’s Republic of China Coal Law (the “Coal Law”), which became effective on December 1, 1996. The Coal Law sets forth requirements for all coal mines, from State-ownedincluding state-owned mines to townshipand privately owned mines, regarding planningmainly providing for resource exploitation planning, approval of new mines, the issuance of mining and safety production permits, implementation of safety standards, processing of coal, business management, protection of mine areas from destructive exploitation, and safety protection for miners and administrative supervision.

EntitiesAccording to the Coal Law, entities seeking to establish mining enterprises must apply to the relevant government office and obtain all necessary approvals. Upon obtaining such approvals, the entities concerned will be granted a mining permit from the Ministry of Land and Resources. Thereafter, an entity must obtain a coal production permit and a coal operation permit and other related quality permits in order to commence coal production and sell coal products in the PRC. The PRC Government is in the process of amending the Coal Law, in response to concerns over the lack of a well-coordinated development plan for mining, which contributed to a significant amount of waste of valuable coal resources. The lack of effective penalty provisions or the lenient enforcement of existing provisions in the Coal Law has been cited as another important reason for the current rulemaking effort.

Mining activities in the PRC are also subject to the People’s Republic of China Mineral Resources Law (“Mineral Resources Law”), which was promulgated by the PRC Government on March 19, 1986 and amended on August 29, 1996. The Mineral Resources Law regulates any matters relating to the planning or engaging in the exploration, exploitation and mining of mineral resources. According the Mineral Resources Law all mineral resources, including coal, are owned by the state. Except under limited circumstances, any enterprise planning to engage in the exploration, exploitation and mining of mineral resources must first apply for and obtain exploration rights and mining rights before commencing the relevant activities. The Mineral Resources Law prohibits the transfer of exploration and exploitation rights in general unless the transfer falls within certain specified circumstances.

We are principally subject to governmental supervision and regulation by twothe following agencies of the PRC Government:

The following is a brief summary of the principal laws, regulations, policies and administrative directives to which we are subject.

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