As filed with Securities and Exchange Commission on June 29, 2007


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 20-F

 


 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

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

forFor the fiscal year ended DECEMBERDecember 31, 20052006

OR

 

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

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number 001-14714

LOGO


LOGO

(Exact name of Registrant as specified in its charter)

Yanzhou Coal Mining Company Limited

(Translation of Registrant’s name into English)


People’s Republic of China

(Jurisdiction of incorporation or organization)

298 South Fushan Road

Zoucheng, Shandong Province

People’s Republic of China

(Address of principal executive offices)

 


Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares New York Stock Exchange
H Shares, par value RMB1.00 each*each TheNew York Stock Exchange of Hong Kong LimitedExchange*

 

*Not for trading in the United States, but only in connection with the listing of the American Depositary Shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

 


Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

2,960,000,000 Domestic Shares, par value RMB1.00 per share

1,958,400,000 H Shares, par value RMB1.00 per share

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

Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

                    Yes  ¨    YesNo  x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                    Accelerated filer  ¨                    Non-accelerated filer  ¨

Indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

¨     Yes  ¨    No¨

 



TABLE OF CONTENTS

 

PAGE

NO.

CAUTIONARY STATEMENT

  1

CERTAIN DEFINITIONS AND SUPPLEMENTAL INFORMATION

  21

EXCHANGE RATES

  3
PART I  

ITEM 1.

  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.ADVISERS

  43

ITEM 2.

  OFFER STATISTICS AND EXPECTED TIMETABLE.TIMETABLE  43

ITEM 3.

  KEY INFORMATION.INFORMATION  43

ITEM 4.

  INFORMATION ON THE COMPANY.COMPANY  1312

ITEM 5.

  OPERATING AND FINANCIAL REVIEW AND PROSPECTS.PROSPECTS  3138

ITEM 6.

  DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES.EMPLOYEES  4754

ITEM 7.

  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.TRANSACTIONS  5765

ITEM 8.

  FINANCIAL INFORMATION  6169

ITEM 9.

  THE OFFER AND LISTING  6372

ITEM 10.

  ADDITIONAL INFORMATION.INFORMATION  6674

ITEM 11.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.RISK  8391

ITEM 12.

  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.SECURITIES  8492
PART II  

ITEM 13.

  

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.DELINQUENCIES

  8593

ITEM 14.

  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS  8593

ITEM 15.

  CONTROLS AND PROCEDURES  8593

ITEM 16A.

  AUDIT COMMITTEE FINANCIAL EXPERT  8594

ITEM 16B.

16B
  CODE OF ETHICS  8694

ITEM 16C.

  PRINCIPAL ACCOUNTANT FEES AND SERVICES  8695

ITEM 16D.

  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES  8695

ITEM 16E.

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS  8796
PART III  

ITEM 17.

FINANCIAL STATEMENTS.

88

ITEM 18.

17
  FINANCIAL STATEMENTS.STATEMENTS  8896

ITEM 19.

18.
  EXHIBITS.FINANCIAL STATEMENTS  8896
ITEM 19.EXHIBITS96

SIGNATURES

  

i


CAUTIONARY STATEMENT

Certain information contained in this annual report,Annual Report which does not relate to historical financial information may be deemed to constitute forward-looking statements. The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe” or similar expressions are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or the Exchange Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. These forward-looking statements include, without limitation, statements relating to:

 

future prices and demand for our products and demand for our customers’ products;

 

future PRC tariff levels and export quotas for coal;

 

sales of our products;

 

the amount and nature of, and potential for, future development;

 

coal mine reserves potential;

 

production forecasts of coal;

 

trends in the coal industry and domestic and international coal market conditions;

 

the effectiveness of our cost-saving measures;

 

future expansion plans and capital expenditures;

 

expected production capacity increases;

 

competition;

 

changes in legislation, regulations and policies;

 

estimates of proven and probable coal mine reserves;

 

our research and development plans; and

 

our dividend policy.

These statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties, which could cause actual results to differ materially from our expectations. These risks are more fully described in the section entitled “Item 3. Key Information – Risk Factors.”Factors”.

Consequently, all of the forward-looking statements made in this annual reportAnnual Report are qualified by these cautionary statements. We cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us, or our business or operations.

Unless otherwise indicated, statistical and market trend information, as well as statements related to market position and competitive data, are based on our internal statistics and/or estimates gathered from our own research and/or various publicly available sources.

CERTAIN DEFINITIONS AND SUPPLEMENTAL INFORMATION

As used herein, references to “we”, “our”, “Company”, “our Company” or “us” refer to Yanzhou Coal Mining Company Limited and its subsidiaries which have been consolidated into the accounts of Yanzhou Coal Mining Company Limited for the purpose of the consolidated financial statements, unless the context indicates otherwise. References to the “Parent Company”“Yankuang Group” or “Controlling Shareholder” include references to Yankuang Group Corporation Limited (formerly known as Yanzhou Mining (Group) Corporation Limited) and, in respect of references to any time prior to our incorporation, are to the businesses, assets and liabilities of the Predecessor that were not transferred

to us in the Restructuringrestructuring and incorporation of the Company (defined below) in 1997 and, where the context requires, includes our subsidiaries, and references to the “Predecessor” mean the entity that held all our assets and liabilities as well as the assets and liabilities of the Parent CompanyControlling Shareholder prior to the Restructuring.

As used herein, “Restructuring” meansreferences to “the Company” refers to Yanzhou Coal Mining Company Limited on a stand-alone basis and does not include its subsidiaries that have been consolidated into our incorporation on September 25, 1997 andaccounts for the transfer to us, effective as of September 25, 1997,purposes of the principal coal mining businessesconsolidated financial statements. The subsidiaries of the Predecessor and certain assets and liabilitiesCompany which have been consolidated into our accounts for the purposes of the Predecessor relating thereto, together with certain other businesses, assetsconsolidated financial statements include: Shandong Yanmei Shipping Co., Ltd. (“Yanmei Shipping”), Zhongyan Trading Co. Ltd. of Qingdao Bonded Area (“Zhongyan Trading”), Yanzhou Coal Yulin Nenghua Co., Ltd. (“Yulin Nenghua”), Yancoal Australia Pty Limited (“Yancoal Australia”), Yanmei Shanxi Nenghua Co., Ltd. (“Shanxi Nenghua”), and liabilities of the Predecessor.Yanmei Heze Power Chemical Co., Ltd. (“Heze Nenghua”).

References to Shares herein refer to our (i) domestic invested shares held by the Parent CompanyControlling Shareholder on behalf of the State, RMB1.00 par value each (the “State Legal Person Shares”), (ii) domestic invested shares other than those held by the Parent Company,Controlling Shareholder, RMB1.00 par value each (the “A“RMB Ordinary A Shares”), (iii) overseas listed foreign invested shares issued and traded in HK dollars, par value RMB1.00 each (the “H Shares”), and (iv) American Depositary Shares (“ADSs”), each of which represents 50 H Shares, collectively. The ADSs are evidenced by American Depositary Receipts (“ADRs”).

References to the “Domestic Shares” herein refer to the State Legal Person Shares held by Yankuang Group on behalf of the State and RMB Ordinary A Shares collectively.

References to the “Combined Offering” herein refer to (i) our offering of H Shares in Hong Kong in an offer for subscription, (ii) our offering of ADSs in a public offering initially in the United States and Canada, and (iii) our offering of ADSs outside the United States, Canada and the PRC and to certain professional investors in Hong Kong that purchased ADSs or H Shares other than in the Hong Kong offering. The Combined Offering was completed by us in April 1998 and resulted in the issuance by us of 850,000,000 H Shares, held in H Share and ADS form.

References to the “Directors, Supervisors and Executive Officers” herein refer to our directors, supervisors and executive officers as discussed in Item 6 herein.

References to the “Articles of Association” herein refer to our articles of association, as amended from time to time.

As used herein, “Eastern China” includes Shandong Province, Jiangsu Province, Anhui Province, Zhejiang Province, Fujian Province, Jiangxi Province and Shanghai municipality.

As used herein, “PRC Government” or “Government” or “State” means the central government of the People’s Republic of China (the “PRC” or “China”), including all political subdivisions (including provincial, municipal and other regional or local governmental entities) and instrumentalities thereof.

As used herein, “tonne” means metric tonne, equal to 1,000 kilograms or approximately 2,205 pounds in weight.

Certain mining terms used herein are defined in the “Glossary of Mining Terms” annexed as Appendix B to the registration statement on Form F-l forming part of the registration statement filed with the U.S. Securities and Exchange Commission, a copy of which may be obtained upon request.

We publish our financial statements in Renminbi yuan, the official legal tender currency of the PRC. Except as otherwise stated herein, all monetary amounts in this Form 20-F have been presented in RMB.

Our audited financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), which differ in certain material respects from generally accepted accounting principles in the United States (“U.S. GAAP”). Note 4746 to our audited financial statements provides a reconciliation of our financial statements to U.S. GAAP in accordance with Item 18 of Form 20-F.

References to the “Financial Statements” herein refer to the Financial Statements in Item 18 of this Form 20-F annual report.

EXCHANGE RATES

Unless otherwise specified, references in this Form 20-F to “U.S. dollars” or “U.S.$” are to United States dollars, references to “HK dollars” or “HK$” are to Hong Kong dollars and references to “Renminbi” or “RMB” are to Renminbi yuan.

Solely for the convenience of the reader, certain items in this Form 20-F contain translations of Renminbi amounts into U.S. dollars. All such Renminbi translations of amounts from Renminbi to U.S. dollars have been made, except as otherwise noted, at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on December 31, 200529, 2006 of U.S.$1.00 = RMB8.0702.RMB7.8041. No representation is made that the Renminbi amounts could have been or could be converted into U.S. dollars at that rate or at any other rate.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

A.Selected Financial Data

Historical Financial Information

The following tables presentselected financial information presents our consolidated summary income statement data, consolidated balance sheet data and consolidated cash flow data as of and for the years ended December 31, 2001, 2002, 2003, 2004, and 2005. The summary balance sheet data as of December 31, 2004 and 2005 and income statement and cash flow data for the years ended December 31, 2003, 2004 and 2005 have been derived from, and2006. The following financial information should be read in conjunction with the audited financial statements included elsewhere in this report. The summary balance sheet data as of December 31, 2001, 2002 and 2003 and income statement and cash flow data for the years ended December 31, 2001 and 2002 have been derived from our audited financial statements as of and for such dates and are not included in this annual report. Unless otherwise indicated, the financial statements are prepared and presented in accordance with International Financial Reporting Standards, also known as “IFRS”. For a reconciliation of our net income and owner’s equitythe IFRS as compared to generally accepted accounting principles in the United States, also known as “U.S. GAAP”, see Note 4746 to the Financial Statements.financial statements. In 2005,2006, we have applied, for the first time, a number of new standards, amendments and interpretations (“New IFRS”) issued by the International Accounting Standards Board issued a number(the “IASB”) and the International Financial Reporting Interpretations Committee of new or revised IFRSthe IASB which are either effective for accounting periods beginning on or after December 1, 2005 or January 1, 2005. We have adopted these2006. Since the adoption of the new IFRS indid not have a material effect on how the result for the current or prior accounting periods have been prepared and presented, no prior period adjustment was required. See Note 3 to the financial statements and changed our accounting policies accordingly. See Note 47 to the Financial Statements included in Item 18.

   As of and for the Year Ended December 31,
   2002  2003  2004  2005  2006  2006
   RMB  RMB  RMB  RMB  RMB  U.S.$
   

(Amounts in millions except numbers of Shares and ADSs, and per Share,

per ADS and operating data)

INCOME STATEMENT DATA

            

IFRS

            

Net Revenue

            

Net sales of coal

  6,213.9  6,794.3  10,354.3  11,353.5  11,846.9  1,518.0

The Company(2)

  6,213.9  6,794.3  10,354.3  11,353.5  11,710.7  1,500.6

Domestic

  3,414.0  4,337.1  7,407.0  8,421.5  9,365.9  1,200.1

Export(3)

  2,799.9  2,457.2  2,947.3  2,932.0  2,344.8  300.5

Yancoal Australia

  —    —    —    —    114.4  14.7

Shanxi Nenghua

  —    —    —    —    21.8  2.7

Railway transportation service income

  142.5  154.6  220.8  163.4  160.4  20.5

  As of and For the Year Ended December 31,   As of and for the Year Ended December 31, 
  2001 2002 2003 2004 2005 2005   2002 2003 2004 2005 2006 2006 
  RMB RMB RMB RMB RMB U.S.$   RMB RMB RMB RMB RMB U.S.$ 
  (Amounts in millions except numbers of Shares and ADSs, and per Share,
per ADS and operating data)
   

(Amounts in millions except numbers of Shares and ADSs, and per Share,

per ADS and operating data)

 

INCOME STATEMENT DATA

       

IFRS

       

Net Revenue

       

Net sales of coal

       

Domestic

  2,599.8  3,414.0  4,337.1  7,407.0  8,421.5  1,043.5 

Export(2)

  2,276.2  2,799.9  2,457.2  2,947.3  2,932.0  363.3 

Railway transportation service income

  —    142.5  154.6  220.8  163.4  20.2 

Total net revenue(3)

  4,876.0  6,356.4  6,948.9  10,575.1  11,516.9  1,427.1 

Total net revenue(4)

  6,356.4  6,948.9  10,575.1  11,516.9  12,007.3  1,538.5 

Gross profit

  2,063.4  2,993.5  3,193.9  6,023.4  6,228.3  771.8   2,993.5  3,193.9  6,023.4  6,228.3  5,817.3  745.4 

Interest expenses

  (61.5) (117.9) (60.0) (35.9) (24.6) (3.0)  (117.9) (60.0) (35.9) (24.6) (26.3) (3.4)

Income before income taxes

  1,360.2  1,748.2  1,974.9  4,673.3  4,420.0  547.7   1,748.2  1,974.9  4,673.3  4,420.0  3,726.6  477.5 

Net income attributable to equity

holders of the Company

  970.9  1,222.0  1,386.7  3,154.3  2,881.5  357.1 

Net income attributable to our equity holders

  1,222.0  1,386.7  3,154.3  2,881.5  2,373.0  304.1 

Net income/Earnings per Share

  0.35  0.43  0.30  0.66  0.59  0.07   0.43  0.30  0.66  0.59  0.48  0.06 

Net income/Earnings per ADS

  17.29  21.29  15.1  33.25  29.29  3.63   21.29  15.1  33.25  29.29  24.12  3.09 

Operating income per Share

  0.51  0.65  0.44  0.99  0.90  0.11   0.65  0.44  0.99  0.90  0.76  0.10 

Income from continuing operation per ADS

  25.32  32.51  22.16  49.64  45.18  5.60   32.51  22.16  49.64  45.18  37.88  4.85 

U.S. GAAP

              

Net income(4)

  1,227.6  1,325.7  1,499.2  3,263.9  2,994.7  371.1 

Net income(5)

  1,325.7  1,499.2  3,263.9  2,991.1  2,405.8  308.3 

Net income per Share

  0.44  0.46  0.33  0.69  0.61  0.08   0.46  0.33  0.69  0.61  0.49  0.06 

Net income per ADS

  21.86  23.10  16.32  34.40  30.44  3.77   23.10  16.32  34.40  30.41  24.46  3.13 

CASH FLOW DATA

              

IFRS

              

Net cash provided by operating activities

  1,610.2  2,239.7  2,701.2  4,418.4  3,939.3  488.1   2,239.7  2,701.2  4,418.4  3,939.3  3,767.2  482.7 

Depreciation

  819.6  851.1  920.5  958.7  952.1  118.0   851.1  920.5  958.7  952.1  1,062.0  136.1 

Net cash used in investing activities

  (1,948.2) (2,165.5) (1,310.3) (2,300.8) (2,262.5) 280.4   (2,165.5) (1,310.3) (2,300.8) (2,262.5) (3,625.5) (464.6)

Net cash (used in) provided by financing activities

  618.0  345.2  (911.4) 1,075.4  (1,009.3) (125.1)  345.2  (911.4) 1,075.4  (1,009.3) (1,291.5) (165.5)

OTHER FINANCIAL DATA

              

Income before income tax

  1,360.2  1,748.2  1,974.9  4,673.3  4,420.0  547.7   1,748.2  1,974.9  4,673.3  4,420.0  3,726.6  477.5 

Add: Interest expenses

  61.5  117.9  60.0  35.9  24.6  3.0   117.9  60.0  35.9  24.6  26.3  3.4 

Less: Interest income

  39.9  30.2  17.8  92.7  91.7  11.4   30.2  17.8  92.7  91.7  94.3  12.1 

Add: Depreciation and amortisation

  827.0  858.5  950.1  994.3  971.9  120.4   858.5  950.1  994.3  971.9  1,088.2  139.4 

EBITDA(5)

  2,208.8  2,694.4  2,967.2  5,610.8  5,324.8  659.7 

EBITDA margin(6)

  45.3% 42.4% 42.7% 53.1% 46.2% 46.2%

EBITDA(6)

  2,694.4  2,967.2  5,610.8  5,324.8  4,746.8  608.2 

EBITDA margin(7)

  42.4% 42.7% 53.1% 46.2% 39.5% 39.5%

OPERATING DATA

              

Raw coal production (‘000 tonnes)

  34,018  38,435  43,279  39,146  34,655  N/A   38,435  43,279  39,146  34,655  36,051  N/A 

The Company(2) (‘000 tonnes)

  38,435  43,279  39,146  34,655  35,485  N/A 

Yancoal Australia (‘000 tonnes)

  —    —    —    —    447  N/A 

Shanxi Nenghua (‘000 tonnes)

  —    —    —    —    119  N/A 

Net sales (‘000 tonnes)

         35,048  39,408  38,004  32,485  34,663  N/A 

Domestic

  18,369  20,582  25,776  27,988  25,234  N/A 

Export

  12,666  14,466  13,632  10,016  7,251  N/A 

Total

  31,035  35,048  39,408  38,004  32,485  N/A 

The Company(2) (‘000 tonnes)

  35,048  39,408  38,004  32,485  34,330  N/A 

Domestic (‘000 tonnes)

  20,582  25,776  27,988  25,234  28,194  N/A 

Export (‘000 tonnes)

  14,466  13,632  10,016  7,251  6,136  N/A 

Yancoal Australia (‘000 tonnes)

  —    —    —    —    192  N/A 

Shanxi Nenghua (‘000 tonnes)

  —    —    —    —    141  N/A 

BALANCE SHEET DATA

              

IFRS

              

Total current assets

  3,221.7  3,873.4  4,430.5  8,319.6  10,951.1  1,357.0   3,873.4  4,430.5  8,319.6  10,951.1  9,871.9  1,265.0 

Total current liability

  2,047.6  1,662.7  2,372.0  2,545.1  3,429.0  424.9   1,662.7  2,372.0  2,545.1  3,429.0  3,828.0  490.5 

Net current assets

  1,174.1  2,170.7  2,058.5  5,774.5  7,522.1  932.1   2,170.7  2,058.5  5,774.5  7,522.1  6,043.9  774.5 

Property, plant and equipment

  7,479.8  8,276.9  8,616.4  8,537.2  9,318.5  1,154.7 

Property, plant and equipment, net

  8,276.9  8,616.4  8,537.2  9,318.5  12,139.9  1,555.6 

Total assets

  11,182.6  12,924.0  13,909.9  18,336.7  21,254.4  2,633.7   12,924.0  13,909.9  18,336.7  21,254.4  23,458.7  3,005.9 

Total long-term borrowings

  72.5  1,261.3  650.9  441.1  231.8  28.7 

Equity attributable to equity holders of the Company

  9,060.0  9,995.0  11,083.2  15,523.8  17,618.6  2,183.2 

Total long-term borrowing

  1,261.3  650.9  441.1  231.8  403.1  51.7 

Equity attributable to our equity holders

  9,995.0  11,083.2  15,523.8  17,618.6  18,931.8  2,425.9 

U.S. GAAP

              

Property, plant and equipment and prepaid lease payment, net

  7,176.7  7,271.4  7,785.8  8,073.7  8,851.5  1,096.8   7,271.4  7,785.8  8,073.7  9,279.7  11,860.3  1,519.8 

Total assets

  11,071.0  11,787.5  12,845.8  17,379.1  20,189.4  2,501.7   11,787.5  12,845.8  17,379.1  20,136.7  22,134.1  2,836.2 

Equity attributable to

equity holders of the Company

  7,668.9  8,858.5  10,019.2  14,519.3  16,699.8  2,069.3 

Equity attributable to our equity holders

  8,858.5  10,019.2  14,519.3  16,565.3  17,913.2  2,295.4 

Number of Shares

              

Domestic Shares

  1,850.0  1,850.0  1,850.0  1,850.0  2,960.0  2,960   1,850.0  1,850.0  1,850.0  2,960.0  2,960.0  2,960 

H Shares (including H Shares represented by ADS)

  1,020.0  1,020.0  1,020.0  1,224.0  1,958.4  1,958.4   1,020.0  1,020.0  1,224.0  1,958.4  1,958.4  1,958.4 

ADS

  20.4  20.4  20.4  24.5  39.2  39.168   20.4  20.4  24.48  39.168  39.168  39.168 

Dividend per

              

Domestic Share/H Share(7)

  0.082  0.100  0.104  0.164  0.260  0.032 

ADS(8)

  4.10  5.00  5.20  8.20  13.00  1.611 

   As of and for the Year Ended December 31,
   2002  2003  2004  2005  2006  2006
   RMB  RMB  RMB  RMB  RMB  U.S.$
   

(Amounts in millions except numbers of Shares and ADSs, and per Share,

per ADS and operating data)

Domestic Share/H Share(8)

  0.10  0.104  0.164  0.260  0.220  0.028

ADS(9)

  5.00  5.20  8.20  13.00  11.0  1.410


(1)The above financial highlights as of and for the year 2004 represent the data resulting from the consolidation of the financial statements of Yanmei Shipping, Yulin Nenghua and Yancoal Australia . The above financial highlights as of and for the year 2005 represent the data resulting from the additional consolidation of the financial statements of Yankuang Heze Power Chemical Company Limited (“Heze Nenghua”), Shandong Yanmei Shipping Co. Ltd. (“Yanmei Shipping”), Yanzhou Coal Yulin Power Chemical Co. Limited, Yancoal Australia Pty LimitedNenghua. The above financial highlights as of and Austar Coal Mine Pty Limited.for the year 2006 represent the data resulting from the additional consolidation of the financial statements of Shanxi Nenghua. The gross profit, taxes and surcharges resulting from the principal businesses of Yanmei Shipping are calculated as theour transportation cost of coal of us.coal. As the sales income, operation results, and assets of Yanmei Shipping have only limited impact on us, they are not separately set out and analyzed in this report. Heze Nenghua Yanzhou Coaland Yulin Power Chemical Co. Limited, Yancoal Australia Pty Limited and Austar Coal Mine Pty LimitedNenghua are currently in the preparation stage or in the construction stage and have limited impact on our financial results, and hence are not separately set out and analyzed in this report.
(2)“The Company” does not include the subsidiaries that have been consolidated into our accounts for the purposes of the consolidated financial statements. The subsidiaries that have been consolidated into our accounts for the purposes of the consolidated financial statements include: Yanmei Shipping, Zhongyan Trading, Yulin Nenghua, Yancoal Australia, Shanxi Nenghua, and Heze Nenghua.
(3)Export sales constituted 46.7%, 44.0%, 35.4%, 27.9%, 25.5% and 25.5%20.0% of total net revenue of the Company in 2001, 2002, 2003, 2004, 2005 and 2005, respectively.2006.
(3)(4)Total net revenue is the sum of net sales of coal and railway transportation service income.
(4)(5)The net income for the year ended December 31, 2001 under U.S. GAAP included the loss of Jining III acquired in 2001 using the pooling of interest method. The net income for the years ended December 31, 2001 under U.S. GAAP included the profit of Railway Assets using the pooling of interest method. The net income for the year ended December 31, 2004 and the total assets value and owners’ equity as atof December 31, 2004 under U.S. GAAP included the loss and net assets of Heze Nenghua acquired in 2005 using the pooling of interest method. The net income for the year ended December 31, 2005 and the total assets value and owners’ equity as of December 31, 2005 under U.S. GAAP included the loss and net assets of Shanxi Nenghua acquired in 2006 using the pooling of interest method.
(5)(6)EBITDA refers to earnings before interest income, interest expense, taxes, depreciation and amortization. EBITDA should not be construed as an alternative to operating income or any other measure of performance or as an indicator of our operating performance, liquidity or cash flows generated by operating, investing and financing activities. The items of net income excluded from EBITDA are significant components in understanding and assessing our financial performance, and EBITDA does not take into account capital expenditures or changes in working capital, which could have a material impact on our operating cash flow. Our computation of EBITDA may not be comparable to other similarly titled measures of other companies. We have included the information concerning EBITDA because management believes it is a useful supplement to cash flow data as a measure of our performance.
(6)(7)EBITDA margin represents EBITDA as a percentage of our total net revenue.
(7)(8)The calculation of Dividend per Domestic Share/H Share is based on the dividend paid in the relevant year and total number of Domestic Shares and H Shares ranking for the dividend.
(8)(9)Dividend per ADS is calculated at 50 times Dividend per Domestic Share/H Share based on one ADS being equivalent to 50 H Shares.

Exchange Rate Information

The following table sets forth, for the periods indicated, the noon buying rates for U.S. dollars in New York for cable transfers payable in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York expressed in Renminbi per U.S. dollar:

 

   Noon Buying Rate

Period

  Period End  Average(1)  High  Low
   (expressed in RMB per U.S.$)

2000

  8.2781  8.2784  8.2799  8.2768

2001

  8.2766  8.2772  8.2786  8.2709

2002

  8.2800  8.2772  8.2800  8.2700

2003

  8.2767  8.2771  8.2800  8.2765

2004

  8.2765  8.2768  8.2774  8.2764

2005

  8.0702  8.1826  8.2765  8.0702

December

  8.0702  8.0755  8.0808  8.0702

2006

        

January

  8.0608  8.0654  8.0702  8.0596

February

  8.0415  8.0512  8.0616  8.0415

March

  8.0167  8.0350  8.0505  8.0167

April

  8.0165  8.0143  8.0248  8.0040

May

  8.0215  8.0131  8.0300  8.0005

June (through June 22, 2006)

  7.9963  8.0060  8.0225  7.9963
   Noon Buying Rate

Period

  Period End  Average(1)  High  Low
   (expressed in RMB per U.S.$)

2002

  8.2800  8.2772  8.2800  8.2700

2003

  8.2767  8.2771  8.2800  8.2765

2004

  8.2765  8.2768  8.2774  8.2764

2005

  8.0702  8.1826  8.2765  8.0702

2006

  7.8041  7.9723  8.0702  7.8041

December

  7.8041  7.8219  7.8350  7.8041

   Noon Buying Rate

Period

  Period End  Average(1)  High  Low
   (expressed in RMB per U.S.$)

2007

  7.8041  7.9723  8.0702  7.8041

January

  7.7714  7.7876  7.8127  7.705

February

  7.7410  7.7502  7.7632  7.7410

March

  7.7232  7.7369  7.7454  7.7232

April

  7.7090  7.7247  7.7345  7.090

May

  7.6516  7.6773  7.7065  7.6463

June (through June 22, 2007)

  7.6220  7.6381  7.6680  7.6175


Source:The Noon Buying Rate in New York for cable transfers payable in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.

 

(1)Determined by averaging the rates on the last business day of each month during the respective period, except for monthly averages, which are determined by averaging the rates on each business day of the month.

On June 28, 2006,22, 2007 the noon buying rate for Renminbi was U.S.$1.00 = RMB7.997.RMB7.6220

B. Capitalization and Indebtedness

Not applicable.

C. ReasonReasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Our business and results of operations are dependent on coal markets, which may be cyclical.

As the majority of our revenue is derived from sales of coal and coal-related products, our business and operating results are substantially dependent on the domestic and international demand for coal. The domestic and international coal markets are cyclical and exhibit fluctuation in supply and demand from year to year andyear. They are subject to numerous factors beyond our control, including, but not limited to, the economic conditions in the PRC, the global economic conditions and fluctuations in industries with high demand for coal, such as the power and steel industries. Fluctuations in supply and demand for coal have effects on coal prices, which in turn affect our operating and financial performance. We have experienced substantial price fluctuations in the past and believe that such fluctuations will continue. The average selling price of our coal products per tonne was RMB172.4 in 2003, RMB272.3RMB272.45 in 2004, RMB349.50 in 2005 and RMB349.5RMB341.77 in 2005.2006. The demand for coal is primarily affected by the overall economic development and the demand for coal from the electricity generation, steel and construction industries. The supply of coal, on the other hand, is primarily affected by the geographical location of the coal supplies, the volume of coal produced by the domestic and international coal suppliers, and the quality and price of competing sources of coal. Alternative fuels, such as natural gas, oil and nuclear power, and alternative energy sources, such as hydroelectric power, and international shipping costs also have effectsinfluences on the market demand for coal. Material changes in the international coal market may adversely affect our Company’s export sales and future operational results. Excess supply of coal or significant reduction in the demand for our coal by the foreign or domestic electricity generation or steel industries may have an adverse effect on coal prices, which would in turn cause a decline in our profitability. In addition, any significant decline in domestic or export coal prices could also materially and adversely affect our business and result of operations.

Our business relies on our major customers.

Prior to 2004, Shandong Power and Fuel Company was our largest domestic customer. For the year ended December 31, 2003, our sales to Shandong Power and Fuel Company accounted for 11.3% of our total net sales in 2003. TheIn the past, Shandong Power and Fuel Company had in the past purchased coal on behalf of several electric power plants in Shandong Province, including Zouxian Electric Power Plant. The Shandong Power and Fuel Company ceased to act as the central procurement center for coal on behalf of Zouxian Electric Power Plant and other electric power plants in Shandong Province after its restructuring at the end of 2003 and ceased to be our largest domestic customer.

For the yearyears ended December 31, 20042005 and 2005,2006, Huadian Power International Corporation Limited (“Huadian”) replaced Shandong Power and Fuel Company and became our largest domestic customer. For the years ended December 31, 20042005 and 2005,2006, we supplied a total of 4.95.6 million and 5.64.9 million tonnes, representing 9.2%13.4% and 13.4%11.3% of our total net sales in 20042005 and 2005,2006, respectively, to our largest domestic customer.Huadian. 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 2005,2006, respectively.

The 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. We believe we are likely to remain the

principal coal supplier for Zouxian Electric Power Plant’s principal coal supplierPlant because (i) we are located within close proximity to the Zouxian Electric Power Plant, (ii) the Zouxian Electric Power Plant is unable to receive railway shipments of coal other than through our own railway network and (iii) the Zouxian Electric Power Plant’s boilers were designed to use our coal. Given thethat a large percentage of our revenues is derived from the supply of coal to the Zouxian Electric Power Plant, any adverse developments at the Zouxian Electric Power Plant could have an adverse impact on our results of operations.

We do not have direct export rights.

Currently, we do not have direct export rights. As a result, all of our export sales must be made through intermediary export sales companies. We use export sales serviceservices provided by the following three companies: China Coal Energy Group Company, China National Minerals Import and Export Company Limited and Shanxi Coal Import and Export Group Company (collectively, the “Export Sales Companies”). The quantity, quality, prices and final customer destination of our export sales are determined by us, the Export Sales Companies and overseas coal purchasers. As a result, we do not directly control matters such as port storage, loading, unloading and shipping processes. Although we are in the process of applying to the PRC central government,Central Government, with the assistance of the Shandong provincial government, for direct export rights, there can be no assurance that we can obtain such rights. If we cannot obtain such direct export rights, we will have to continue replyto rely on the intermediary export sales companies to export our coal. In addition, as export sales represent a significant percentage of our total sales, any material changes in the international coal market could adversely affect our export sales and results of operations.

Our business relies on short-term sales contracts and letters of intent.

The PRC governmentGovernment undertook measures in recent years to introduce market-oriented mechanisms to the coal sale and purchase process, including for example, abolishing government-devised pricing guidance for thermal coal and other temporary price intervention measures andto permit the suppliers and buyers to determine pricing through discussions. Major domestic coal suppliers and coal purchasers attend the Annual National Coal Trading Convention to negotiate and discuss the price and quantity of coal to be supplied and purchased for the coming year through the signing of letters of intent and short- and long-term supply contracts. Approximately 86.0%88.5%, 88.5%87.0% and 87.0%87.3% of our sales in 2003, 2004, 2005 and 2005,2006, respectively, were derived from such sales contracts and letters of intent. 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 to purchases made under the letters of intent are generally determined at the time of sale based on mutual agreement between us and the relevant customers. Such letters of intent may not be enforceable due to their omission of certain material terms. In addition, the PRC governmentGovernment also adopted measures to ensure adequate allocation of railway transportation capacity to major coal suppliers and buyers and to improve market efficiency by permitting direct negotiation between the suppliers and buyers.

In the past, we and our customers have completed the majority of the transactions contemplated under such letters of intent. However, a sudden and significant increase in the proportion of unrealized sales could have a material adverse impact on our results of operations. Furthermore, as the price of coal sold pursuant to such letters of intent is generally determined at the time of sale, any significant downturn in the market price of coal could have an immediate and adverse impact on our results of operations.

Our product delivery relies on the PRC’s railway transportation system.

Approximately 60.1%60.0%, 60.0%53.6% and 53.6%50.8% of our total net sales in 2003, 2004, 2005 and 2005,2006, respectively, were derived from sales of coal transported by the PRC’s national railway system (excluding coal sold to the Zouxian Electric Power Plant which werewas transported entirely by and within our own railway network). As the railway system has limited transportation capacity and cannot fully satisfy coal transportation requirements, discrepancies between capacity and demand for transportation exist in certain areas of the PRC. Currently, our domestic customers are mainly located in Eastern China, where the railway system is relatively advanced. We generally utilize the national rail system to transport coal to our customers as well as major coal shipping ports in the eastern coast of China for transshipping to customers in the coastal region of China and overseas. No assurance can be given that we will continue to be allocated adequate railway transport capacity or acquire adequate rail cars, or that we will not experience any material delay in transporting our coal as a result of insufficient railway transport capacity or rail cars.

The coal reserve data in this annual reportAnnual Report are only estimates.

The coal reserve data provided by us are only estimates which may differ materially from the actual in-place proven and probable reserves. Our reserves estimates may change substantially if new information subsequently becomes available. There are inherent uncertainties in estimating reserves, including many factors, assumptions and variables involved in estimating reserves that are beyond our control. Our actual results of operations may differ materially from our long-term business and operational plans derived based on the estimated coal reserve data. We can notcannot assure you that we will not adjust our coal reserve estimates in the future, and in such event, our results of operations may be materially and adversely affected.

Competition in the PRC and the international coal industry is increasing and our business and prospects will be adversely affected if we are not able to compete effectively.

We face competition in all areas of our business. Competition in the coal industry is based on many factors, including price, production capacity, coal quality and characteristics, transportation capability and costs, blending capability and brand name. Our coal business competes in the domestic and international markets with other large domestic coal producers and certain major international coal mining companies.producers. Some of our overseas competitors may have greater financial, marketing, distribution and other resources than we do, and have more well-known brand names in the international markets. We currently compete favorably on the quality of our coal products. However, there can be no assurance that we will continue to compete favorably due to quality improvements by our competitors. Although weWe believe that we compete favorably with respect to transportation capability and costs due to insufficient rail capacity for the transportation of coal fromfact that our principal competitors are located mainly in Shanxi Province, Shaanxi Province and the Inner Mongolia Autonomous Region, (where our principal competitors are located) to Eastern China (where demand for coal has been most strong)where there is occasional insufficient rail capacity and the significant costs incurred in transporting coal from these regions to Eastern China, where the strongest demand for coal is. However, improvements in the PRC national rail network will reduce our competitive advantage in transportation. For example, the PRC Government is planning to construct additional railways to transport coal from Northern and Northwestern China to Eastern China. Accordingly, the completion of these projects may increase the supply of coal available to customers in Eastern China, which may have a material adverse impact on our results of operations.

Our operations may be affected by uncertain mining conditions.

As with all underground coal mining companies, our operations are affected by mining conditions such as a deterioration in the quality or thickness of faults and/or coal seams, pressure in mine openings, presence of gas and/or water inflow and propensity to spontaneous combustion, as well as operational risks associated with industrial or engineering activity, such as mechanical breakdowns. Although we have conducted geological investigations to evaluate such mining conditions and adapt our mining plans to address them, there can be no assurance that the occurrence of any adverse mining conditions would not result in an increase in our costs of production, a reduction of our coal output or the temporary suspension of our operations.

Underground mining is also subject to certain risks such as methane outbursts and accidents caused by roof weakness and groundfalls. There can be no assurance that the occurrence of such events or conditions would not have a material adverse impact on our business and results of operations.

Results of our operations depend on our ability to acquire or develop new coal mines or coal reserves.

Our recoverable coal reserves decline as we produce coal. As we can only increase our existing production capacity by a limited amount, the future increase in our coal production will depend on our acquisition ofalready developed new coal reserves, developmentacquisitions of new mines or the expansion of our existing coal mines.

We acquired Jining III Coal Mine and Southland Colliery in 2001 and 2004, respectively. In 2005, we further acquired from our Controlling Shareholder 95.67% of the equity interest in Heze Nenghua from our Parent Company and are currently developingNenghua; Zhaolou Coal Mine in Juye Coal Field, which is owned by Heze Nenghua, is currently under construction. In November 2006 and other newFebruary 2007, our Company aggregately acquired 100% of the equity interests of Shanxi Nenghua which was held by our Controlling Shareholder and Lunan Fertilizer Plant; Tianchi Coal Mine, which is owned by Shanxi Nenghua, was put into operation in November 2006. We are also in the process of setting up the relevant company for the coal mining projectsproject in Yushuwan, Shaanxi Province. However, we can not

We cannot give any assurance that we will be able to continue identifying suitable targets in the PRC or abroad for acquisition or acquire suitable targets on competitive terms. Nor can we assure you that we will be able to successfully develop new coal mines or expand our existing ones in accordance with our development proposal or at all. Our failure to timely or successfully acquire suitable targettargets on competitive terms, or to successfully complete the development of new coal mines or to expand our existing coal mines could have an adverse effect on the results of operation and our financial condition and results of operation.condition.

The acquisition and/or the development of new mines in the PRC and overseas requiresrequire approval of the PRC government.Government. Delay or failure in securing the relevant PRC governmentGovernment approvals or permits as well as any adverse change in government policies may cause a significant adjustment to our development and acquisition plans, which may materially adversely affect our profitability and growth prospects. In addition, we could encounter unforeseen problems due to our unfamiliarity with local laws and regulations, or suffer foreign exchange losses in connection with overseas investments. We cannot assure you that our overseas expansion or investments will be successful.

We may suffer losses resulting from industry-related accidents and lack of insurance.

We operate coal mines and related facilities that may be affected by water, gas, fire or structural problems. As a result, we, like other coal mining companies, have experienced accidents that have caused property damage and personal injuries. Although we have implemented safety measures for our production facilities, and providedprovide on-the-job training for our employees, and, we have in accordance with relevant laws set aside approximately 2.0% of employees’ total remuneration for employees’ injury insurance, there can be no assurance that industry-related accidents will not occur in the future.

We do not currently maintain fire, casualty or other property insurance covering our properties, equipment or inventories, 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, other than third party liability insurance with respect to vehicles. Any uninsured losses and liabilities incurred by us could have a material adverse effect on our financial condition and results of operations.

We may be required to allocate additional funds for land subsidence.

A consequence of the underground mining methods used at our mines is land subsidence above underground mining sites. Depending on the circumstances, we may relocate inhabitants from the land above the underground mining sites prior to mining those sites or we may compensate the inhabitants for losses or damages from land subsidence after the underground sites have been mined. We may also be required to make payments for land subsidence, restoration, rehabilitation or environmental protection of the land after the underground sites have been mined. An estimate of such costs is

recognized in the period in which the obligation is identified and is charged as an expense in our income statement in proportion to the coal extracted. The paymentPayment for such costs is funded from working capital. The amount charged to income statements in 2005 amounted to RMB636.62006 was RMB743.0 million. The provision for land subsidence, restoration, rehabilitation and environmental costs has been determined by the directors based on the past occurrences of land subsidence. However, the provision is only an estimate. The estimate of the costs for land subsidence, restoration, rehabilitation or environmental protection of the land may be subject to change in the future as the actual costs become apparent and standards established by the PRC Government change from time to time. Therefore, there can be no assurance that such estimates are accurate or that our land subsidence, restoration, rehabilitation and relocationenvironmental protection costs will not substantially increase in the future or that the PRC Government will not impose new fees in respect of land subsidence. Any such substantial increases or new fees could have a material adverse effect on our results of operations.

Our business operations may be adversely affected by present or future environmental regulations.

As a producer of coal products, we are subject to significant, extensive, and increasingly stringent environmental protection laws and regulations in China. These laws and regulations:

 

impose fees for the discharge of waste substances;

 

require the establishment of reserves for reclamation and rehabilitation;

 

require the payment of fines for serious environmental offences; and

 

allow the PRC Government, at its discretion, to close any facility that fails to comply with orders requiring it to correct or stop operations causing environmental damage.

Our coal mining operations may produce significant amounts of waste water, gas and solid waste materials. Currently, the PRC Government is moving toward more rigorous enforcement of applicable laws and regulations as well as the adoption and enforcement of more stringent environmental standards. Our budgeted amounts of capital expenditure for environmental regulatory compliance may not be sufficient and we may need to allocate additional funds for such purpose. If we fail to comply with current or future

environmental laws and regulations, we may be required to pay penalties or fines or take corrective actions, any of which may have a material adverse effect on our business operations and financial condition.

In addition, China is a signatory to the 1992 United Nations Framework Convention on Climate Change and the 1997 Kyoto Protocol, which are intended to limit emissions of greenhouse gases. Efforts to control greenhouse gas emission in China could result in reduced use of coal if power generators switch to sources of fuel with lower carbon dioxide emissions, which in turn could reduce the revenues of our coal business and have a material adverse effect on our results of operations.

New quotas for coal exports in the PRC may adversely affect the amount of our coal exports.

Export sales of coal accounted for 36.2%28.5%, 28.5%25.8% and 25.8%20.8% of our net sales of coal in 2003, 2004, 2005 and 2005,2006, respectively. Average selling prices for exportoverseas coal sales are generally higher than average selling prices for domestic sales. In 2005,2006, average selling prices for export sales were RMB404.3RMB388.59 per tonne, compared to average selling prices for domestic sales of RMB333.7RMB331.31 per tonne.

In January 2004, the PRC Government promulgated new regulations, entitled “Measures for the Administration of Quotas for Coal Export,” which taketook effect on July 1, 2004. Under the new regulations, the National Development and Reform Commission and the Ministry of Commerce will be responsible for determining the total volume of the PRC’s export quota of coal and allocating the quota among the authorized coal exporters. Under the regulations, the National Development and Reform Commission and the Ministry of Commerce are required to announce the total export quota available for each fiscal year by not later than October 31 of the prior year. After the total available export quota has been announced, the National Development and Reform Commission and the Ministry of Commerce will accept written applications from authorized coal exporters for allocation of specific export quotas for the following year.

The new regulations did not have a material adverse effect on our export sales in 20042005 and 20052006 as our export agents have consistently receivereceived export quota sufficient to satisfy our export volume. However, we are unable to predict what impact, if any, they may have on the level of our export coal

sales for 20062007 and later years. Article 10 of the regulations provides that, in determining the allocation of specific quotas to authorized coal exporters, the National Development and Reform Commission and the Ministry of Commerce will refer to the exporters’ respective coal export performances in the previous year. We have been one of the largest coal exporters in China. For the years ended December 31, 2003, 2004, 2005 and 2005,2006, our export sales of coal (not including Yancoal Australia’s overseas sales of coal) accounted for approximately 14.5%11.6%, 11.6%10.2% and 10.2%9.9%, respectively, of the total coal export sales in China during the same period. Although our export sales have not been affected by the new regulations, if national coal exports are reduced, the level of our export sales in future periods could be affected, which in turn could adversely affect our results of operations.

Our Parent CompanyControlling Shareholder may have a significant influence on us.

As at Marchof December 31, 2006, the Parent CompanyControlling Shareholder owned 52.86% of our outstanding shares. Our Articles of Association provide that, in addition to any obligation imposed by law, a controlling shareholder shall not exercise its voting rights in a manner prejudicial to the interests of the shareholders generally, including voting with respect to certain enumerated matters of fundamental importance to shareholders.

In addition to being our majority shareholder, the Parent Company also provides certain materials, utilities and services to us pursuant to the materials and services supply agreement dated October 17, 1997 between us and the Parent Company (as amended by supplemental agreements dated October 30, 2001 and May 29, 2003).PursuantPursuant to the regulations of Hong Kong Stock Exchange and Shanghai Stock Exchange on on-goingcontinuing connected transactions and the operation developmentsactual operations of us and the Parent Company,Controlling Shareholder, we completed the necessary review of its on-goingprocedures for our continuing connected transactions as required by law and entered into six new on-goingcontinuing connected transaction agreements (“New On-goingContinuing Connected Transaction Agreements”), including the materials and water supply agreement, electricity supply agreement, labor and service agreement, equipment maintenance and repair works agreement, products and materials agreement and administrative service for pension fund and retirement benefits agreement, with the Parent CompanyControlling Shareholder in the first quarter of 2006. ItWe also determined the annual caps on the connected transactions for each New On-goingContinuing Connected Transaction Agreements in each year (“the Annual Caps”) fromfor 2006 to 2008. For details of the New On-goingContinuing Connected Transactions, please see “Item 7 — Major Shareholders and Related Party Transaction.”Transaction”. Any material financial or operational problems experienced by the Parent Company leadingControlling Shareholder which leads to disruption of its operations could materially affect our operations and future prospects.

Our operations are subject to a number of risks relating to the PRC.

We are also subject to a number of risks relating to the PRC, including the following:

 

The central and local governments of the PRC governments continue to support the development and operation of the coal industry in China. If the PRC Government changes its current policies that are currently beneficial to us, we may face significant constraints on our flexibility and ability to expand our business operations or to maximize our profitability.

 

Under current PRC regulatory requirements, our projects for the development of new coal mines require PRC Government approval. If any of our important projects required for our growth or cost reduction are not approved, or are not approved on a timely basis, our financial condition and operating performances could be adversely affected.

 

The PRC Government has been reforming, and is expected to continue to reform its economic system. Many of the reforms 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 the reform measures. This refining and readjustment process may not always have a positive effect on our operations. Our operating results may be adversely affected by changes in the PRC’s economic and social conditions and by changes in policies of the PRC Government such as changes in laws and regulations (or the interpretation thereof), imposition of additional restrictions on currency conversion and reduction in tariff protection and other import restrictions.

 

Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong and U.S. dollars, has been based on rates set by

On July 21, 2005, the People’s Bank of China, or PBOC, which are set daily based onannounced the previous day’s PRC interbank foreign exchange market rate and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of Renminbi to U.S. dollars has generally been stable. On July 21, 2005, however, PBOC announced a reform of its exchange rate system. Under the reform, Renminbi is no longer effectively linked to US dollars but instead is allowed to trade in a tight 0.3% band against a basket of foreign currencies. Any further appreciation of Renminbi in the future will increase the cost of our export sales, reduce our account receivables denominated in foreign currencies and adversely affect our financial condition and results of operations. On the other hand, any devaluation of the Renminbi may adversely affect the value of, and dividends payable on, our H shares and ADSs in foreign currencies since we receive our revenues and denominate our profits in Renminbi. Our financial condition and operating performance may also be affected by changes in the value of certain currencies other than Renminbi in which our earnings and obligations are denominated. In particular, a devaluation of the Renminbi is likely to increase the portion of our cash flow required to satisfy our foreign currency-denominated obligations.

the other hand, any devaluation of the Renminbi may adversely affect the value of, and dividends payable on, our H Shares and ADSs in foreign currencies since we receive our revenues and denominate our profits in Renminbi. Our financial condition and operating performance may also be affected by changes in the value of certain currencies other than Renminbi in which our earnings and obligations are denominated. In particular, a devaluation of the Renminbi is likely to increase the portion of our cash flow required to satisfy our foreign currency-denominated obligations.

 

Since 1997, many new laws and regulations covering general economic matters have been promulgated in the PRC. Despite this activity to develop the legal system, PRC’s system of laws is not yet complete.continuously evolving. Even where adequate law exists, enforcement of existing laws or contracts based on existing law may be uncertain and sporadic,arbitrary, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperiencelack of precedents in PRC’s judiciary in many cases creates additional uncertainty as to the possible outcome of any litigation. In addition, interpretation of statutes and regulations may be subject to evolving government policies reflecting domesticand political changes.

Our coal operations are extensively regulated by the PRC Government and government regulations may limit our activities and adversely affect our business operations.

Our coal operations, like those of other PRC energy companies, are subject to extensive regulationregulations established by the PRC Government. Central governmental authorities, such as the National Development and Reform Commission, the State Environmental Protection Administration, the Ministry of Land and Resources, the State Administration of Coal Mine Safety, the and the State Bureau of Taxation, and provincial and local authorities and agencies exercise extensive control over various aspects of China’s coal mining and transportation (including rail and sea transport). These controls affect the following material aspects of our operations:

 

exploration, exploitation and mining rights and licensing;

 

rehabilitation of mining sites after mining is completed;

recovery rate requirements;

 

pricing of our transport services;

 

industry-specific taxes and fees;

 

target of our capital investments;

 

export quotas and procedures;

 

pension funds appropriation;

 

waivers of certain import tariffs on our supplies; and

 

environmental and safety standards.

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:

 

Business address:        298 Fushan South Road, Zoucheng, Shandong Province, PRC

Telephone number:    (86) 537 538 2319

Website:                     http://www.yanzhoucoal.com.cn/mygsbak/index.asp
•        Business address:298 Fushan South Road, Zoucheng, Shandong Province, PRC
•        Telephone number:(86) 537 538 2319
•        Website:http://www.yanzhoucoal.com.cn/mygsbak/index.asp

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

(1)The original non-tradable shares held by Yankuang Group will be subject to a trading moratorium of 48 months from the date of completion of the share reform plan.The original non-tradable shares of the Company held by Yankuang Group have not been traded.

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:

 

Sulphur
content

Ash

Content

Calorific

Value

Washed

Principal Application

%%(megajoule/
kilogram)

No.1 Clean Coal

0.47-8
average 7.6
26-28
average 27.6
YesHigh-quality metallurgical production

No.2 Clean Coal

0.58-10
average 9.6
26-28
average 26.8
YesMetallurgical production; construction; production of liquidize coal

No.3 Clean Coal

0.69-16
average 13
24-26
average 25.3
YesMetallurgical production; electric power generation; coal chemical production

Lump Coal

0.612-14
average 13
25-26
average 25.5
YesConstruction; power generation; coal for oven application

Screened Raw Coal

0.618-27
average 20.3
24-26
average 25.3
NoPower generation

Mixed Coal

0.622-30
average 29.3
18-22
average 20.1
YesPower generation
   Sulphur
Content
  

Ash

Content

  

Calorific

Value

  Washed  

Principal Application

   %  %  (megajoule/
kilogram)
      

No.1 Clean Coal

  0.4  7-8
average 7.6
  26-28
average 27.6
  Yes  High-quality metallurgical production

No.2 Clean Coal

  0.5  8-10 average
9.6
  26-28
average 26.8
  Yes  Metallurgical production; construction; production of liquidize coal

No.3 Clean Coal

  0.6  9-16 average
13
  24-26
average 25.3
  Yes  Metallurgical production; electric power generation; coal chemical production

Lump Coal

  0.6  12-14 average
13
  25-26
average 25.5
  Yes  Construction; power generation; coal for oven application

Screened Raw Coal

  0.6  18-27 average
20.3
  24-26
average 25.3
  No  Power generation

Mixed Coal

  0.6  22-30 average
29.3
  18-22
average 20.1
  Yes  Power generation

Australian Clean Coal

  1.25  5.0  33  Yes  Metallurgical production

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.

 

  Year Ended December 31,  Year Ended December 31,
  2003  2004  2005  2004  2005  2006
  Sales Volume  Net Sales  Sales Volume  Net Sales  Sales Volume  Net Sales  Sales Volume  Net Sales  Sales Volume  Net Sales  Sales Volume  Net Sales
  (‘000 tonnes)  (RMB million)  (‘000 tonnes)  (RMB million)  (‘000 tonnes)  (RMB million)  

(‘000

tonnes)

  (RMB
million)
  

(‘000

tonnes)

  (RMB
million)
  

(‘000

tonnes)

  (RMB
million)

No. 1 Clean Coal

  513.8  128.2  631.3  220.5  773.9  398.0  631.3  220.5  773.9  398.0  869.3  439.3

No. 2 Clean Coal

  6,729.2  1,287.6  6,329.2  2,013.5  5,084.5  2,499.1  6,329.2  2,013.5  5,084.5  2,499.1  5,566.3  2,668.5

No. 3 Clean Coal

  11,952.7  2,126.3  11,861.9  3,484.0  11,183.0  4,143.8  11,861.9  3,484.0  11,183.0  4,143.8  12,129.7  4,581.7

Lump Coal

  583.4  130.3  752.3  284.3  485.5  209.9  752.3  284.3  485.5  209.9  555.4  237.6

Screened Raw Coal

  13,937.5  2,499.4  14,936.6  3,867.5  10,805.4  3,478.1  14,936.6  3,867.5  10,805.4  3,478.1  10,967.3  3,160.4

Mixed Coal and others

  5,690.9  622.5  3,492.6  484.5  4,152.1  624.7  3,492.6  484.5  4,152.1  624.7  4,383.1  645.0

Australian Clean Coal

  —    —    —    —    192.4  114.4
                                    

Total

  39,407.5  6,794.3  38,003.9  10,354.3  32,484.5  11,353.5  38,003.9  10,354.3  32,484.5  11,353.5  34,663.5  11,846.9
                                    

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:

 

  Year Ended December 31,  Year Ended December 31,
  2003  2004  2005  2004  2005  2006
  Net
Sales
  % of Net
Coal Sales
  Net
Sales
  

% of Net

Coal Sales

  Net
Sales
  

% of Net

Coal Sales

  

Net

Sales

  % of Net
Coal Sales
  

Net

Sales

  

% of Net

Coal Sales

  

Net

Sales

  

% of Net

Coal Sales

  (RMB
million)
     (RMB
million)
     (RMB
million)
     (RMB
million)
     (RMB
million)
     (RMB
million)
   

Domestic Sales

                        

Electric power plant

  1,421.4  20.9  2,121.5  20.5  2,357.6  20.8  2,127.0  20.5  2,357.6  20.8  2,714.9  22.9

Metallurgical mills

  294.9  4.3  656.9  6.3  811.4  7.1  656.9  6.3  811.4  7.1  607.9  5.1

Construction material and chemical manufacturers

  329.8  4.9  784.1  7.6  686.2  6.0  784.1  7.6  686.2  6.0  2,037.3  17.2

Fuel trading companies and others

  2,291.0  33.7  3,844.5  37.1  4,566.2  40.3  3,839.0  37.1  4,566.2  40.3  4,027.7  34.0

Subtotals of Domestic Sales

  4,337.1  63.8  7,407.0  71.5  8.421.5  74.2  7,407.0  71.5  8,421.5  74.2  9387.8  79.2
                                    

Exports

            

Overseas Sales

            

Electric power plant

  1,226.6  18.1  1,683.8  16.3  967.6  8.5  1,683.8  16.3  1952.0  17.2  1,680.1  14.2

Metallurgical mills

  1,135.8  16.7  1,208.1  11.7  1,952.0  17.2  1,208.1  11.7  967.6  8.5  779.1  6.6

Others

  94.8  1.4  55.4  0.5  12.4  0.1  55.4  0.5  12.4  0.1  —    —  

Subtotals of Exports

  2,457.2  36.2  2,947.3  28.5  2,932.0  25.8

Subtotals of Overseas Sales

  2,947.3  28.5  2,932.0  25.8  2459.2  20.8
                                    

Total

  6,794.3  100.0  10,354.3  100.0  11,353.4  100.0  10,354.3  100.0  11,353.5  100.0  11,846.9  100.0
                                    

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:

 

  Year Ended December 31,  Year Ended December 31,
  2003  2004  2005  2004  2005  2006
  Net
Sales
  

% of Net

Coal Sales

  Net
Sales
  % of Net
Coal Sales
  Net
Sales
  % of Net
Coal Sales
  

Net

Sales

  

% of Net

Coal Sales

  

Net

Sales

  % of Net
Coal Sales
  

Net

Sales

  % of Net
Coal Sales
  (RMB
million)
     (RMB
million)
     (RMB
million)
     (RMB
million)
     (RMB
million)
     (RMB
million)
   

Domestic Sales

            

Eastern China

                        

Shandong Province

  2,443.7  36.0  5,014.4  48.4  5,697.4  50.2  5,014.4  48.4  5,697.4  50.2  6,544.7  55.2

Jiangsu Province

  546.6  8.0  738.1  7.1  674.7  5.9  738.1  7.1  674.7  5.9  677.3  5.7

Zhejiang Province

  495.6  7.3  700.6  6.8  536.3  4.7  700.6  6.8  536.3  4.7  449.1  3.8

Shanghai

  365.5  5.4  351.6  3.4  528.8  4.7  351.6  3.4  528.8  4.7  506.6  4.3

Other provinces in the region(1)

  86.9  1.3  316.8  3.1  560.8  4.9

Subtotal

  3,938.3  58.0  7,121.5  68.8  7,998.0  70.4

Southern China(1)

  398.8  5.8  285.5  2.7  423.5  3.7

Exports

  2,457.2  36.2  2,947.3  28.5  2,932.0  25.8

Other provinces in Eastern China(1)

  316.8  3.1  560.8  4.9  386.9  3.2

Eastern China District Subtotal

  7,121.5  68.8  7,998.0  70.4  8,564.6  72.2

Southern China District

  285.5  2.7  423.4  3.7  801.2  6.8

Other Provinces(2)

  —    —    —    —    21.9  0.2

Overseas

  2,947.3  28.5  2,932.0  25.8  2459.2  20.8
                                    

Total

  6,794.3  100.0  10,354.3  100.0  11,353.5  100.0  10,354.3  100.0  11,353.4  100.0  11,846.9  100.0
                                    

(1)Other provinces in Eastern ChinaChina” include Anhui Province, Fujian Province and Jiangxi Province whereas Southern China includes Guangdong Province Hainan Province and Hunan Province.
(2)“Other provinces” refers to the sales area of coals produced by Tianchi Coal Mines in Shanxi Province for 2006.

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

 

Domestic

  

Overseas+

Huadian Power International Corporation Ltd.

  

Sumitomo Metallurgy, Inc.

POSCO Engineering & Construction Co.,Ltd

Shanghai Baosteel Corporation Ltd.Group Corporation.

  

Idemitsu

Dongguan Shijie FuelChubu Electric Power Company,

Nippon Steel Corporation

Incorporated

Jinin Hongyun Materials Ltd

  

Kyushu Electric Power

Co., Inc.

Shanghai Electric Fuel Ltd

  Mitsui Mining Company Limited

JFE Steel CorporationZhejiang Zheneng Fuxing Fuel Ltd

UBE Industries, Ltd

+Through Export Sales Companies

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:

   

Raw Coal
production

(in million tonnes)

  

Percentage of the total

raw coal production

in the PRC

 
      (%) 

Shenhua Group Corporation

  149.7  6.8%

China Coal Group

  71.9  3.3%

Shanxi Coking Coal Group Company

  60.8  2.8%

Datong Coal Mining Group Company

  56.7  2.6%

Heilongjiang Longmei Mining (Group) Co. Ltd.

  48.1  2.2%

Yankuang Group Company

  37.0  1.7%

Yangquan Coal Group Co.

  32.5  1.5%

Huainan Mining Group Co.

  32.4  1.5%

Pingdingshan Coal Group Co.

  32.1  1.5%

Jincheng Anthracite Group Co.

  30.1  1.4%

Total

  551.1  25.2%


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:

Provinces2005 Production(1)Principal Seaport
(’000 tonnes)

Shenhua Group

Beijing149,683Huanghua, Tianjin and
Qinhuandao

ChinaCoal Group

Beijing71,858Qinhuangdao and
Lianyungang

Shanxi Coking Coal Group Company

Shanxi60,809Qinhuangdao

Datong Coal Mining Group Company

Shanxi56,684Qinhuangdao

Longmay Coal Group Co.

Heilongjiang48,070Tianjin and Jinzhou

Yankuang Group Company.

Shandong33,455Rizhao

Yangquan Coal Group Co.

Shanxi32,451Huanghua and Qinhuandao

Huainan Mining Group Co.

Anhui32,405Not applicable

Pingdingshan Coal Group Co.

Henan32,060Not applicable

Jincheng Wuyan Group Co.

Shanxi30,060Not applicable

(l)China Coal Industry Association

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 State Council, which is the highest level of the executive branch, is responsible for the examination and approval of major investment projects specified in the 2004 Catalogue of Investment Projects released by the PRC Government;

the National Development and Reform Commission (the “NDRC”)Commission”“, which setsformulates and implements the major policies concerning China’s economic and social development, policies,examines and approves developmentinvestment projects exceeding certain capital expenditure amounts or in specified industry sectors, including examination and approval of Sino-foreign joint ventureforeign investment projects, coordinates economic developmentoversees reform of State-ownedstate-owned enterprises and oversees their reform, formulates industrial policies and investment guidelines for allthe natural resource industries, includingsuch as coal production. In addition, the NDRC administers coal industry;export activities and export quotas jointly with the Ministry of Commerce. The NDRC is also responsible for the evaluation and implementation of the price-linking mechanism between the prices of coal and power;

 

the Ministry of Land and Resources (“MLR”), which has the authority to grant land use licenses and mining right permits.permits, approves transfer and lease of mining rights, and reviews mining rights premium and reserve valuation;

the State Administration of Coal Mine Safety (“SACMS”), which is responsible for the implementation and supervision of the relevant safety laws and regulations applicable to coal mines and coal mining operations;

the Ministry of Railways (“MOR”), which supervises China’s railway operations and provides strategic development plans for railway transportation. The MOR, together with the NDRC, reviews all applications for railway construction plans, including railways designated or used for coal transportation;

the State Environmental Protection Administration of China (“SEPA”), which supervises and controls environmental protection and monitors China’s environmental system at the national level; and

the Ministry of Construction (“MOC”), which is responsible for the management of survey and design of construction projects, including but not limited to the survey and design of coal mines.

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

Pricing

In China, the prices of coal products, excluding prices of thermal coal used in electricity generation, are determined by the market.

Until 2002, the production and pricing of coal have largely been subject to close control and supervision by the PRC government,Government, which centrally manages the production and pricing of coal. Previously, the price of coal was determined based on a government-devised pricing guideline which set out the suggested prices for coal. However, in order to effectuate the transformtransformation from planned economy to market economy practices, from January 1, 2002 China eliminated from 1 January 2002 the Statestate guidance price for coal and left the determination ofallowed prices for all types of coal largely to thebe determined in accordance with market forces

demand. However, as the PRC governmentGovernment continues to maintain control over the national railway system, which is the primary means for coal transportation in China, the Chinese governmentPRC Government still may exert influence over the pricing of coal through its allocation of railway transportation capacity for coal.

In addition, under the Price Law of the People’s Republic of China, promulgated on December 29, December 1997, effective from May 1, May 1998, in the event of an actual increase or potential increase in the prices of important

merchandise products such as coal, the State Council and the provincial governments, autonomous regions and municipalities directly under the central governmentPRC Government may adopt intervention measures, for some prices, such as restricting the ratio of price differentials or of profits, and imposing price limits, etc. In August 2004, the NDRC issued a notice setting forth temporary measures to be imposed on thermal coal prices for certain regions. In December 2004, the NDRC issued a notice setting forth guidelines for pricing of thermal coal sales in 2005. Under these guidelines, the coal suppliers and their customers may not negotiate for the sale of coal at prices exceeding the government suggested price range.

On May 1, 2005, the PRC Government implemented a policy to associate coal prices with electricity price, allowing electricity prices to be adjusted on the fluctuation in coal prices. Factors affecting the fluctuations in coal prices include the overall performance of the Chinese economy, business cycles in the power industry, the availability of alternative energy sources, and coal production and transportation capacities. Currently, the price of thermal coal used in electricity generation and the market price are not in line. On December 27, 2005, the PRC Government issued a notice to (i) cancel the 2004 NDRC notices regarding temporary measures and pricing limitation imposing on thermal coal prices and (ii) allow the prices of thermal coal used in electricity generation to be negotiated by coal suppliers and their customers. However, the PRC Government may adopt temporary intervention measures in the event of an actual increase or potential increase in the prices of thermal coal for electricity generation pursuant to the Price Law. In the next five-year plan period (2006-2010), the PRC Government will gradually adjust prices of thermal coal used in electricity generation in accordance with the market price of coal.

Similar to coal pricing, the production and supply of coal, which wasis dictated by the PRC government’sGovernment’s annual state coal allocation plan, has been gradually liberalized and largely subject to market forces. Major domestic coal suppliers and coal purchasers attend the Annual National Coal Trading Convention to negotiate and discuss the price and quantity of coal to be supplied and purchased for the coming year through the signing of letters of intent and short-short and long-term supply contracts.

On December 18, 2006, the National Development and Reform Committee issued the Notice Relating to the Good Preparation for Inter Provincial Coal Production Transportation Works (Fa Gai Yun Xing [2006] No. 2867). According to the notice, in 2007, policies should be implemented to encourage the reform of the market system for determining coal prices by allowing parties to determine prices through discussions in accordance with market demand, and to encourage price determination based on quality. On December 27, 2006, the relevant government departments and units such as the National Development and Reform Committee for railway operations, Transportation Department etc. convened a 2007 coal industry video and telephone conference. This symbolized the end of the Annual National Coal Trading Convention that has been in place for over 50 years. Under the State’s macroeconomic controls, the new mechanism for enterprises to freely determine prices through negotiations were put in place.

Fees and Taxes

PRCThe table below sets forth material taxes and fees that are imposed upon coal mining entitiesproducers in China, as well as reserves which we are subjectrequired to certain mining fees and taxes, including a resource tax and resource compensation fee.set aside.

Item

Base

Rate

Corporate income taxTaxable income33% , 15% or 7.5%
VATRevenue form domestic sales13%
Revenue from export sales13%
Business taxRevenue from service3% or 5%
City construction taxAmount of VAT and business tax5% to 7%
Education surchargeAmount of VAT and business tax3%
Resource taxAggregate volume of raw coal or coal products sold

RMB3.6 per tonne (Shandong Province)

RMB3.2 per tonne (Shanxi Province)

Compensation for the depletion of coal resources

Proceeds form the sale of coal1%
Future development pension fundVolume of raw coal producedRMB6.5 to RMB8 per tonne
Safety fundVolume of raw coal producedRMB3 to RMB8 per tonne

Under the Mineral Resources Law, if mining results in damage to arable land, grasslands or afforestedforest areas, the mining enterprise must take effective measures to return the land to an arable state, plant trees or grass or take other measures. The Mineral Resources Law and other applicable laws and regulations also state that anyone who causes others to suffer loss in terms of production or in terms of living standards is held liable for the loss under the law and is required to compensate the persons affected and to remedy the situation. In addition, the Mineral Resources Law also provides for (i) regulations concerning labor safety and hygiene and (ii) environmental protection.

All coal producers 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 serious pollution and provide for the discretion of the PRC Government to close any facility which fails to comply with orders requiring it to cease or cure operations causing environmental damage. All environmental protection facilities must be inspected and certified by relevant governmental authorities as being in compliance with PRC environmental protection laws and regulations.

Regulations Concerning Imports and Exports of Coal

In the PRC, the import and export of goods and technologies and the provision of international trade services are governed by the Foreign Trade Law, which was promulgated on May 12, 1994 and amended on April 6, 2004 with an effective date of July 1, 2004. Imports of coal into China are subject to import tariffs. Pursuant to China’s commitment under its World Trade Organization agreement, tariff rates for coal imports willare expected to be reduced.

Under the amended Foreign Trade Law, the Cargo Import and other relevant regulations,Export Ordinance and the Administrative Measures of Coal Export Quota, coal exports remain subject to State control and require governmental approval. Currently, there are only four authorisedauthorized coal exporters, Shenhua Coal Trading Company Limited, China Coal Energy Group Company, China National Minerals Import and Export Company Limited and Shanxi Coal Import and Export Group Company.

Pursuant to regulations promulgated in January 2004, China’s coal and coke exports have been subject to a government approval system since July 1, July 2004, under which the NDRC and the Ministry of Commerce are responsible for determining China’s total coal and coke export quota and for allocating the quota among

the authorized coal and coke exporters. The total quota will take into consideration China’s economic needs, the rational use of coal resources, the PRC government’sGovernment’s economic policy and the dynamics of the domestic and international coal and coke markets. Each year, after the NDRC publishes the total coal and coke export quota for the following year, authorized coal and coke exporters are required to submit written applications for the following year’s quota to the NDRC. The NDRC and the Ministry of Commerce then allocate the annual quota for the following year among the authorized coal exporters. Each year’s quota expires on December 31. Upon receiving quota approval, authorized coal and coke exporters may apply for coal and coke export permits to the relevant authority designated by the MOFCOM. Authorized coal and coke exporters are also required to report their monthly quota usage to the NDRC.

The regulations provide that quotas may be adjusted in the event of:

 

a major change in the international market;

 

a major change in domestic coal resources;

 

an imbalance in the usage of the coal export quota by an authorized coal exporter compared to its allocation of the coal export quota; and

 

other circumstances which require an adjustment to the coal export quotas.

The total national quota approved for 20052006 and 20062007 was 80 million and 70 million tonnes, respectively.

The PRC Government grants VAT refund has been completely abolished since September 15, 2006. 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 producersexported 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.

Domestic Trading of Coal

Pursuant to the Measures for the exportRegulation of coal. In JanuaryCoal Operations promulgated by the NDRC on December 27, 2004, the state implemented a system to examine coal operation qualifications in respect of coal operations, including the wholesale and retail of raw coal and processed coal products, and the processing and distribution of coal for civilian use. Before an enterprise can engage in coal operations, it must obtain a coal operation qualification certificate. A coal production enterprise that deals in coal products which it did not itself produce and process is required to obtain coal operation

qualifications. The enterprise is also prohibited from dealing in coal products produced and/or processed by a coal mine enterprise that does not have a coal production permit. An enterprise is also prohibited from selling coal products to a coal operation enterprise that does not have coal operation qualifications.

Although the PRC Government announced with immediate effect, reductionindirectly influences coal prices through its broad regulation of export VAT refundelectricity prices and control over the allocation of national railway capacity, domestic coal prices have mainly been market-driven since 2002, when the PRC Government eliminated the price control measures for coal used in electric power generation. Prior to 2006, however, the PRC Government continued to implement temporary measures to prevent and control any unusual fluctuations in thermal coal exports from 13.0%prices. This, among other reasons, has caused thermal coal contract prices for major users to 11.0%. The export VAT refund was further reduced to 8.0% in May 2005.be generally lower than spot market prices during this period. On January 1, 2006, the NDRC announced the elimination of such temporary intervention practices on thermal coal price, thus completely removing control over thermal coal prices, including contract prices for major users.

Environmental Protection Laws and Regulations

The State Administration forPursuant to the Environmental Protection Law, the SEPA is responsible for uniform supervision and control of environmental protection in China. It formulatesempowered to formulate national environmental quality and discharge standards and monitorsto monitor China’s environmental system.system at the national level for the purpose of preventing and eliminating environmental pollution and damage to ecosystems. Environmental protection authoritiesbureaus at the county level and above are responsible for environmental protection within their areas of jurisdiction.

Environmental regulations require companies to file an environmental impact report with the relevant environmental authority for approval before undertaking the construction of a new production facility or any major expansion or renovation of an existing production facility. New facilities built pursuant to this approval are not permitted to operate until the relevant environmental authority has performed an inspection and is satisfiedhas found that the facilities are in compliance with environmental standards.

Mining operations, including both open pit mines and underground mines, may result in disturbances of surface and underground land and cause water pollution, landslides and other types of environmental damage. To manage the adverse effects that the coal industry has on the environment, China has promulgated a series of laws and regulations. Through these laws and regulations, China has established national and local environmental protection legal frameworks and issued standards applicable to emission controls, discharges of wastes and pollutants to the environment, generation, handling, storage, transportation, treatment and disposal of waste materials by production facilities, land rehabilitation and reforestation.

The Environmental Protection Law, promulgated by the National People’s Congress on December 26, 1989, is the cardinal law for environmental protection in China. The law establishes the basic principle for coordinated advancement of economic growth, social progress and environmental protection, and defines the rights and duties of governments at all levels. Local environmental protection bureaus may set stricter local standards than the national standards and enterprises are required to comply with the stricter of the two sets of standards. The PRC Environmental Protection Law requires any entity operating a facility that produces pollutants or other hazards to incorporate environmental protection measures ininto its operations and to establish an environmental protection responsibility system. Such system, includes adoption ofwhich must adopt effective measures to control and properly dispose of waste gases, waste water, waste residue, dust or other waste materials. Any

New construction, expansion or reconstruction projects and other installations that directly or indirectly discharge pollutants to the environment shall be subject to relevant state regulations governing environmental protection for such projects. Entities undertaking such projects must submit a pollutant discharge declaration statement detailing the amount, type, location and method of treatment to the competent authorities for examination. The authorities will allow the construction project operator to release a certain amount of pollutants into the environment and will issue a pollutant discharge license for that amount of discharge subject to the payment of discharge fees. The release of pollutants is subject to monitoring by the competent environmental protection authorities. If an entity that discharges more than the amount permitted by the pollutant discharge license, the local environmental protection bureau can fine the entity up to several times the discharge fees payable by the offending entity for its allowable discharge, require the offending entity to close its operations, or take other measures to remedy the problem.

In the environmental impact statement of a construction project, the project operator shall make an assessment regarding the pollution and environmental hazards the project is likely to produce and its impact on the ecosystem, and measures for their prevention and control. The operator shall submit the statement according to the specified procedure to the competent environmental protection authority for examination and approval. The building of sewage outlets within any water conservancy projects, such as canals, irrigation channels and reservoirs, shall be subject to the consent of the competent authority in charge of water conservancy projects.

The facilities for the prevention and control of pollution must registerbe designed, constructed and put into use or operation simultaneously with the relevantmain part of a construction project. Such facilities must be inspected by the competent environmental protection authority. If they do not conform to the specified requirements, the operator shall not be permitted to put the new facility into operation or use.

RemedialIn addition, the Regulations on Coal Dust Control at Ports and Railway Environmental Protection Regulations, both require port or railway operators to take measures to limit coal dust pollution.

The rehabilitation of mining sites is another important issue the PRC Government has sought to address. Under the Law of Land Administration of the People’s Republic of China, promulgated on June 15, 1986, and amended on August 28, 2004, and the Land Rehabilitation Regulations, issued by the State Council in 1988 and effective January 1, 1989, coal producers must undertake measures to restore the mining site to its original state within a prescribed time frame if mining activities result in damage to arable land, grassland or forest. The rehabilitated land must meet rehabilitation standards, as required by law from time to time, and may only be subsequently used upon examination and approval by the land authorities. A coal producers’ failure to comply with this requirement or its failure to return the mining site to its original state will result in the imposition of fines, rehabilitation fees and/or rejection of applications for violationsland use rights by the local bureau of land and resources.

Emissions of waste water by coal mines and coking plants are regulated by the Law on Prevention and Control of Water Pollution of the People’s Republic of China, promulgated by the National People’s Congress in 1984 and effective as amended in 1996, and the Administrative Regulations on the Levy and Use of Discharge Fees, issued by the State Council on January 2, 2003 and effective July 1, 2003. Any new construction projects, such as coal mines and coking plants, must submit an environmental impact statement, which shall include an assessment on the water pollution hazards the project is likely to produce and its impact on the ecosystem. The environment impact statement must also contain measures to prevent and control the water pollution hazards. Every new production facility must be equipped with waste water processing facilities which must be put in use together with the production facilities. Construction projects that discharge pollutants into water shall pay a pollutant discharge fee in accordance with state regulations.

Violators of the Environmental Protection Law include a warning,and various environmental regulations may be subject to warnings, payment of damages or imposition of a fine.and fines. Any entity undertaking a construction project that fails to installwork or manufacturing activities before the pollution prevention and waste control and processing facilities in compliance withare inspected and approved by the environmental standards for a construction projectprotection department may be ordered to suspend production or operations and may be fined. Criminal liabilityThe violators of relevant environment protection laws and regulations may be imposed for a material violationexposed to criminal liability if violations resulted in severe loss of property, personal injuries or death.

In addition to the PRC environmental laws and regulations, that causes loss of property or personal injuries or death.China is a signatory to the 1992 United Nations Framework Convention on Climate Change and the 1998 Kyoto Protocol, which propose emission targets to reduce greenhouse gas emissions. The Kyoto Protocol came into force on February 16, 2005. At present, the Kyoto Protocol has not set any specific emission targets for certain countries, including China.

Mineral Resources Laws and Regulations

All mineral resources in China are owned by the State under the current Mineral Resources Law. Exploration, exploitation and mining operations must comply with the relevant provisions of the Mineral Resources Law and other relevant regulations, and are under the supervision of the Ministry of Land and Resources. Exploration and exploitation of mineral resources are also subject to examination and approval by the Ministry of Land and Resources and relevant local authorities. Upon approval, a mining permit is issued by the relevant administrative authorities, which are responsible for supervision and inspection of mining exploitation in their jurisdiction. Annual reportsThe holders of mining rights are required to be filed by the holders of mining rightsfile annual reports with the relevant administrative authorities.

The Mineral Resources Law governs, among other things, the assignment of mining rights. If the entity holding the mining rights is to be changed due to a sale of enterprise assets or other circumstances that may cause a change in the property rights to the assets of the enterprise, the enterprise may assign its mining rights, subject to approval according to the Coal Law, the Mineral Resources Law and other laws and regulations.

The PRC Government permits mine operators of collectively owned mines to exploit mineral resources in designated areas and individuals to mine scattered mineral resources. Such mine operators and individuals are subject to government regulation. Mining activities by individuals are restricted. Individuals are not permitted to exploit mineral reserves allocated for exploitation by a mining enterprise or company or protected reserves. Indiscriminate mining that damages mineral resources is prohibited.

If mining activities result in damage to arable land, grassland or afforested areas, the mining operator must take measures to return the land to an arable state within the prescribed time frame. Any entity or individual which fails to fulfill its remediation obligations may be fined and denied application for land use rights for new land by the relevant land and natural resources authorities.

It is unlawful for an entity or individual to conduct mining operations in areas designated for other legal mining operators. A mining operator whose exploitation causes harm to others in terms of production or in terms of living standards is liable for compensation and is required to take necessary remedial measures. When a mine is closed, a mine closure report and information concerning the mining facilities, hidden dangers, remediation and environmental protection must be submitted for examination and approval in accordance with the relevant law.

The mineral products illegally extracted and the income derived from such activities may be confiscated and may result in fines, revocation of the mining permit and, in serious circumstances, criminal liability.

Coal ClassificationMining safety

BasedOn June 7, 2005, the State Council promulgated Several Opinions on carbon contentPromoting the Healthy Development of the Coal Industry (“Opinions”), announcing the PRC Government’s policies with respect to the development and heat value,restructuring of the coal canindustry. The Opinions resonated with the NDRC’s announcement on the revision of the Coal Law and reiterated the PRC Government’s policies with respect to the administration of coal reserves, enhancement of coal mine safety, encouragement of industry consolidation among coal producers, acceleration of the construction of large coal production bases, improvement of mining techniques and equipment for coal production and the organization and regulation of small coal mines.

The Measures for Implementing Work Safety Permits in Coal Mine Enterprises

The State Administration of Work Safety and the SACMS issued “The Measures for Implementing Work Safety Permits in Coal Mine Enterprises”, which came into effect on May 17, 2004. Pursuant to this document, a coal mine enterprise without a work safety permit may not engage in coal production activities. Coal mining enterprises and their mines that do not satisfy the safety conditions set forth in this document, or those that violate the provisions of this document, will be classifiedpunished accordingly.

Special Regulations by the State Council on Preventing Work Safety Related Accidents in Coal Mines and Five Sets of Supplemental Rules and Regulations

The Special Regulations by the State Council on Preventing Work Safety Related Accidents in Coal Mines were promulgated and entered into four major categories: anthracite, bituminouseffect on September 3, 2005.

This regulation specifies that coal sub-bituminousmine enterprises are responsible for preventing coal mine work safety-related accidents. If a coal mine has not obtained, in accordance with the law, a mining right permit, work safety permit, coal production permit or business license and lignite. Anthracite containsif the highest levelmine manager has not obtained, in accordance with the law, a mine manager qualification certificate and a mine manager safety qualification certificate, the coal mine may not engage in production. A coal mine should have adequate safety equipment, facilities and resources and should have in place measures to guard against the occurrence of carbon, least moisture and highest heat values, and generates little flame and smoke when burned. Bituminous coal is a high-grade coal with heat values typically ranging from 23Mj/Kg to over 30Mj/Kg. Bituminous coal burns with a smoky flame and is used for utility and industrial steam purposeswork safety related accidents, as well as a sound contingency plan to deal with emergencies. Coal mining enterprises should establish a sound system for making the coke necessarydetection, elimination, treatment and reporting of latent work safety-related dangers. If a major latent work safety-related danger as specified exists in a coal mine, the enterprise should immediately suspend

production and eliminate the latent danger. Coal mining enterprises should provide their personnel working underground and their special operation personnel with safety education and training in accordance with relevant state regulations. The person in charge of a coal mine and the production and operation management personnel should go into mines and act as foremen on a rotating basis in accordance with state regulations, while a file recording their entry into the mine should be maintained. In addition, the State Administration of Work Safety issued five sets of supplemental measures:

(i) The Measures for steel production. AllDetermining Major Latent Work Safety Related Dangers in Coal Mines (for Trial Implementation) stipulates the specific criteria for determining major latent work safety-related dangers. It further defines each of the latent safety related dangers specified in the Special Regulations of the State Council on Preventing Work Safety Related Accidents in Coal Mines, and lists more than 60 major latent safety related dangers.

(ii) The Implementing Measures for the Detection and Elimination of Latent Dangers in Coal Mines and the Rectification and Closure of Such Mines (for Trial Implementation) specifies that coal produced by our mines is bituminous coal. Sub-bituminous coal has a carbon content between bituminous coalmining enterprises are responsible for the detection and ligniteelimination of latent work safety-related dangers and has a heat value generally ranging from over 19 to 22 Mj/Kg. This typethat the main persons in charge of coal is used mainlymining enterprises are fully responsible for the detection, elimination and treatment of latent work safety-related dangers in their enterprises.

(iii) The Measures for the Supervision and Inspection of Coal Mine Safety Training (for Trial Implementation) specifies that coal mining enterprises must arrange and provide safety education and training to all of their mining personnel in accordance with relevant regulations; select and send their principal persons in charge, work safety management personnel and special operation personnel to qualified coal mine safety training institutions for training in a timely manner; and obtain the corresponding qualification certificates.

(iv) The Guiding Opinions on Persons in Charge of Coal Mines and Production and Operation Management Personnel Going into Mines as Foremen requires the various types of coal mines to arrange for their persons in charge and production and operation management personnel to go into the mines to act as foremen and to ensure that each shift has at least one such person on site directing the operations. Coal mining enterprises are required to establish such procedures, clarify foremen’s duties and responsibilities and strictly implement internal management and performance appraisal.

(v) The Measures for Rewarding the Reporting of Major Latent Work Safety Related Dangers in, and Violations of the Law by, electric utilities. Lignite isCoal Mines (for Trial Implementation) specifies that all units or individuals have the lowest ranking coal. It generally has a heat valueright to report major latent work safety-related dangers in, and violations of about 15Mj/Kg and is used to fuel electric power plants.

Coal is also commonly describedlaw by, its sulphur content due to the importance of sulphur in environmental regulations. “Low-sulphur coal” typically is used to describe coal with a sulphur content of 1% or less. Our in situ coal in the No. 3 Seam (the most important coal seam in the Yanzhou and Jining coalfields which our six mines exploit) has sulphur contents generally ranging from 0.39% to 0.75% and therefore is a type of low-sulphur coal.mines.

C. Organizational Structure

In 2005, we had 14As of the end of 2006, there are 17 departments in our Company, namely the Secretariat of the Board of Directors, Audit Department of the Board of Directors, Department of Coordination, Department of Human Resources, Department of Financial Planning, Enterprise Management Department, Information Management Department, Enterprise Development Department, Risk Management Department, General Control Center, Department of Production Technology, Department of Safety Inspection, Electrical Engineering and Power Department, Ventilation and Dust Elimination Department, Geological Survey Department, Department of Enterprise Management, Project Department, Community Relationship Office and Technical Center.Center

Our shareholding and organizational structure as atof March 31, 20062007 are illustrated by the diagram below:

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D. Property, Plants and Equipment

Real Property and Leasehold Property

As of December 31, 2005,2006, the net book value of our property, plant and equipment was RMB9,318.5RMB12,139.9 million. Our corporate headquartersThe six coal mines and production and ancillary facilities of the Company are mainly in Shandong Province, occupywe also own some assets in Shaanxi Province and Shanxi Province in the PRC and Australia. As of December 31, 2006, our Company and our subsidiaries occupied an area of 16,863,31619,586,741 square meters, of which 88,0903,309,603 square meters are used as stations, offices, warehouses and other facilities for our railway services. Yancoalis occupied by the Company in Australia occupiesShandong Province, Shanxi Nenghua owns an area of 97,300 square meters, and Yancoal Australia owns 16,179,838 square meters. The total gross floor areameters of our production and other facilities in PRC is 595,388 square meters. Heze Nenghua and Yulin are in the process of applying for the necessary land use rights to their production areas.land. Under PRC law, we have freely transferable land use rights for a term of 50 years commencing from the respective dates when we acquired such land use rights in the PRC. In addition, land ownership held by Yancoal Australia is not subject to expiration pursuant to Southland Property Law in 1900. Based on necessity of our business development, our Company will seek opportunity to acquire more land and to obtain relevant approvals. We are in the process of applying to the appropriate authorities to obtain relevant title certificates in respect of some of our lands.

Coal Mines and Production Facilities

Existing coal mines

The six domestic coal mines of the Company currently operated by us are all located in the southwestern part of Shandong Province. All of these mines are connected by our railway network, which provides access to our customers either directly or through the PRC national railway or highway system. We completed the acquisition of assets of Austar Coal Mine on December 24, 2004. In 2005, we acquired 95.67% equity interest in Heze Nenghua from the Parent Company.Controlling Shareholder. The principal activities of Heze Nenghua are to conduct the initial preparation of the Zhaolou, , Wanfu and other coal mines at the Juye Coalfield including (i) obtaining the approvals for the coal mine projects, (ii) applying for the necessary exploration rights for coal, and (iii) preparing for the construction of the coal mines. As at December 31, 2005, HezeIn November 2006, we acquired the 98% equity interest in Shanxi Nenghua has commenced construction works forowned by Yankuang Group, and in February 2007, we acquired 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 mineremaining 2% equity interest in Shanxi Nenghua 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.Yankuang Group’s subsidiary, Lunan Fertilizer Plant.

The locations of ourthe six domestic six coal mines of the Company in Shandong Province and the connection of the railway system are shown on the map below:

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The location of Austar Coal Mine is shown on the map below:

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The location of Tianchi Coal Mine is shown on the map below:

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Our six domestic coal mines and our Austar Coal Mine are all underground coal mines.

The following table sets out detailed information for each of the mines currently owned by our mines:Company which are in operation:

 

  Nantun  

Xinglong-

Zhuang

  Baodian  Dongtan  Jining II Jining III  Austar Total  Nantun  

Xinglong

Zhuang

  Baodian  Dongtan  Jining II Jining III  Austar  Tianchi  Total

Background data:

                               

Start of construction

  1966  1975  1977  1979  1989  1993  1998  N/A  1966  1975  1977  1979  1989  1993  1998  2004  N/A

Start of commercial production

  1973  1981  1986  1989  1997  2000  2000  N/A  1973  1981  1986  1989  1997  2000  2000  2006  N/A

Coalfield area(square kilometers)

  35.2  59.81  36.4  60.0  87.1  105.1  63.0  446.6  35.2  59.81  36.4  60.0  87.1  105.1  63.0  20  466.6

Reserve data:

(millions tonnes as of December 31, 2005)

              

Reserve data:

(millions tonnes as of December 31, 2006)

                 

Total in-place proven and probable reserves(1)

  132.85  356.57  310.83  487.32  429.50  251.37  N/A  1968.44  129.38  348.68  305.33  479.16  425.68  244.40  N/A  —    1,932.63

Proven and probable reserves recoverable by longwall mining methods(2)

  28.17  97.78  77.51  104.97  164.36  89.37   562.16  24.70  89.89  72.01  96.81  160.54  82.40  —    —    526.35

recoverable reserves

  —    —    —    —    —    —    —    30.0  30.08

probable resources reserves

  —    —    —    —    —    —    —    66.08  66.08

Depth of mine(meters underground)

  397.0  429.2  474.7  710.0  593.0  556.0  N/A  N/A  397.0  429.2  474.7  710.0  593.0  556.0  300  —    N/A

Average thickness of main coal seam(meters)

  8.60  8.29  8.88  8.41  6.78  7.00  N/A  N/A  8.60  8.29  8.88  8.41  6.78  6.20  5.30  4.50  N/A

Production data:(million tonnes)

              

Production data:
(million tonnes)

                 

Designed raw coal production capacity

  2.4  3.0  3.0  4.0  4.0  5.0  2.0  23.4  2.4  3.0  3.0  4.0  4.0  5.0  2.0  1.0  24.4

Designed coal preparation input capacity

  1.8  3.0  3.0  4.0  3.0  5.0  2.0  22.8  1.8  3.0  3.0  4.0  3.0  5.0  2.0  —    22.8

Raw coal production

                               

1994

  2.9  3.9  3.3  3.5  —    —    —    13.6  2.9  3.9  3.3  3.5  —    —    —    —    13.6

1995

  3.6  3.8  3.6  3.8  0.2(2) —    —    15.0  3.6  3.8  3.6  3.8  0.2(2) —    —    —    15.0

1996

  4.0  4.0  4.1  4.9  0.4(2) —    —    17.4  4.0  4.0  4.1  4.9  0.4(2) —    —    —    17.4

1997

  3.9  4.1  4.0  4.9  0.8(2) —    —    17.7  3.9  4.1  4.0  4.9  0.8(2) —    —    —    17.7

1998

  4.2  5.0  4.3  5.4  1.8  —    —    20.7  4.2  5.0  4.3  5.4  1.8  —    —    —    20.7

1999

  4.0  6.1  4.7  6.1  3.2  —    —    24.1  4.0  6.1  4.7  6.1  3.2  —    —    —    24.1

2000

  4.5  6.2  5.3  6.7  4.8  —    N/A  27.5  4.5  6.2  5.3  6.7  4.8  —    —    —    27.5

2001

  4.9  6.6  6.2  7.1  4.1  5.1  N/A  34.0  4.9  6.6  6.2  7.1  4.1  5.1  —    —    34.0

2002

  3.6  7.1  6.4  8.1  5.2  8.0  N/A  38.4  3.6  7.1  6.4  8.1  5.2  8.0  —    —    38.4

2003

  4.7  7.0  7.3  8.2  6.0  10.1  N/A  43.3  4.7  7.0  7.3  8.2  6.0  10.1  —    —    43.3

2004

  4.1  7.4  7.0  8.5  4.9  7.3  N/A  39.2  4.1  7.4  7.0  8.5  4.9  7.3  —    —    39.2

2005

  4.0  6.6  5.0  7.5  4.5  7.0  N/A(3) 34.6  4.0  6.6  5.0  7.5  4.5  7.0  —    —    34.6

Cumulative raw coal production as of December 31, 2005

  48.4  67.8  61.2  74.7  35.9  37.5  N/A  325.5

2006

  3.9  7.2  5.6  8.0  4.0  6.8  0.4  0.1  36.0

Cumulative raw coal production as of December 31, 2006

  52.3  75.0  66.8  82.7  39.9  44.3  0.4  0.1  361.5

(1)The reserve data (except for Austar Coal Mine) including (i) total in-place proven and probable reserves (if applicable), (ii) proven and probable reserves recoverable by longwall mining methods, (iii) recoverable reserves; (iv) probable resource reserves; (v) depth of mine and (iv)(vi) average thickness of main coal seam, is based on the relevant information from Report of independent mining consultants, after deduction of actual production volume and non-accessible reserves up to December 31, 2005.2006. Non-accessible reserve is defined as the portion of identified resources estimated to be not accessible by application of one or more accessibility factors within an area. The report of the independent mining consultants for Nantun, Xinglong Zhuang, Baodian, Dongtan and Jining II was prepared by International Mining Consultants Limited Nottinghamshire, United Kingdom (“IMC”) on February 16, 1998, and the Report for Jining III was prepared by SRK Consulting in August 2000.The report of the independent mining consultant for Tianchi Coal Mine was prepared by Minarco Asia Pacific Pty Limited in May 2006, which is attached hereto as Exhibit 14.1 to this Annual Report.
(2)Produced during trial production period.
(3)The mine was shut down in January 2004.With respect to Tianchi Coal Mine, “start of construction” refers to “the redevelopment and expansion”; “start of commercial production” refers to “commencement of production after completion of redevelopment and expansion”.

Nantun Coal Mine.Nantun is located in the southsouthern portion of our coalfield. Nantun began its commercial production in 1973 with original designed annual output of 1.5 million tonnes of coal. In 1993, the designed annual output for Nantun was increased to 2.4 million tonnes after the completion of a renovation project. The main coal seam of Nantun is divided into two leaves. The thickness of the upper leaf averages 5.35

meters and the thickness of the lower leaf averages 3.21 meters. As of December 31, 2006, the estimated probable reserves on the main coal layer were 129.4 million tonnes, of which 24.7 million tonnes were recoverable by our longwall mining methods. We generally use the longwall caving mining method to extract coal from the upper layer of the coal seam and use mechanized longwall faces to mine the lower layer of the coal seam. Currently, Nantun produces coal from two longwall faces.

The Nantun coal preparation plant produces mainly No. 2 and No. 3 Clean Coal and employs only jig machines. Most of the equipment used in the Nantun coal preparation plant was manufactured in the PRC.

Xinglongzhuang Coal Mine. Xinglongzhuang is located in the northnorthern portion of our coalfield. The main coal seam of Xinglongzhuang is concentrated in one leaf with an average thickness of 8.29 meters. We principally use the longwall caving mining method to mine in Xinglongzhuang. Currently, Xinglongzhuang operates one longwall face. As of December 31, 2006, the estimated probable reserves on the main coal layer were 348.7 million tonnes, of which 89.9 million tonnes were recoverable by our longwall mining methods.

The Xinglongzhuang coal preparation plant produces mainly No. 1, No. 2 and No. 3 Clean Coal. The Xinglongzhuang coal preparation plant’s principal equipment, including the jig machines, sink-and-float separation machines and floating separation machines, was imported.

Baodian Coal Mine. Baodian is located in the west central areawestern portion of our coalfield. Certain sections of the main coal seam of Baodian are concentrated in one leaf, with an average thickness of 8.81 meters, and the remaining sections are divided into two leaves with average thickness of 5.74 meters for the upper leaf and 3.38 meters for the lower leaf. We generally use the longwall caving mining method to extract coal from the concentrated layer and the upper leaf of the divided sections of the main coal seam. Currently, Baodian operates two longwall faces. As of December 31, 2006, the estimated probable reserves on the main coal layer was 305.3 million tonnes, of which 72.0 million tonnes were recoverable by our longwall mining methods.

The original design of the Baodian coal preparation plant was identical to that of the Nantun coal preparation plant. Subsequently, we remodeled the jig machines and added a number of sink-and-float machines and floating separation machines in the Baodian coal preparation plant. Most of the equipment used in the Baodian coal preparation plant was manufactured in the PRC. The principal product of the Baodian coal preparation plant is No. 2 and No. 3 Clean Coal.

Dongtan Coal Mine. Dongtan is located in the east central areaeastern portion of our coalfield. Certain sections of the main coal seam of Dongtan are concentrated in one leaf, with an average thickness of 8.41 meters, and the remaining sections are divided into two leaves, with average thickness of 5.38 meters for the upper leaf and 3.22 meters for the lower leaf. We generally use the longwall caving mining method to extract coal from the concentrated leaf and the upper leaf of the divided sections of the main coal seam. Currently, Dongtan operates two longwall faces. As of December 31, 2006, the estimated probable reserves on the main coal layer were 479.2 million tonnes, of which 96.8 million tonnes were recoverable by our longwall mining methods.

Most of the equipment used in the Dongtan coal preparation plant, including the jig machines, the sink-and-float separation machines and the floating separation machines, was manufactured in the PRC. The principal product of the Dongtan coal preparation plant is No. 2 and No. 3 Clean Coal.

Jining II.II Coal Mine. Jining II is located in the northnorthern portion of the Jining coalfield, thecoalfield. The quality of its coal reserves of which is similar to that in our coalfield.

Certain sections of the main coal seam of Jining II are concentrated in one leaf, with an average thickness of 6.78 meters, and the remaining sections are divided into two leaves, with an average thickness of 2.1 meters for the upper leaf and an average thickness of 4.68 meters for the lower leaf. We use mainly longwall mining methods at Jining II. Currently, Jining II operates three longwall faces. As of December 31, 2006, the estimated probable reserves on the main coal layer were 425.7 million tonnes, of which 160.5 million tonnes were recoverable by our longwall mining methods.

The main equipment used in Jining II areis jig machines, most of which are manufactured in the PRC. The principal product of the Jining II coal preparation plant is No. 2 and No. 3 Clean Coal.

Jining III.III Coal Mine. Jining III is located in the southsouthern portion of the Jining coalfield and covers an area of 110.0 square kilometers. Jining III commenced commercial production on December 28, 2000, having a designed annual raw coal production capacity of five million tonnes. The average thickness of the main coal seam of Jining III is 6.2 meters. Currently, Jining III operates two longwall faces. As of December 31, 2006, the estimated probable reserves on the main coal layer were 244.4 million tonnes, of which 82.4 million tonnes were recoverable by our longwall mining methods.

The main equipment used in Jining III areis jig machines, which are imported from Germany. The principal product of the Jining III coal preparation plant is No. 2 and No. 3 Clean Coal.

Austar Coal Mine.Austar Coal Mine is an underground longwall mine located in Hunter Valley, New South Wales, Australia. Austar Coal Mine covers an area of 63.0 square kilometers. Austar Coal Mine was constructed in 1998 and it commenced commercial production in 2000, having a designed annual raw coal production capacity of two million tonnes. Austar Coal Mine produces hard coking coal and semi-soft

coking coal. The average thickness of the main coal seam of Austar Coal Mine is 5.3 meters. According to the Information Memorandum – Southland Coal Pty Ltd. provided by the vendor of the coal mine at the time of the acquisition, Austar Coal Mine has a proven and probable reserve of approximately 41 million tonnes.

Austar Coal Mine was formerly owned and operated by Southland Coal Pty Limited. In December 2003, an underground fire occurred at Austar Coal Mine. The mine was shut down in January 2004. In 2004, we acquired the entire interest in the Austar Coal Mine from independent third parties including Southland Coal Pty Limited and completed the transfer on December 24, 2004. We have also established two wholly-owned subsidiaries in Australia, Yancoal Australia and Austar, in 2004 for our operations at Austar Coal Mine.

We commenced the reconstruction, expansion of production capacity and technology upgrade at Austar Coal Mine in 2005 and plan to begin production atthe Austar Coal Mine has resumed operation in the third quarter ofOctober 2006.

The main equipment to be used in Austar Coal Mine is heavy-medium cyclone machines, which are manufactured in Australia. Austar Coal Mine will operate 1one longwall face upon operation.The designed coal production capacity of Austar Coal Mine after the reconstruction, expansion and technology upgrade is 2.0 million tonnes per annum. We planned to spend a total of approximately AUD161.0AUD230.3 million on Austar Coal Mine and we have incurred AUD76.6AUD205.9 million as atof December 31, 2005.2006.

Tianchi Coal Mine.Tianchi Coal Mine is located in Heshun County of Shanxi Province, with an area of approximately 20 square kilometers. After approval was obtained from the State Development Reform Committee on December 31, 2004, Tianchi Coal Mine underwent a redevelopment and expansion, and on November 3, 2006 has commenced commercial production after the construction works was completed. The designed production capacity was increased from 0.3 million tonnes to 1.2 million tonnes per annum. Tianchi Coal Mine is operated by inclined shaft development, and it produces mostly lean coal and meager lean coal. The average thickness of the main coal seam of Tianchi Coal Mine is 4.5 meters. As of December 31, 2006, the estimated probable resources reserves were 66.1 million tonnes, and the recoverable reserve were 30.0 million tonnes.

Tianchi Coal Mine does not have a coal preparation plant.

Mines under developmentDevelopment

Zhaolou Coal Mine is an underground longwall mine located in the central portion of Juye Coal Field. Zhaolou Coal Mine covers an area of 145.0145 square kilometers. We commenced the construction of Zhaolou Coal Mine in 2004 and we plan to complete the construction of Zhaolou Coal Mine in December 2007.2008. Zhaolou Coal Mine has a designed annual raw coal production capacity of three3 million tonnes. Zhaolou Coal Mine produces 1/3 coking coal and steam coal. The average thickness of the main coal seam of Zhaolou Coal Mine is 7 to 9 meters. According to Zhaolou Coal Minethe Revised Independent Technical Review and Resource and Reserve ReportAssessment attached as Exhibit 14.1, the total provenprobable and probable reserverecoverable reserves of Zhaolou Coal Mine was 105.9106.0 million as atof December 31, 2005.2006.

The construction at the Zhaolou Coal Mine is expected to cost approximately RMB2,364.7 million and we have spent an aggregate total of approximately RMB476.6RMB875.5 million on the construction and development of Zhaolou Coal Mine as atof December 31, 2005.2006.

Railway NetworkAssets

In 2002, we acquired our railway network from the Parent Company. Currently, the railway networkRailway Assets consists of 27 locomotives, 359 railcars, and special purpose coal transportation railway tracks of approximately 184 kilometers in length whichthat link most of our coal mines and production units of the Parent CompanyControlling Shareholder and our largest end-customer, the Zouxian Electric Power Plant. As of December 31, 2005,2006, our Railway Asset Department employed approximately 3,4013,580 employees. The railway network connects to two of the major national railways, namely, the Beijing-Shanghai Railway and Yanzhou-Shijiugang Railway.

After the acquisition, we and the Parent Company entered into a supplemental agreement on October 30, 2001. The Supplemental Agreement amended the Materials and Services Supply Agreement dated October 17, 1997 which provided that the Parent Company would provide us with railway transportation services. According to the supplemental agreement, (i) the Parent Company and/or its subsidiaries no longer provide railway transportation services to us; and (ii) we will provide the Parent Company and/or its subsidiaries railway transportation services.

Mining Rights

The ParentMining Rights of our Five Mines

According to the approval of the State-owned Supervision Department and the Coal Industry Supervision Department obtained at the establishment of the Company, and we havethe Mining Agreement entered into a mining rightswith Yankuang Group in October 1997 and the supplemental agreement dated October 17,entered into in February 1998, whereas the five coal mines owned by the Company: Nantun, Xinglongzhuang, Baodian, Dongtan and Jining II (“the Five Mines”), would incur RMB13.0 million per year for compensation for the depletion of coal resources. For ten years from 1997 (the “Mining Rights Agreement”) pursuant to whichonwards, the compensation would be collected by Yankuang Group, and if the state implemented new regulations after ten years, the compensation would be adjusted accordingly.

During the time of the report, we agreed to pay to the Parent Company an annual fee (the “Annual Fee”) of approximatelypaid Yankuang Group RMB13.0 million as compensation for the Parent Company’s agreementdepletion of coal resources for the Five Mines.

In September 2006, the State Council approved the Implementation Plan for the Compensation System Reform Testing in relation to relinquishDeepening Coal Resources as jointly promulgated by the Finance Department, Ministry of Land and Resources, and the National Development and Reform Commission. According to the implementation plan, if an enterprise obtained mining rights associatedthat were the result of state-funded exploration, it must pay mining right fees in relation to valuation of the remaining reserves. Shandong Province is one of the testing points for mining rights paid with fiveconsideration. Up until the date of our mines in China (Nantun Mine, Xinglongzhuang Mine, Baodian Mine, Dongtan Mine and Jining II). Thedisclosure of this report, the detailed terms of the implementation of the use of mining rights are 67 years for Baodian, 70 years for Dongtan, 45 years for Nantun, 80 years for Xinglongzhuang and 64 years for Jining II. All such terms commenced on October 14, 1997, the date on which the mining rights permitsin Shandong Province were issued. The Annual Fee is fixed for a period of 10 years (the “Initial Period”) commencing from 1997, after which the Annual Fee will be revised if new national legislation is passed in respect thereof. The Parent Company and we also entered into a compensation agreement dated October 17, 1997 (the “Compensation Agreement”) whereby

the Parent Company has agreed to compensate us in respect of any amounts in excess of the Annual Fee which we may, following the Initial Period, be required to pay as a result of any such new national legislation. For payment information, see “Item 5. Operating and Financial Review and Prospects – F. Contractual Obligations”.unclear.

Jining III Mining Rights

Pursuant to the Jining III Coal Mine Acquisition Agreement dated August 4, 2000 entered into between us and the Parent Company,Controlling Shareholder, the consideration offor the mining right of Jining III coal mineCoal Mine is approximately RMB132.5 million, which shall be paid to the Parent CompanyControlling Shareholder in ten equal annual interest free installments commencing from 2001. During 2005,2006, we paid RMB13.248RMB13.3 million to the Parent Company.Controlling Shareholder.

Austar Coal Mine Mining Rights

We obtained aan exploration license for Austar Coal Mine from the NSW Department of Primary Industries on April 5, 2005. In accordance with the Asset Sale Agreement, we are obligated to pay the vendor AUD4,000,000 upon our successful procurement of exploration license to the new exploration site adjacent to the Austar Coal Mine. We are in the process of obtainingDuring 2005, we successfully obtained the exploration license for the adjacent mines. Accordingly, consideration amounted to RMB23.6 million was paid upon the new exploration site adjacent to the Austarcompletion of registration process in 2006.

Tianchi Coal Mine and expect to complete

At the process by June 2006.time we acquired Shanxi Nenghua, we paid a total consideration of RMB748.3 million, including the consideration for the mining right of Tianchi Coal Mines for RMB136.6 million.

Zhaolou Coal Mine Mining Rights

PursuantIn December 2005, we acquired 95.67% of the equity interest in Heze Nenghua from Yankuang Group. According to a supplementalthe acquisition agreement, dated June 28, 2005 entered between us and the Parent Company, the Parent Company irrevocably undertook that we shall haveHeze Nenghua has the right to acquire the mining rights of Zhaolou coal mine and Wanfu coal mine fromCoal Mine within 12 months upon its availability.

On June 28, 2006, Yankuang Group obtained the Parent Company within twelve months from the respective dates on which such mining rights are obtainedcertificate issued by the Parent Company for a considerationState Resources Department in relation to be determined based on valuations conducted by independent qualified PRC valuers. Our Parent company is inZhaolou Coal Mine. In accordance with the terms of the Heze Nenghua Acquisition Agreement, we have begun the process of obtainingacquiring the mining rights of Zhaolou Coal Mine, and we planwill make the appropriate disclosure in relation to acquire suchthe acquisition progress. The construction of Zhaolou Coal Mine is expected to be completed in 2008.

Except for the Five Mines of the Company, the mining rights fromof the Parent Company within 12 months upon its availability.coal mines owned by us are all paid with consideration.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis should be read in conjunction with the information set forth in the Financial Statements. The differences between IFRS and U.S. GAAP that would have had an impact on ourthe equity attributable to our equity holders of the Company and net income attributable to our equity holders of the Company as of December 31, 2004 and 2005 and net income attributable to our equity holders of the Company for the years ended December 31, 2003, 2004, 2005 and 20052006 are set forth in Note 4746 to the Financial Statements.financial statements.

A. Operating Results

We are engaged in the underground mining of prime quality low-sulphur coal from our mines for sale to electric power plants, metallurgical producers and other customers located principallyprimarily in the economically developed eastern provinces inof the PRC, and for export to customers located in East Asia. Our raw coal production was 34.736.1 million tonnes in 2005,2006, and our total coal sales volume was 32.534.7 million tonnes in 2005.tonnes. Domestic coal sales accounted for 62.4%70.0%, 70.0%73.1% and 73.1%78.2% of our total net sales during 2003, 2004, 2005 and 2005,2006, respectively, and export coal sales through export sales agent accounted for 35.4%27.9%, 27.9%25.5% and 25.5%20.5%, respectively, of our total net sales for such periods. We started to operate Yanmei Shipping in 2004.

In 2002 we acquired our local railway transportation network from the Parent Company,Controlling Shareholder, and began to provide rail transportation services both for our own coal sales and for the Parent Company,Controlling Shareholder, its subsidiaries and other third parties. In 2005,2006, we transported a total of 20.219.5 million tonnes of goods, compared to 30.320.2 million tonnes in 2004.2005.

Sales of the railway transportation services segment consist of two components, namely (i) amount charged to customers for the transportation of coal purchased on an ex-mine basis, where the customer pays the cost of transportation; and (ii) transportation services provided to third parties for the transport of goods via our railway network. In 2006, the internal sales was RMB206.8 million and external sales was RMB160.4 million. External sales are recorded as our revenues for the period, and the costs of providing these services are recorded as our cost of transportation services. For a presentation of segment revenues, results, and inter-segment eliminations and segment balance sheet items, see Note 6 to the Financial Statements.

Pursuant to the Restructuring, we assumed certain assets and liabilities from the Predecessor, including Nantun, Xinglongzhuang, Baodian and Dongtan mines, If treated as well as certain other facilities necessary for us to carry out our business. We acquired Jining II mine, Jining III mine, our railway network from the Parent Companyan independent business in 1998, 2001 and 2002, respectively. On December 24, 2004, we completed the transfer2006, Railway Assets contributed net profits of all assets of Southland Colliery, which we subsequently renamed as Austar Coal Mine. We acquired 95.67% of equity interest in Heze Nenghua from our Parent Company on December 7, 2005. Heze Nenghua is responsible for the construction of Zhaolou Coal Mine in the Juye Coal Field.RMB9.3 million.

Overview

In 2005,2006, we produced 34.736.1 million tonnes of raw coal representing a 11.5% decrease compared to 2004 and sold 32.534.7 million tonnes of coal, representing a 14.5% decrease4.0% and 6.7% increase, respectively, compared to 2004, among which sales2005. In 2006, our realizable total net revenue was RMB12,007.3 million, representing an increase of export coal were 7.34.3% compared to 2005, while the net income attributable to our equity holders was RMB2,373.0 million tonnes,in 2006, representing a decrease of 27.6%17.6% compared to 2004. Our total net revenue was RMB11,516.9 million in 2005, representing an increase of 8.9% compared to 2004, while our net income attributable to the equity holders of the Company was RMB2,881.5 million in 2005, representing a decrease of 8.6% compared to 2004.2005. The following table sets forth our sales and sales volumes classified according to our principal products and services sales:

  Historical Sales Data by Product and Service   Historical Sales Data by Product and Service 
  2003 2004 2005   2004 2005 2006 
  Sales
Volume
 Net Sales % of Total
Net Sales
 Sales
Volume
 Net Sales % of Total
Net Sales
 Sales
Volume
 Net Sales % of Total
Net Sales
   Sales
Volume
  

Net

Sales

  

% of

Total
Net Sales

 Sales
Volume
  

Net

Sales

  

% of

Total
Net Sales

 Sales
Volume
  

Net

Sales

  

% of

Total
Net Sales

 
  (‘000 tonnes) (RMB million) (‘000 tonnes) (RMB million) (‘000 tonnes) (RMB million)   

(‘000

tonnes)

  

(RMB

million)

   

(‘000

tonnes)

  

(RMB

million)

   

(‘000

tonnes)

  

(RMB

million)

   

Clean Coal

                          

No. 1 Clean Coal

  513.8 128.2 1.8 631.3 220.5 2.1  773.9 398.0 3.5   631.3  220.5  2.1% 773.9  398.0  3.5% 869.3  439.3  3.6%

No. 2 Clean Coal

  6,729.2 1,287.6 18.5 6,329.2 2,013.50 19.0  5,084.5 2,499.1 22.0   6,329.2  2,013.50  19.0% 5,084.5  2,499.1  21.7% 5,566.3  2,668.5  22.2%

Domestic Sales

  636.5 151.8 2.2 2,326.7 805.4 7.6  2,981.3 1,531.4 13.3   2,326.7  805.4  7.6% 2,981.3  1,531.4  13.3% 4,064.2  2,003.8  16.7%

Export

  6,092.7 1,135.8 16.3 4,002.5 1,208.10 11.4  2,103.2 967.7 8.5   4,002.5  1,208.10  11.4% 2,103.2  967.6  8.4% 1,502.1  664.7  5.5%

No.3 Clean Coal

  11,952.7 2,126.3 30.6 11,861.9 3,484.00 33.0  11,183.0 4,143.8 36.0   11,861.9  3,484.00  33.0% 11,183.0  4,143.8  36.0% 12,129.7  4,518.7  38.2%

Domestic Sales

  4,858.3 899.7 12.9 6,027.9 1,800.20 17.0  6,066.8 2,191.9 19.0   6,027.9  1,800.20  17.0% 6,066.8  2,191.9  19.0% 7,495.6  2,901.6  24.2%

Export

  7,094.4 1,226.6 17.7 5,834.0 1,683.80 15.9  5,116.2 1,951.9 17.2   5,834.0  1,683.80  15.9% 5,116.2  1,951.9  16.9% 4,634.1  1,680.1  14.0%

Lump Coal

  583.4 130.3 1.9 752.3 284.3 2.7  485.5 209.9 1.8   752.3  284.3  2.7% 485.5  209.9  1.8% 555.4  237.6  2.0%

Domestic

  138.8 35.4 0.5 572.7 228.9 2.2  454.0 197.4 1.7   572.7  228.9  2.2% 454.0  197.4  1.7% 555.4  237.6  2.0%

Export

  444.6 94.8 1.4 179.6 55.4 0.5  31.5 12.5 0.1   179.6  55.4  0.5% 31.5  12.5  0.1% —    —    —   

Australian Clean Coal

  —    —    —    —    —    —    192.4  114.4  1.0%

Subtotal

  19,779.1 3,672.4 52.8 19,574.7 6,002.30 56.8  17,527.0 7,250.7 63.8   19,574.7  6,002.3  56.8% 17,527.0  7,250.7  63.0% 19,313.1  8,041.5  67.0%

1. Coal Business

                

Domestic Sales

  6,147.4 1,215.2 17.5 9,558.6 3,055.00 28.9  10,276.2 4,318.7 38.0   9,558.6  3,055.00  28.9% 10,276.2  4,318.7  37.5% 12,984.5  5,582.3  46.5%

Export

  13,631.7 2,457.2 35.3 10,016.1 2,947.30 27.9  7,250.8 2,932.0 25.8   10,016.1  2,947.30  27.9% 7,250.8  2,932.0  25.5% 6,328.6  2,459.2  20.5%

Screened Raw Coal

  13,937.5 2,499.4 36.0 14,936.6 3,867.5 36.5  10,805.4 3,478.1 30.6   14,936.6  3,867.5  36.5% 10,805.4  3,478.1  30.2% 10,967.3  3,160.4  26.3%

Mixed Coal and Others

  5,690.9 622.5 9.0 3,492.6 484.5 4.6  4,152.1 624.7 5.5   3,492.6  484.5  4.6% 4,152.1  624.7  5.4% 4,383.1  645.0  5.4%

Net Coal Sales

  39,407.5 6,794.3 97.8 38,003.9 10,354.3 97.9  32,484.5 11,353.5 98.6 

Railway Transportation Services Revenue

  —   154.6 2.2 —   220.8 2.1  —   163.4 1.4 

Coal business total

  38,003.9  10,354.3  97.9% 32,484.5  11,353.5  98.6%’ 34,663.5  11,864.9  98.7%

2. Railway

                

Transportation Services Revenue

  —    220.8  2.1% —    163.4  1.4% —    160.4  1.3%
                                                 

Total

  39,407.5 6,948.9 100.0 38,003.9 10,575.1 100.0% 32,484.5 11,516.9 100.0%

3. Total

  38,003.9  10,575.1  100.0% 32,484.5  11,516.9  100.0% —    12,007.3  100.0%
                                                 

Net coal sales represent the invoiced value of coal sold and isare net of returns, discounts, sales taxes, and transportation costs, if the invoiced value includes transportation costs to the customers.port fees and various miscellaneous fees. Sales taxes consist primarily of a resource tax calculated at thea rate of RMB2.40 per tonne of the imputed quantity of raw coal sold, which was increased tosold. Our Company’s applicable coal industry tax rates in Shandong Province is RMB3.60 effective from May 1, 2005per tonne and the applicable coal industry rates in Shanxi Province is RMB3.2 per tonnes. Such taxes are paidpayable to the local tax bureau.

The following table sets forth our principal operating revenues, costs and expenses, and such items as expressed as percentages of total net sales:

 

  2004 2005 2006 
  2003  2004  2005  RMB  % of
Total
Net Sales
 RMB  % of
Total
Net Sales
 RMB  % of
Total
Net Sales
 
  RMB  % of Total
Net Sales
  RMB  % of Total
Net Sales
  RMB  % of Total
Net Sales
  (RMB
Million)
   (RMB
Million)
   (RMB
Million)
   

Net sales

                      

Net sales of coal

  6,794.3  97.8  10,354.3  97.9  11,353.5  98.6  10,354.3  97.9% 11,353.5  98.6% 11,846.9  98.7%

Railway transportation service revenue

  154.6  2.2  220.8  2.1  163.4  1.4  220.8  2.1% 163.4  1.4% 160.4  1.3%

Total net sales

  6,948.9  100.0  10,575.1  100.0  11,516.9  100.0  10,575.1  100.0% 11,516.9  100.0% 12,007.3  100.0%

Cost of sales and services provided

                      

Materials

  899.6  12.9  1,088.7  10.3  1,147.6  10.0  1,088.7  10.3% 1,147.6  10.0% 1,320.6  11.0%

Wages and employee benefits

  863.7  12.4  1,022.6  9.7  1,258.3  10.9  1,022.6  9.7% 1,258.3  10.9% 1,646.0  13.7%

Electricity

  278.5  4.0  298.3  2.8  282.5  2.5  298.3  2.8% 282.5  2.5% 33.35  2.8%

Depreciation

  836.1  12.0  918.4  8.7  891.6  7.7  918.4  8.7% 891.6  7.7% 963.0  8.0%

Repairs and maintenance

  374.9  5.4  455.8  4.3  351.0  3.0  455.8  4.3% 351.0  3.0% 327.2  2.7%

Land subsidence, restoration, rehabilitation and environmental costs

  264.2  3.8  323.2  3.1  636.6  5.5  323.2  3.1% 636.6  5.5% 743.0  6.2%

Mining right expenses

  19.6  0.3  19.6  0.2  19.6  0.2  19.6  0.2% 19.6  0.2% 25.0  0.2%

Other transportation fee

  48.2  0.7  119.7  1.1  98.8  0.9  119.7  1.1% 98.8  0.9% 106.6  0.9%

Others

  170.2  2.5  305.4  2.8  602.6  5.2  305.4  2.9% 602.6  5.2% 722.5  6.0%

Total cost of sales and services provided

  3,755.0  54.0  4,551.7  43.0  5,288.7  45.9  4,551.7  43.0% 5,288.6  45.9% 6,190.1  51.6%
                                     

Selling, general and administrative expenses

  1,264.9  18.2  1,479.9  14.0  1,918.8  16.7  1,479.9  14.0% 1,918.8  16.7% 2,230.1  18.6%
                                     

Total cost of sales and operating expenses

  5,019.9  72.2  6,031.6  57.0  7,207.4  62.6  6,031.6  57.0% 7,207.4  62.6% 8,420.2  70.1%
                                     

The discussion and analysis have been based upon financial statements prepared in accordance with the IFRS, which differs in certain respects from U.S. GAAP. For a further discussion on the differences between IFRS and U.S. GAAP, see Note 4746 to our financial statements included elsewhere in this annual report.Annual Report.

Year Ended December 31, 2006 Compared with Year Ended December 31, 2005

Our net sales in 2006 increased by RMB490.4 million, or 4.3%, to RMB12,007.3 million from RMB11,516.9 million in 2005, this was due primarily to the increased net sale of our coal products.

Our net sales of coal increased by RMB493.5 million, or 4.3%, to RMB11,846.9 million in 2006. The increase of net sales of coal was primarily due to the increase of our sales volume of coal, partly offset by the decreased average selling price of the Company’s coal products.

In 2006, we sold 34.7 million tonnes of coal, representing an increase of 2.2 million tonnes, or 6.7%, as compared to 2005. The increase was a result of (i) the 1.9 million tonnes, or 5.7%, increase of sales volume of the six coal mines of the Company (ii) the 0.2 million tonnes of sales volume of Yancoal Australia, and (iii) the 0.1 million tonnes of sales volume of Shangxi Nenghua.

The decrease of average coal sales price of the Company was primarily due to the corresponding decrease in export coal prices. Our net income from railway transportation services was RMB160.4 million, representing a decrease of RMB3.0 million, or 1.9%, from RMB163.4 million in 2005. The decrease was primarily due to a decrease in the volume of coal deliveries made by our railway network for coal sales where transportation expenses were charged on an ex-mine basis to customer.

Our total cost of sales (including railway transportation services) increased by RMB901.5 million, or 17.0%, to RMB6,190.1 million in 2006 as compared to RMB5,288.6 million in 2005, primarily due to the increased cost of our coal sales. Increase of our cost of coal sales was primarily due to (i) the increase in commodity prices, (ii) the increase in employees’ wages; (iii) the increase in expenditures on safety measures, and (iv) the consolidation of the cost of coal sales of our subsidiaries which were not acquired or put into operation in 2005.

The unit cost of coal sales per tonne for the Company was RMB170.2, an increase of RMB10.5, or 6.6%, compared with RMB159.6 in 2005. Such increase in unit cost of coal sales per tonne was attributable to certain internal and external factors, including increases of raw material prices, employees’ wages, subsidence fees of our Company as a result of the increased efforts to relocate the villages located above coal fields, and more frequent changes of underground work-faces.

Our selling, general and administrative expenses were RMB2,230.1 million in 2006, representing an increase of RMB311.3 million, or 16.2%, from RMB1,918.8 million of 2005. The increase of our selling, general and administrative expenses was primarily due to (i) the increase of RMB378.0 million of selling, general and administrative expenses of the Company, which was mainly attributable to the increase in employees’ insurance, wages and depreciation expenses, and (ii) an additional RMB5.1 million for the selling, general and administrative expenses of Shanxi Nenghua. However, the increases were partly offset by the decrease of RMB42.0 million of selling, general and administrative expenses of Yancoal Australia as compared to 2005.

Our other operating income increased by RMB30.8 million or 22.8%, to RMB165.8 million in 2006 from RMB135.0 million in 2005. The increase was mainly due to (i) the RMB12.9 million increase of profit from sales of material and fittings; and (ii) the RMB8.4 million increase of interest income of bank deposit.

Our interest expenses increased by RMB1.7 million, or 7.1%, to RMB26.3 million in 2006, from RMB24.6 million in 2005. The increase was primarily due to the two new long-term loans borrowed by Shanxi Nenghua.

As a result, our income before income taxes decreased by RMB693.4 million, or 15.7%, from RMB4,420.0 million in 2005 to RMB3,726.6 million in 2006.

Our income tax expenses decreased by RMB183.3 million, or 12.0%, from RMB1,538.0 million in 2005 to RMB1,354.7 million in 2006.

As a result, the net income attributable to our equity holders decreased by RMB508.5 million, or 17.6%, to RMB2,373.0 million in 2006 from RMB2,881.5 million in 2005.

Year Ended December 31, 2005 Compared with Year Ended December 31, 2004

Our net sales increased by RMB941.8 million, or 8.9%, to RMB11,516.9 million in 2005 from RMB10,575.1 million in 2004, due primarily to the increases of revenue from sales of coal. Net sales of coal increased by RMB999.1 million, or 9.6%, to RMB11,353.5 million in 2005. The increase was primarily due to an increase of average coal sales prices ofby 28.3%, which resulted in an increase of net sales of coal by RMB2,502.9 million, partially offset by a decrease of coal sales volume of 14.5%, which resulted in the decrease of net sales of coal by RMB1,503.8 million.

The increase in the average selling price of our coal was primarily due to improved market conditions which resulted in increase in coal prices in both the domestic and the export markets as well as the increase in net sales price primarily due to the implementation of the “Four Optimizations” strategy. Our average sales price per tonne for coal increased 28.3% from RMB272.3 for the year ended December 31, December 2004 to RMB349.5 for the year ended December 31, December 2005.

In 2005, we produced 34.7 million tonnes of raw coal, representing a 11.5% decrease compared to 2004 and sold 32.5 million tonnes of coal, representing a 14.5% decrease compared to 2004, primarily due to decrease in our raw coal production. Our domestic sales of coal in 2005 were 25.2 million tonnes, representing ana decrease of 9.9% compared to 2004. Our export sales of coal in 2005 were 7.3 million tonnes, representing a decrease of 27.6% compared to 2004. The change in sales structure was primarily due to our timely adjustment of product mix in light of the market needs.

Our net income from railway transportation service was RMB163.4 million, representing a decrease of RMB57.3 million, or 26.0%, from RMB220.8 million in 2004. Such decrease was principally due to the decrease in the sales volume of coal resulting from decreased production volume as well as the decrease in coal deliveries made by our railway network for coal sales where transportation expenses were charged on ex-mine basis to the customers.

Our cost of sales and services (including railway transportation service) increased by RMB736.9 million, or 16.2%, to RMB5,288.6 million in 2005, as compared to RMB4,551.7 million in 2004. The cost of coal sales was RMB5,184.8 million, representing an increase of RMB722.5 million, or 16.2%, as

compared to RMB4,462.3 million in 2004, principally due to (i) the increase in commodity prices, (ii) the increase in employees’ wages, (iii) the reduction of the rate of export VAT rebate, and (iv) the increase in expenditures on safety measures .measures. The unit cost of coal sales was RMB159.6 per tonne of coal in 2005, representing an increase of RMB42.2, or 36.0%, as compared to RMB117.4 in 2004.

Of the RMB42.2 increase in unit cost of coal sales per tonne of coal we sold in 2005, RMB15.8 was attributable to external factors beyond our control, including (i) an increase of RMB2.6 in unit cost of coal sales resulting from the reduction of export VAT rebate; (ii) an increase of RMB2.1 resulting from the increase in cost of raw materials; and (iii) an increase of RMB11.1 resulting from the increase in subsidence fees to relocate villages above our coal mines. Of the reminderremainder of the RMB42.2 increase in unit cost of our coal sales in 2005, RMB9.4 was attributable to increase in employee wages, RMB2.9 was attributable to the increase of expenses as a result of the implementation of measures designed to (i) increase pricing through optimizing our product- and customer-mix; (ii) optimize transportation and port flow structures to reduce cost of sales; (iii) stragicallystrategically allocate coal sales to more profitable markets; and (iv) increase product sales to major customers (“Four Optimizations”), RMB1.2 was attributable to the increase in safety inputs and RMB14.7 was attributable to increased fixed costs resulting from the decrease in sales volumes by 5.5 million tonnes in 2005 compared to 2004.

Our selling, general and administrative expenses were RMB1,918.8 million in 2005, representing an increase of RMB438.9 million, or 29.7%, from RMB1,479.9 million in 2004. This increase was primarily due to (i) an increase in retirement benefits scheme contributions of RMB114.2 million; (ii) an increase in employee wages and benefits of RMB114.3 million; (iii) an increase in start-up cost incurred by Yancoal Australia Pty Ltd. of RMB121.8 million; and (iv) an increase of foreign exchange loss of RMB98.7 million.

Our other operating income decreased by RMB30.7 million, or 18.5%, to RMB135.0 million in 2005 from RMB165.7 million in 2004. The decrease was primarily due to a decrease in interest income of RMB16.1 million and a decrease in the release of negative goodwill of RMB 27.6 million as compared to 2004 resulting from the revised IFRS adopted in 2005. For the information about the revised IFRS, please see “-G-Critical“Item 5 – G – Critical Accounting Policies”.

Our interest expenses decreased by RMB11.3 million, or 31.5%, from RMB35.9 million in 2004 to RMB24.6 million in 2005 from RMB35.9 million in 2004.2005. The decrease was primarily due to the partial repayment of bank loans by theour Company.

As a result, our income before taxes decreased by RMB253.3 million, or 5.4%, from RMB4,673.3 million in 2004 to RMB4,420.0 million in 2005 from RMB4,673.3 million in 2004.2005.

Our income tax expenses increased by RMB19.2 million, or 1.3%, to RMB1,538.0 million in 2005 from RMB1,518.8 million primarily due to an under-provision of income tax from prior years.

Our net income attributable to our equity holders of the Company decreased by RMB226.7 million, or 7.2%, from RMB3,154.3 million in 2004 to RMB2,927.6 million in 2005 from RMB3,154.3 million in 2004.

Year Ended December 31, 2004 Compared with Year Ended December 31, 2003

Our net sales increased by RMB3,626.2 million, or 52.2%, to RMB10,575.1 million in 2004 from RMB6,948.9 million in 2003, due primarily to the increased revenue from sales of coal. Net sales of coal increased by RMB3,560.0 million, or 52.4%, to RMB10,354.3 million in 2004. The increase was primarily due to an increase of average selling price of coal by 57.9%, which resulted in an increase of net sales of coal by RMB3,796.6 million, partially offset by a decrease of coal sales volume of 3.6%, which resulted in the decrease of net sales of coal by RMB242.1 million.

The increase in the average selling price of our coal was primarily due to improved market conditions which resulted in increase in coal prices in both the domestic and the export markets as well as the increase in net sales price primarily due to the implementation of the “Four Optimizations” strategy. Our average sales price per tonne for coal increased 57.9% from RMB172.4 for the year ended 31 December 2003 to RMB272.3 for the year ended 31 December 2004.

In 2004, we produced 39.1 million tonnes of raw coal, representing a 9.5% decrease compared to 2003 and sold 38.0 million tonnes of coal, representing a 3.6% decrease compared to 2003, primarily due to decrease in our raw coal production resulted from the adjustment of coal mine production system layout and the frequent assembly and disasssembly of workface in 2004 for the purpose of stablizing the coal output in future. Our domestic sales of coal in 2004 were 28.0 million tonnes, representing an increase of 8.6%

compared to 2003. Our export sales of coal in 2004 were 10.0 million tonnes, representing a decrease of 26.5% compared to 2003. The change in sales structure was primarily due to our timely adjustment of product mix in light of the market needs.

Our net income from railway transportation service was RMB220.8 million, representing an increase of RMB66.2 million, or 42.8%, from RMB154.6 million in 2003. Such increase was principally due to the increase in the volume of coal deliveries made by our railway network for coal sales transactions where transportation expenses were charged on ex-mine basis to the customers.

Our cost of sales and services increased by RMB796.7 million, or 21.2%, to RMB4,551.7 million in 2004, as compared to RMB3,755.0 million in 2003. The cost of coal sales was RMB4,462.3 million, representing an increase of RMB774.9 million, or 21.0%, as compared to RMB3,687.4 million in 2003, principally due to (i) the increase in commodity prices, (ii) the increase in employees’ wages, (iii) the reduction of the rate of export tax rebate and (iv) the increase in safety inputs. The unit cost of coal sales was RMB117.4 per tonne of coal we sold in 2004, representing an increase of RMB23.8, or 25.4%, as compared to RMB93.6 in 2003.

Of the RMB23.8 increase in unit cost of coal sales per tonne of coal we sold in 2004, RMB8.1 was attributable to external factors beyond our control, namely, reduction of export tax rebate and increase in cost of raw materials, RMB4.9 was attributable to the increase of safety inputs, RMB4.1 was attributable to the increase in employee wages resulting from our payment of employee performance bonus, RMB4.1 was attributable to the increase of expenses as a result of the implementation of our “Four Optimizations” measures, and RMB2.8 was attributable to the increase in unit fixed costs resulting from the decrease of 141 million tonnes coal sales in 2004. Our cost control measures have to a certain extent off-set portion of the overall increase in unit cost of coal sales.

Our selling, general and administrative expenses were RMB1,479.9 million in 2004, increased by RMB215.0 million, or 17.0%, from RMB1,264.9 million in 2003. This increase was mainly due to (i) an increase in retirement benefits scheme contributions of RMB59.1 million; (ii) an increase in employee’s wages and employee’s benefits of RMB40.0 million; (iii) an increase in resources compensation fees of RMB26.0 million; and (iv) a loss of RMB104.6 million from the sales of properties, plant and equipment.

Our other operating income increased by RMB59.9 million, or 56.6%, to RMB165.7 million in 2004 from RMB105.8 million in 2003. The increase was mainly due to the increase of interest on bank deposits.

Our interest expenses decreased by RMB24.0 million, or 40.1%, to RMB36.0 million in 2004 from RMB60.0 million in 2003. The decrease was principally due to the partial repayment of bank loans in the principal amount of RMB200.0 million.

As a result, our income before taxes increased by RMB2,698.4 million, or 136.6%, to RMB4,673.3 million in 2004 from RMB1,974.9 million in 2003.

Our income tax expenses increased by RMB931.1 million, or 158.4%, to RMB1,518.8 million in 2004 from RMB587.7 million in 2003 primarily due to the increase in income before tax and a deferred tax charge.

Our net income attributable to equity holders of the Company increased by RMB1,767.6 million, or 127.5%, to RMB3,154.3 million in 2004 from RMB1,386.7 million in 2003.2005.

B. Liquidity and Capital Resources

In 2005,2006, our principal source of cash was cash flow from operations. Principal uses of cash in 20052006 were operating working capital, purchase of property, plants and equipment, repayment of shareholders’ dividends, and increase in term deposits.deposits and the acquisition of the equity interest in Shanxi Nenghua.

As atof December 31, 2005,2006, the balance of our bills and accounts receivable were RMB2,211.9 million, representing a decrease of RMB12.9 million, or 0.6%, from RMB2,224.8 million representing an increaseas of RMB1,001.0December 31, 2005. Bills receivable decreased by RMB88.5 million, or 81.8%4.2%, from RMB1,223.8to RMB2,004.4 million as atof December 31, 2004. Bills receivable increased by RMB1,202.9 million, or 135.2%, to2006 from RMB2,092.9 million from RMB890.0 million as atof December 31, 2004,2005, principally due to the increase in bankdecrease of bills received from certain major customers in connection with sales of coal. We acceptedSince 2006, we accept a higher percentage of bank bills received from certain major and credit-worthy customers in partorder to facilitate sales in light of the rising coal prices. Accounts receivable decreasedincreased by RMB201.8RMB75.6 million, or 60.5%57.3%, to RMB207.5 million as of December 31, 2006 from RMB131.9 million from RMB333.7 million as atof December 31, 2004, principally2005. Such increase was primarily due to the reduction(i) an increase of newRMB43.3 million for accounts receivable by our Company in 2006 due to increased settlement balances from strategic customers; (ii) RMB26.3 million of accounts receivable for Yancoal Australia in 2006; and improvement(iii) RMB6.0 million of our collection of sales proceeds represented by accounts receivable.receivable for Shanxi Nenghua in 2006.

An analysis of the allowance for doubtful debts for bills and accounts receivable for 2003, 2004, 2005 and 20052006 is as follows:

 

   2003  2004  2005
   RMB’000  RMB’000  RMB’000

Balance at January 1

  76,083  100,627  126,700

Additional allowance charged to income

  71,125  26,073  —  

Direct write-off charged against allowance

  (46,581) —    —  
         

Balance at December 31

  100,627  126,700  126,700
         
     2004    2005    2006 
     RMB’000    RMB’000    RMB’000 

Balance as of January 1

    100,627    126,700    126,700 

Additional/(reversal of ) allowance charged to
income

    26,073    —      (16,650)

Direct write-off charged against allowance

    —      —      (78,603)
                

Balance as of December 31

    126,700    126,700    31,477 
                

Our inventories decreasedincreased by RMB14.9RMB109.1 million, or 3.1%23.2%, to RMB579.6 million as of December 31, 2006 from RMB470.5 million as atof December 31, 2005, from RMB485.4 million as at December 31, 2004.

Other loan receivable decreased by RMB210.0 million, or 24.7%, to RMB640.0 million as at December 31, 2005, from RMB850.0 million as to December 31, 2004, principally2005. The increase was due to the collectionincrease in coal inventories of outstanding entrusted bank loans amounting to RMB160.0 million from Shandong Longxiang Industry Company Limited and RMB50.0 million from Shandong Cement Company Limited.Yancoal Australia.

Prepayment and other current assets increased by RMB14.1RMB29.1 million, or 7.5%or14.4%, to RMB231.5 million as of December 31, 2006, from RMB202.4 million as atof December 31, 2005, from RMB188.3 million as at December 31, 2004.2005. The increase was primarilymainly due to the increase inof prepayment or advances to suppliers, prepayment of freight and related transportation charges.supplier.

As atof December 31, 2005,2006, total bills and billsaccounts payable increased by RMB19.4RMB248.0 million, or 4.1%49.8%, to RMB745.7 million from RMB497.7 million from RMB478.3 million as atof December 31, 2004.2005. The increase was mainly caused by the increase of accounts payable.

Other accounts payable and provisions increased by RMB238.3RMB323.8 million, or 17.8%20.5%, to RMB1,899.7 million as of December 31, 2006 from RMB1,575.9 million as atof December 31, 2005, from RMB1,337.6 million as at December 31, 2004, principally due to increases(i) an RMB199.5 million increase of the customers’ deposits; and (ii) an RMB226.3 million increase of accounts receivable in advance, wages payable, fund payable for the purchase of properties,property, machinery, and equipment and rawproject materials and accounts payablecompared to the Parent Company.

Long-term liabilities decreased by RMB86.1 million, or 32.6%, to RMB178.1 million as at December 31, 2005 from RMB264.2 million as at December 31, 2004. Thisthat in 2005; which was principally due to the repayment of RMB200.0 million in long-term bank loans, partially offset by the RMB100.9 million decrease of resources compensation payable compared to that in 2005.

Long-term liabilities increased by RMB458.9 million, or 257.7%, to RMB637.0 million as of December 31, 2006 from RMB178.1 million as of December 31, 2005. This was mainly attributable to the RMB330 million new long-term loan of Shanxi Nenghua as a result of our acquisition of Shanxi Nenghua which we acquired and the increase inof RMB137.5 million for deferred tax liabilities accrued from the provisioningprovision of land subsidence fees and safety production expenses of RMB123.2 million.expenses.

Our principal capital expenditures have been for the acquisition of property, plant and equipment. During 2003, 2004 and 2005, our total capital expenditures were RMB1,328.1 million, RMB1,057.5 million and RMB1,303.7 million, respectively. Our capital expenditure for the purchase and construction of property, machinery and equipment was RMB830.2RMB1,290.5 million and RMB1,290.5RMB3,363.4 million in 2004year 2005 and 2005, respectively. According2006, respectively, representing an increase of RMB2,072.9 million, among which, (i) capital expenditure for the construction of property increased by RMB1,881.1 million; and (ii) capital expenditure for machinery and equipment increased by RMB185.6 million. These increases were mainly due to the increase in expenditure in the construction of properties and purchase of machinery and equipments for projects being developed by some of our wholly owned subsidiaries and controlled entities. In accordance with the Acquisition Agreement of Jining III Acquisition Agreement,Coal Mine, we have paid the Parent CompanyControlling Shareholder RMB13.2 million for acquisition of the mining rightrights of Jining III Coal Mine during this reporting period. For information about our contractual commitmentscommitment for capital expenditures, see “ –“- F. Contractual Obligations”.

Equity attributable to our equity holders of the Company increased by RMB2,094.8RMB1,313.2 million, or 13.5%,7.5 %, to RMB18,931.8 million as of December 31, 2006 from RMB17,618.6 million atas of December 31, 2005, comparedwhich was mainly attributable to December 31, 2004, principally due tothe increase in profit realized from operating activities. We paid dividends of RMB298.5 million, RMB470.7 million, and RMB799.2 million and RMB1,082.0 million in 2003, 2004, 2005 and 2005,2006, respectively. As atof December 31, 2005,2006, our debt to equity ratio was 1.3%2.1%, which was calculated based on the equity attributable to theour equity holders of the Company and total amount of bank loanloans, which amounted to RMB18,931 million and RMB403,1 million, respectively. As of December 31, 2006, our Company’s debt to equity ratio was 2.1%, which was calculated on the basis of the equity attributable to our equity holders and total amount of borrowings amounting to RMB17,618.6RMB18,931.8 million and RMB231.8RMB403.1 million, respectively.

NetThe following table sets forth our cash provided byflow for each of the three years ended December 31, 2004, 2005 and 2006:

   Year ended 31 December 
   2004  2005  2006 
   (RMB’000)  (RMB’000)  (RMB’000) 

Cash and cash equivalents at beginning of year

  2,023,772  5,216,738  5,885,581 

Net cash generated from operating activities

  4,418,381  3,939,274  3,767,156 

Net cash used in investing activities

  (2,300,808) (2,262,466) (3,625,523)

Net cash generated from / (used in) financing activities

  1,075,393  (1,008,279) (1,291,549)

Net increase/ (decrease) in cash and cash equivalents

  3,192,966  667,529  (1,149,916)

Cash and cash equivalents at end of year

  5,216,738  5,885,581  4,715,945 

Our net cash generated from operating activities decreased by RMB479.1RMB172.1 million, or 10.8%4.3%, from RMB4,418.4 million in 2004 to RMB3,939.3 million in 2005. The decrease2005 to RMB3,767.2 million in 2006, despite the increase in our cash generated from operations by RMB307.9 million from RMB5,164.1 million in 2005 to RMB5,472.1 million in 2006. This was mainly because we paid an increased RMB488.6 million in income taxes in 2006. Although our operating cash flow before movements in working capital decreased by RMB526.5 million to RMB4,794.3 in 2006 million from RMB5,320.8 million in 2005, our cash generated from operations increased primarily due to the decrease of our operating income, increase in billsbill and accounts receivable from certain major and credit-worthy customers through extending the payment period for purpose of facilitating sales, increase in advances to suppliersbill and prepayments for freightaccounts payable, which was partially offset by the increase in inventories and related charges.decrease in other payables and accrued expenses.

Net cash used in investing activities decreasedincreased from RMB2,300.8 million in 2004 to RMB2,262.5 million in 2005.2005 to RMB3,625.5 million in 2006. Net cash used in investing activities primarily reflected (i) an increase in term deposits of RMB1,326.3approximately RMB1,821.7 million in 2005, (ii) an increase in capital expenditures for purchase of property, plant and equipment of approximately RMB572.4 million from RMB743.0 million in 2004 to RMB1,315.4 million in 2005 and (iii)to RMB3137.1 million in 2006, (ii) the increase in restricted cash of RMB5.3RMB50.5 million in 2005.2006, (iii) the investment of RMB444.2 million for the

acquisition of Shangxi Nenghua, and (iv) the payment of RMB 18.5million, RMB97.4 million and RMB23.6 million for the acquisition of Southland Coal Mine, the deposit investment in connection with Yancoal Australia and the acquisition of mining rights in Southland Coal Mine, respectively. The decreaseincrease in net cash used in investing activities was partially offset by a decrease in other loans receivableterm deposits of RMB210.0 million, increased bank balance and cash resulting from acquisition of Heze Nenghua of RMB170.2RMB131.8 million and proceeds from disposal of property, plant and equipment of RMB4.4RMB14.2 million.

Net cash used in financing activities in 20052006 was RMB1,291.5 million, reflecting primarily (i) the payment of dividends of RMB1,082.0 million, and (ii) repayment of bank borrowings of RMB200.0 million. Net cash used in financing activities was RMB1,009.3 million in 2005, reflecting primarily (i) the payment of dividends of RMB799.2 million, and (ii) repayment of bank borrowingsborrowing of RMB200.0 million. Net cash provided by financing activities was RMB1,075.4 million in 2004, reflecting primarily the net proceeds of RMB1,756.9 million from the H shares placement, partially offset by the payment of dividends of RMB470.0 million.

Our estimated capital expenditure for year 20062007 is RMB4,817RMB4,147.2 million, which mainly consists ofincluding : (1)(i) approximately RMB1,262RMB1,035.3 million for the purchase and construction of property, machinery and equipment for the existing six operating coal mines and railway assets; (2)Railway Assets of our Company ;and (ii) approximately RMB3,555RMB3,111.9 million for theexternal development of external projects , including: (a) approximately RMB1,513RMB1,948.1 million for investment in the reconstruction600,000 tonnes capacity methanol facility in Shaanxi Province; (b) approximately RMB663.8 million for investment in Zhaolou Coal Mine in Shandong Province; (c) approximately RMB278.9 million for investment in the 100,000 tonnes capacity methanol facility in Shanxi Province ; and upgrade(d) approximately RMB221.1 million for investment in the construction of Austar Coal Mine in Australia; approximately RMB1,352 million in the investment of 600,000 tonnes methanol project and a new coal mine project in Shanxi Province; and approximately RMB690 million in the investment of Heze Zhaolou Coal Mine.Australia. The capital resource for the aboveplanned capital expenditure is mainly from our cash in hand.hand and remaining proceeds from the issuance of H Shares in 2004.

We believe that the cash on hand, cash from operations, available banking facilitiescurrently owned by our Company and otherthe abundant capital sources of financing will beprovide us with sufficient forcapital to satisfy our operational requirements and capital expenditure need.development requirements.

C. Research and Development, Patents and Licenses, Etc.

We have a team of specialized technicians which iswho are responsible for research and development of new mining and processing technology. Our expenditures for research and development were RMB46.1 million, RMB24.9 million, RMB45.0 million and RMB45.0RMB46.0 million, in the years ended December 31, 2003, 2004, 2005 and 2005,2006, respectively, accounting for 0.7%0.2%, 0.2%0.4% and 0.4%, respectively, of our total net sales for such periods. In addition to our own research and development program, we have also established long-term cooperative relationships with a number of research institutes such as the China Coal Science Research Institution, Coal Mine Design Institution, a number of coal machinery and equipment manufacturers and a number of educational institutions to conduct special research projects.

Our research and development efforts on mining technology have contributed to increases in production in recent years. TheOur Predecessor began to use the longwall caving mining method in 1992. Thereafter, our research and development personnel concentrated on modifying such method, taking into account the special geological conditions of our mines in order to maximize our production. In addition, largely because of our research and development personnel’s efforts, we have been able to:

 

increase production efficiency by utilizing mining extracting equipment with improved technology;

 

extend the length of certain longwall work-faces to approximately 300 meters, thereby reducing costs for tunneling and supports;

 

minimize the number of coal pillars required to support the mining areas, enabling the extraction of a greater proportion of coal;coal and enhancing recycling of coal resources;

 

improve the roof support and auxiliary transportation systems to reduce costs; and

 

complete the two national projects regarding the research on “equipment coordination and technology for 6Mt/a complex-mechanized top coal caving workface” and the research on “high-efficient intensive complex-mechanized top coal caving technology and its key equipment” to successfully develop the two-pillar hydraulic shield support for top coal caving.

We are one of the world’s leading suppliers of coal products utilizing longwall caving extracting technology as the principal mining method. The longwall caving extracting technology is patented in the PRC and Australia. The Parent CompanyControlling Shareholder granted DBT Australia Pty Ltd an exclusive license to develop the longwall caving extracting technology in Australia and South Africa. We believe production costs of coal products can be reduced by utilizing longwall extracting technology.

Upgrading and improving longwall caving extracting technology and equipment as well as mining methods for medium and thick coal seam are our principal business strategies. With regard to upgrading longwall caving extracting technology, weour focus is on further improving relevantthe existing technology and replacing outdated equipment. We are currently focusing on theour research and development ofon the complete set of equipment and technology for full-automatica 6 million tonnes fully-automatic complex-mechanized top coal caving workface and the complete set of equipment and technology for fast tunneling of coal headings in order to further strengthen our competitive advantage in core technologies.

D. Trend Information

Outlook for 2007

The domesticdemand and export demand forsupply of coal in 2006the domestic market is generally in equilibrium, and coal price is expected to remain stable.

Since China is maintaining an economic growth rate of over 8%, the demand of coal by electricity power, metallurgy, building materials, chemicals and other sectors in primary industry will still be persistent. The domestic demandcoal resource supply is expected to increase due to additional production from newly constructed coal mines as well as policy adjustments by the PRC Government, for example, the abolishment of VAT rebate for coal export, levying additional coal export tariff and reducing coal import tariff. No radical breakthrough in the bottleneck of coal transportation capacity is expected in the short term. The PRC Government will continue to regulate and close down sub-standard coal mines and continue to strictly enforce increased safety investments. The Eleventh Five-Year Plan (2006-2010) of Coal Industry encourages the development of large scale coal enterprises under a group structure and the raising of admittance requirements for newly constructed coal mine, which will result in the consolidation of China’s coal industry and enhance the competitive advantages of large-scale coal enterprises. The safety production level and operation system of the coal industry is expected to continue to improve.

Due to continuous growth of the world economy, steady development of electric power and metallurgy industries, and increasingly high oil prices, the coal industry is one of the growing energy industries in terms of demand. The export volume of coal from Australia will remain stable on the whole, the export volume of coal from Indonesia and Vietnam is expected to increase; while the import volume of coal by Japan and South Korea is expected to remain in equilibrium with a shortagestable and the import volume of coal suppliesby China and India will increase. Therefore, the demand and supply in certain regions in China, with respect to certain typeEast Asian coal markets will be stable on the whole, and the supply of coal. As the Chinese economy continues to grow in 2006, industries with substantial coal consumption requirements such as power generation and metallurgical industries are expected to increase coal consumption. Although newly established coal miners and imported coal will contribute to increase in supplies of coal, domestic consumption ofprime coal is expected to exceed domestic supply of coal due to the PRC government’s policy to shut down small coal miners which are not operated in compliance with relevant laws and regulations. The demand for railway transportation services is expected to increase and we may encounter insufficient railway transport capacity or rail cars. However, increased railway transportation capacity is expected to alleviate such insufficiency. The Chinese government’s policy encouraging development of large coal companies and the government-driven initiative to implement a price-linking mechanism between the price for electricity and coal will facilitate the long term development of the coal industry and improve the competitiveness of the large coal companies.

The international demand for coal in 2006 is expected to be strong. As the economy continues to grow in the U.S., Japan and other countries in Asia, there is an increased demand for energy generation resources such coal. Countries in the Asia Pacific region are expected to increase their import of coal by more than 3% in 2006, which will be higher than the rate of growth of coal imports in other countries around the world. The export of coal from China is expected to decrease dueslightly tight. In response to the strong domestic demand that causes reducedof coal, China’s adjustments to its coal import and export quota set by the PRC government, that from Indonesia is expected to increase and that from Australia is expected to remain at the same level. The supplybe in favor of coal in the East Asian coal market is expected to increase in 2006. The international oil prices and the coal prices in Europe and South Africa are expected to remain high. Increased supply and demand of coal in Asia is expected to stabilize coal prices in 2006. On April 20, 2006, the Australian Barlow Jonker Coal spot price was US$52.9 per tonne, which increased by 39.4% compared to the lowest price of US$37.95 per tonne in 2005.prices. The contract price for coal in 2006the international coal market is expected to beon the whole higher than that of 2006. Ever since January 2007, the spot price for coal.of the Australian BJ steam coal has been stable with an increase trend. It is expected that the international coal price in 2007 will be stable coupled with steady increase.

The average coal sales pricesprice of the Company is expected to decreaseincrease slightly in 2006 compared to that of 2005. We are in the process of negotiations for2007. Currently, we have signed domestic and export coal sales contracts for 2006. It is expected that theof 13.0 million tonnes, with average contract price increase of domestic powerRMB52.04 per tonne or a19.2% increase over 2006. Adjustment for spot prices for coal will increase andis also expected in accordance with market changes. Though the domestic contract prices of othernegotiation for coal sales are expected to remain stable. However, export coal price is expected to decrease and the amount of price decrease in semi-soft coking coal will be greater than that of steam coal. Ithas not been completed, it is expected that our Company’s long-term contract price offor export coal will be slightly higher than the current spot price.2006.

E. Off-balance Sheet Arrangements

As of December 31, 2005,2006, other than capital expenditure commitments, discussed in “B. Liquidity and Capital Resources” above, and contractual obligations, discussed in “F. Contractual Obligations” below, we did not have any off-balance sheet arrangements.

F. Contractual Obligations

The following table summarizes our contractual obligations and commercial commitments atas of December 31, 2005:2006:

 

  Payments due by period  Payments due by period
  Total  

Less than

1 Year

  1-3 years  3-5 years  

More than

5 years

  Total  

Less than

1 Year

  1-3 years  3-5 years  

More than

5 years

  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Contractual Obligations

                    

Unsecured bank borrowings

  200,000  200,000  —    —    —    380,000  50,000  154,000  44,000  132,000

Capital commitments for the acquisition of property, plant and equipment(2)

  920,907  920,907  —    —    —  

Capital commitments for the acquisition of property,
plant and equipment

  1,221,884  1,221,884  0  0  0

Capital commitments for the development of new coal mines

  1,900,000  1,900,000  —    —    —    600,000  600,000  0  0  0
                              

Amounts due to Parent Company and its subsidiaries

  540,081  508,254  16,870  14,957  —  

Amounts due to Controlling Shareholder and
its subsidiaries

  1,005,485  982,347  15,885  7,253  0
                              

Total

  3,560,988  3,529,161  16,870  14,957  —    3,207,369  2,854,231  169,885  51,253  132,000
                              

During 2006, we entered into a joint venture with Chia Tai Company and Yushen Company to establish Yushuwan Coalmine Company for the construction and operation of Yushuwan Coalmine in Shaanxi Province. We have to invest approximately RMB196.8 million in order to obtain 41% equity interest. As of December 31, 2006, We have made a deposit of RMB97 million in relation to this joint venture and we are committed to invest a further RMB99.8 million.

Acquisition of Jining III

We acquired Jining III on January 1, 2001 pursuant to the Acquisition Agreement of Jining III Acquisition AgreementCoal Mine, which was entered into between the Parent CompanyControlling Shareholder and us on August 4, 2000. Pursuant to the Jining III Acquisition Agreement of Jining III Coal Mine, we agreed to pay approximately RMB132.5 million as total consideration for the mining rights associated with Jining III. This amount is to be paid to the Parent CompanyControlling Shareholder in 10ten equal annual interest free installments commencedcommencing in 2001. As at December 31, 2005In 2006, we have paid a total of RMB66.2RMB13.3 million to the Parent CompanyControlling Shareholder for mining rights to Jining III.

Loan Agreement

We entered into a long-term loan agreement with the Bank of China on December 3, 2001 and borrowedto borrow a total amount of RMB1.2 billion from the Bank of China on January 4, 2002. The initial interest rate of the loans was 6.21% per annum,, subject to adjustment in accordance with statutory interest rate or changes by the State in relation to the method of calculating interest during the term of the loan agreement. On April 28 and August 25, 2006, the People’s Bank of China (“PBOC”) adjusted interest rates, to 6.4% and 6.8% respectively (“the 2006 PBOC interest rate adjustments”). On August 25, 2006, we had already paid off the remaining amounts on the loan agreement.

On December 28, 2005, Shanxi Tianchi, a subsidiary of Shanxi Nenghua, entered into a long-term loan agreement with the Taiyuan branch of China Minsheng Bank, for an amount of RMB160 million. The initial interest rate of the loan was 5.9% per annum but the interest rate was subject to the 2006 PBOC interest rate adjustments. The loan shall be repaid by three installments over a period of three years, with the first installment due in December 22, 2007. The first two installments are for amounts of RMB50 million each, and the third installment is for RMB60 million. Interest is calculated on a monthly basis.

Shanxi Tianchi, a subsidiary of Shanxi Nenghua, entered into a long-term loan agreement with the State Development Bank on February 13, 2006, and borrowed a total of RMB220 million on February 20, 2006. The initial interest rate of the loans was adjusted6.1% per annum and was subject to 5.76% firstadjustment based on the interest rate stipulated by the PBOC. However, the 2006 PBOC interest rate adjustments did not affect the interest payable on the loan for the year 2006. From May 20, 2008, the principal for the loan will become payable in 2003 and then to 6.12% in 2004. The loan is repayable in six annual20 installments of RMB200.0 million each over a period of 96117 months, commencing August 2004.with each installment amounting to RMB11 million. Interest is payablecalculated on a quarterly basis. We made a partial repayment of RMB600.0 million in June 2003. According to the terms of the loan agreement, the balance of the loan is repayable in three annual installments of RMB200 million, i.e. on August 25, of each year beginning 2004 to 2006.

Mining Rights

Pursuant to the Mining Rights Agreement dated October 17, 1997, we have agreed to pay to the Parent Company an annual fee (“Annual Fee”) of approximately RMB13.0 million as compensation for the Parent Company’s agreement to relinquish the mining rights associated with our mines (other than Jining III). The terms of the mining rights are 67 years for Baodian, 70 years for Dongtan, 45 years for Nantun, 80 years for Xinglongzhuang and 64 years for Jining II. All such terms commenced on October 14, 1997, the date on which the mining rights permits were issued. It has been agreed that the Annual Fee will be fixed for a period of ten years (the “Initial Period”), after which the Annual Fee will be revised if new national legislation is passed in respect thereof. The Parent Company and we have also entered into the Compensation Agreement on October 17, 1997 whereby the Parent Company has agreed that, following the Initial Period, if we request a re-calculation of the amount of Annual Fee payable, the parties shall engage a qualified asset appraisal agency to appraise the value of the relevant mining rights and submit the appraised value to the relevant government authorities for verification and confirmation, before making any adjustment to the Annual Fee.

We entered into the Asset Sale Agreement with the receivers and managers and the liquidators of Southland Coal Pty Limited in October 2004, pursuant to which we acquired the entire assets of Southland

Colliery previously owned by Southland Coal Pty Limited in liquidation. For more details, please see “ Item 4 – Information of the Company – History and Development of the Company” and “Item 4 – Information of the Company – D. Property, Plants and Equipment.”

G. Critical Accounting Policies

We prepare our consolidated financial statements in accordance with International Financial Reporting Standards. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to impairment, inventories, allowance for doubtful debts, income taxes, land subsidence, restoration, rehabilitation and environmental costs, and depreciation of mining structure. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable. Actual results may differ from these estimates.

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Goodwill

Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over ourthe Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of athe relevant subsidiary at the date of acquisition. Goodwill arising on an acquisition of a subsidiary for which the agreement date is on or after January 1, 2005, is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Any impairment is recognized immediately in income statement and is not subsequently reversed.

For previouslyPreviously capitalized goodwill arising on acquisitions after January 1, 2001 we have discontinued amortization from January 1, 2005 onwards, and such goodwill is tested for impairment annually, and whenever there is an indication that the cash generating unit to which the goodwill relates may be impaired.

For the purposes of impairment testing, goodwill is allocated to each of ourthe Group’s cash-generating units expected to benefit from the synergies of the combination.acquisition. Cash-generating units to which goodwill has been allocated are tested for impairment annually, and wheneveror more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit first and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. Any impairment is recognized immediately in the consolidated income statement and is not subsequently reversed.

Determining whether goodwill is impaired requires an estimationAs of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. As at December 31, 2005,2006, the carrying amount of goodwill is RMB153,037,000.RMB295.6 million.

Goodwill arising on the acquisition of businesses or subsidiaries is presented separately in the balance sheet.

On disposal of a business or subsidiary, the attributable amount of goodwill is included in the determination of the gain or loss on disposal.

ThroughAs of December 31, 2005, we recorded a RMB153.0 million2006, the goodwill resultingcomprises those arising from the acquisition of Heze, Jining II, Railway Assets, equity interest in Yanmei Shipping, equity interest in Heze Nenghua and Railway Assets.equity interest in Shanxi Nenghua.

Impairment other than goodwill

At each balance sheet date, we review the carrying amounts of tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognized as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized as income immediately.

At December 31, 2005,2006, we have not recorded an impairment charge for our assets.

Income taxes

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Our liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries, except where we are able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis.

Through December 31, 2005,2006, we have recognized deferred tax liabilities for the tax consequence of temporary differences on the additional provision for land subsidence, restoration, rehabilitationunrealised profits of available-for-sale investment, accelerated depreciation, and environmental costs as management believes that its realization is probable. A change in management’s belief resulting from anticipated levelsthe acquisition of profitability would result in adjustment to the amountmining rights of deferred tax assets recognized and further impact our earnings in the year this change occurs. We have also recognized the deferred taxation for the tax effect on the provision for work safety costs in 2005.Shanxi Nenghua Group.

Land subsidence, restoration, rehabilitation and environmental costs

One consequence of coal mining is land subsidence caused by the resettlement of the land above the underground mining sites. Depending on the circumstances, we may relocate inhabitants from the land above the underground mining sites prior to mining those sites or we may compensate the inhabitants for

losses or damages from land subsidence after the underground sites have been mined. We may also be required to make payments for restoration, rehabilitation or environmental protection of the land after the underground sites have been mined.

An estimate of such costs is recognized in the period in which the obligation is identified and is charged as an expense in proportion to the coal extracted.

Depreciation of mining structure

The mining structure includes the main and auxiliary mine shafts and underground tunnels. Depreciation is provided to write off the cost of the mining structure using the units of production

method based on the estimated production volume for which the structure was designed. Production volumes over the lives of these assets which differ from management’s estimates will impact future operating results.

For a detailed discussion of critical accounting policies, see Note 4 to our Financial Statements.

Estimated impairment on trade receivables

We regularly review the recoverability and age of the trade receivables. Impairment on trade receivables is made based on the estimation of the future cash flow discounted at an effective interest rate to calculate the present value.

Mining Rights

Mining rights are amortized on a straight line basis over the shorter of the contractual period and their useful lives estimated based on the total proven and probable reserves of coal mine. We exercise our judgment in estimating the total proven and probable reserves of coal mine.

For a detailed discussion of critical accounting policies, see Note 4 to our Financial Statements.

Recent Changes in Accounting Pronouncements

In 2005,the current year, the Group has applied, for the first time, a number of new standards, amendments and interpretations (“New IFRS”) issued by the International Accounting Standards Board issued a number(the “IASB”) and the International Financial Reporting Interpretations Committee (the IFRIC) of new or revised IFRSthe IASB which are either effective for accounting periods beginning on or after December 1, 2005 or January 1, 2005. We have adopted these2006. The adoption of the new IFRS in the financial statements for the year ended December 31, 2005.

We have considered these new IFRS and identified a number of these new IFRS that may have ahad no material effect on how the results for the current or prior accounting periods have been prepared and presented. Accordingly, no prior period adjustment has been required.

In 2005, the Group had adopted all of ourthe new and revised standards and interpretations issued by the IASB and IFRIC of the IASB that are relevant to its operations and financial position are preparedeffective for accounting periods beginning on January 1, 2005. The adoption of these new and presented as described below:revised standards and interpretations had resulted in changes to the Group’s accounting policies in the following areas that had affected the amounts reported for the prior periods:

 

goodwill (IFRS 3); and

 

excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost of acquisition (previously known as negative goodwill) (IFRS 3);.

The impact of these changes in accounting policies is discussed in detail below. The impact on basic earnings per share is disclosed in note 16 to the financial statements included in Item 18.are as follows:

At the date of authorization of these financial statements, the following standards and interpretations were in issue but not yet effective:

IAS 1 (Amendment)Presentation of Financial Statements Added disclosures about an entity’s capital1
IAS 19 (Amendment)Employee Benefits2
IAS 39 (Amendment)Financial Instruments: Recognition and Measurement Amendment for hedges of forecast intragroup transactions2
IAS 39 (Amendment)Financial Instruments: Recognition and Measurement Amendment for fair value option2
IAS 39 (Amendment) & IFRS 4Financial Instruments: Recognition and Measurement Amendment for financial guarantee contracts2

IFRS 6Exploration for and Evaluation of Mineral Assets2
IFRS 7Financial Instruments: Disclosures1
IFRIC 4Determining whether an Arrangement Contains a Lease2
IFRIC 5Rights to Interests Arising from Decommissing, Restoration and Environmental Rehabilitation Funds2
IFRIC 6Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment3
IFRIC 7Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies4
IFRIC 8Scope of IFRS 25
IFRIC 9Reassessment of Embedded Derivatives6


1Effective for annual periods beginning on or after January 1, 2007.
2Effective for annual periods beginning on or after January 1, 2006.
3Effective for annual periods beginning on or after December 1, 2005.
4Effective for annual periods beginning on or after March 1, 2006.
5Effective for annual periods beginning on or after May 1, 2006.
6Effective for annual periods beginning on or after June 1, 2006.

We are evaluating the impact of the adoption of these standards and interpretations but have not yet determined the effect on the adoption on our financial position and results of operations.

IFRS 3, “Business Combinations”

Goodwill

IFRS 3 “Business Combinations” has been adopted for business combinations for which the agreement date is on or after March 31, 2004. The option of limited retrospective application of the Standard has not been taken up, thus avoiding the need to restate past business combinations. The principal impact of the new standard on the accounting for that transaction has been the recognition of contingent liabilities that would not have been recognized separately from goodwill under the predecessor Standard, IAS 22. The recognition of these liabilities has had no material impact on the results for the year.

After initial recognition, IFRS 3 requires goodwill acquired in a business combination to be carried at cost less any accumulated impairment losses. Under IAS 36 “Impairment of Assets” (as revised in 2004), impairment reviews are required annually, or more frequently if there are indications that goodwill might be impaired. IFRS 3 prohibits the amortization of goodwill. Previously, under IAS 22, we carried goodwill in its balance sheet at cost less accumulated amortization and accumulated impairment losses. Amortization was charged over the estimated useful life of the goodwill, subject to the rebuttable presumption that the maximum useful life of goodwill was 20 years.

In accordance with the transitional rules of IFRS 3 we have“Business Combinations”, the Group has applied the revised accounting policy for goodwill prospectively from the beginning of its first annual period beginning on or after March 31, 2004, i.e. January 1, 2005, to goodwill acquired in business combinations for which the agreement date was before March 31, 2004. Therefore, from January 1, 2005, we havethe Group has discontinued amortizing such goodwill and has tested the goodwill for impairment in accordance with IAS 36. At January 1, 2005, the carrying amount of amortization accumulated before that date of RMB29.3 million has been eliminated, with a corresponding decrease in the cost of goodwill.

Because the revised accounting policy has been applied prospectively, the change has had no impact on amounts reported for the year ended December 31, 2004 or prior periods. No amortization has been charged in the current year.year 2005. Under the previous accounting policy, RMB15.8 million would have been charged to income statement during the year ended December 31, 2005, leaving a balance of goodwill of RMB137.2 million at December 31, 2005.

No impairment loss has been recognized in the current period in accordance with IAS 36.

Excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost”cost (previously known as negative goodwill)

IFRS 3 requires that, after reassessment, any excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of the business combination should be recognized immediately in profit or loss. IFRS 3 prohibits the recognition of negative goodwill in the balance sheet.

Previously, under IAS 22 (superceded(superseded by IFRS 3), the Group released negative goodwill was released to income over a number of accounting periods, based on an analysis of the circumstances from which the balance resulted. Negative goodwill was reported as a deduction from assets in the balance sheet.

In accordance with the transitional rules of IFRS 3, the Group has applied the revised accounting policy has been applied prospectively from January 1, 2005. Therefore, the change has had no impact on amounts reported for the year ended December 31, 2004 or prior periods.

The carrying amount of negative goodwill at January 1, 2005 has been derecognized at the transition date. Therefore, an adjustment of RMB27.6 million is made to opening retained earnings and negative goodwill at January 1, 2005.

Under the previous accounting policy, RMB27.6 million of negative goodwill would have been released to income during the year ended December 31, 2005, leaving zero balance of negative goodwill at December 31, 2005. Therefore, the impact of the change in accounting policy in 2005 is a reduction in other operating income of RMB27.6 million and no financial impact on net assets at December 31, 2005.

At the date of authorization of the financial statements for the year ended December 31, 2006, the following standards and interpretations were in issue but not yet effective:

IAS (Amendment)

Presentation of Financial Statements Added disclosures about an entity’s capital1

IFRS 7

Financial Instruments: Disclosures1

IFRS 8

Operating Segments2

IFRIC 7

Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies3

IFRIC 8

Scope of IFRS 24

IFRIC 9

Reassessment of Embedded Derivatives5

IFRIC 10

Interim Financial reporting and Impairment6

IFRIC 11

IFRS 2-Group and Treasury Share Transactions7

IFRIC 12

Service Concession Arrangements8


   1

Effective for annual periods beginning on or after January 1, 2007.

2

Effective for annual periods beginning on or after January 1, 2009.

3

Effective for annual periods beginning on or after March 1, 2006.

4

Effective for annual periods beginning on or after May 1, 2006.

5

Effective for annual periods beginning on or after June 1, 2006

6

Effective for annual periods beginning on or after November 1, 2006.

7

Effective for annual periods beginning on or after March 1, 2007.

8

Effective for annual periods beginning on or after January 1, 2008.

The directors anticipate that adoption of these Standards and Interpretations will have no material impact on the results and the financial position of the Group.

Recent Pronouncements in the USU.S. GAAP

In December 2004,February 2006, the Financial Accounting Standards Board (“FASB”) issued StatementNo. 155, (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140”. This statement is effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Our Company will adopt SFAS 155 in the first quarter of 2007. We have not determined the impact, if any, of SFAS 155 on our financial position, results of operations and cash flows.

In June 2006, the Financial Accounting Standard (“SFAS”)Board FASB issued FASB Interpretation No. 123 (revised 2004) (“SFAS No. 123-R”). “Share-Based Payment”, which is a revision of SFAS No. 123,48, “Accounting for Stock-Based Compensation”. SFASUncertainty in Income Taxes—an interpretation of FASB Statement No. 123-R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Generally, the approach in SFAS No. 123-R is similar to the approach described in SFAS No. 123. However, SFAS No. 123-R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on the grant-date fair values. Pro forma disclosure previously permitted under SFAS No. 123 is no longer an alternative. The new standard, as recently amended, will be effective for the Group in the annual reporting period beginning after January 1, 2006. Under SFAS No. 123-R, the Group could elect the modified prospective or modified retroactive option for transition on the adoption of this new standard. Under the modified retroactive option, prior periods are adjusted on a basis consistent with the pro forma disclosures previously required for those periods by SFAS No. 123. Under the modified prospective option, compensation expense for all unvested stock options must be recognized on or after the required effective date based on the grant-date fair value of those stock options. The Group does not issue stock options and therefore the adoption of SFAS No. 123-R did not have material impact on the Group’s financial statements.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4”. SFAS No. 151109” (“FIN 48”), which clarifies the accounting that requires abnormal amountsfor uncertainty in income tax positions in FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of idle facility expenses, freight, handling costs, and spoilage costsa tax position taken or expected to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred on or after July 1, 2005. The Group adopted SFAS No.151 on July 1, 2005 and it did not havetaken in a material effect on the Group’s financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29” (“SFAS 153”), which amends Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions” to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153tax return. FIN 48 is effective for nonmonetary assets exchanges occurring in fiscal periods beginning after June 15, 2005. The Group does not anticipate that the adoption of this statement will have a material effect on the Group’s financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”) which replaces Accounting Principles Board Opinions No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.2006. We will adopt FIN 48 in the first quarter of 2007. We have not determined the impact, if any, of FIN 48 on its financial position, results of operations and cash flows.

In September 2006 the FASB issued FASB Statement No. 157, (“SFAS 157”), “Fair Value Measurement”. SFAS 157 addresses standardizing the measurement of fair value for companies who are required to use a fair value measure of recognition for recognition or disclosure purposes. The Group does not anticipateFASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure date”. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact, if any, of SFAS 157 on its financial position, results of operations and cash flows.

In September 2006, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No.108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of this statement willSAB 108 did not have a material effectimpact on the Group’sour consolidated financial position, or results of operations.

operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value option for Financial Assets and Financial Liabilities”. SFAS No. 159 Permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, of SFAS 159 on its financial position, results of operations and cash flows.

Reconciliation and Summary of Differences between IFRS and U.S. GAAP

The consolidated financial statements are prepared in accordance with IFRS, which differ in certain significant respects from USconsolidated financial statement prepared under U.S. GAAP. The significant differences relate principally to the accounting for the acquisitions of Jining II, Jining III and Railway Assets, the cost bases of property, plant and equipment and land use rights and related adjustments to deferred taxation.

Under IFRS, the acquisitions of Jining II, Jining III, and the Railway Assets, Heze Nenghau and Shanxi Nenghua have been accounted for using the purchase method which accounts for the assets and liabilities of Jining II, Jining III, and the Railway Assets, Heze Nenghua and Shanxi Nenghua at their fair value at the date of acquisition. Any excess of the purchase consideration over the fair value of the net assets acquired is capitalized as goodwill. Prior to January 1, 2005, such goodwill was amortized over a period of ten to twenty years. Subsequent to January 1, 2005, such goodwill is tested for impairment at least annually. Prior to

January 1, 2005, any excess of the fair value of the net assets acquired over the purchase consideration is recorded as negative goodwill, which was presented as a deduction from the assets of the Group in the consolidated balance sheet. Such negative goodwill was released to the statement of income on a systematic basis over the remaining weighted average useful life of the identifiable acquired depreciable/amortizable assets. The carrying amount of negative goodwill has been de-recognized and adjusted to the opening retained earnings at January 1, 2005.

Under US GAAP, as the Group, Jining II, Jining III, the Railway Assets, Heze Nenghua and HezeShanxi Nenghua are entities under the common control of the Parent Company, the assets and liabilities of Jining II, Jining III, the Railway Assets, Heze Nenghua and HezeShanxi Nenghua are required to be included in the consolidated balance sheet of the Group at historical cost. The difference between the historical cost of the assets and liabilities of Jining II, Jining III, the Railway Assets, Heze Nenghua and HezeShanxi Nenghua acquired and the purchase price paid is recorded as an adjustment to shareholders’ equity.

In applying the pooling of interest method, the financial statement items of the combining enterprises for the period in which the combination occurs and for any comparative periods disclosed should be included in the financial statements of the combined enterprises as if they had been combined from the beginning of the earliest period presented. The effect of accounting for the acquisition of HezeShanxi Nenghua using the pooling of interest method on the net income under US GAAP for the year ended December 31, 20042005 and 20032004 is as follows:

 

  Year ended December 31,  Year ended December 31,
  2004 2003  2005 2004
  RMB’000 RMB’000  RMB’000 RMB’000

Net income

      

As previously reported

  3,272,478  1,499,249  2,994,711  3,263,892

Pooling of interest adjustment

      

Net loss from Heze Nenghua

  (8,586) —  

Net loss from Shanxi

  (3,592) —  
            

As restated

  3,263,892  1,499,249  2,991,119  3,263,892
            

Under IFRS, the mining rights of Jining III and Shanxi Nenghua are stated at purchase consideration less amortization. Mining rights are amortized on a straight line basis over twenty years and twenty-seven years, respectively, being the useful lifelives estimated based on the total proven and probable reserves of the coal mine. Under US GAAP, as both the Group and Jining III are entities under the common control of the Parent Company, the mining rights have to be restated at nil cost and no amortization on mining rights will be recognized. However, a deferred tax asset relating to the capitalization of mining rights is required to be recognized under US GAAP as a higher tax base resulting from the capitalization is utilized for PRC tax purposes.

Under IFRS, property, plant and equipment and prepaid lease payments have been stated based on their respective fair values at the date of acquisition even for cases involving transaction between entities under common control. The fair value amount becomes the new cost basisbases of the assets of theour Company formed from the reorganization and depreciation is based on such new basis.bases. Under US GAAP, when accounting for a transfer of assets or exchange of shares between entities under common control, the entity

that receives the net assets or equity interests shall initially recognize the assets and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer. Accordingly, property, plant and equipment and prepaid lease payments are restated at the historical cost and no additional depreciation on the fair value amounts will be recognized under US GAAP. However, a deferred tax asset relating to the difference in cost bases between the fair value at the date of acquisition and historical cost is required to be recognized under US GAAP and the tax bases of the assets are the fair value amount at the date of acquisition.

Under IFRS, the acquisition of Yanmei Shipping has been accounted for using purchase method which accounted for the assets and liabilities of Yanmei Shipping at their fair value at the date of acquisition. The excess of the purchase consideration over the value of the net assets acquired is capitalized as goodwill and was, prior to January 1, 2007, amortized over a period of ten years prior to January 1, 2005. No further difference in this treatment of goodwill are identified from January 1, 2005 onwards. Under US GAAP, goodwill is not amortized but instead tested for impairment at least annually starting from the initial recognition of goodwill in 2003, when Yanmei Shipping was acquired by our Company.

Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. The Group completes a two-step goodwill impairment test. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.

The cost of mining structure is depreciated using the unit of production method based on the estimated production volume for proven and probable reserves, of which the structure was designed.

The adjustments necessary to restate net income and shareholders’ equity in accordance with U.S.US GAAP are shown in the tables set out below.

 

  Year ended December 31,   Year ended December 31, 
  2005 2004 2003   2006 2005 2004 
  RMB’000 RMB’000 RMB’000   RMB’000 RMB’000 RMB’000 

Income attributable to the equity holders of the Company as reported under IFRS

  2,881,461  3,154,317  1,386,686 

Income attributable to our equity holders as reported under IFRS

   2,372,985   2,881,461   3,154,317 

U.S. GAAP adjustments:

        

Additional depreciation charged on fair valued property, plant and equipment and prepaid lease payments

  187,885  187,418  188,191    187,859   187,885   187,418 

Additional deferred tax charge due to a higher tax base resulting from the difference in cost bases of property, plant and equipment and prepaid lease payments and capitalization of mining rights

  (64,188) (64,034) (64,389)

Amortization of negative goodwill on acquisition of of Jining III

  —    (27,620) (27,620)

Additional deferred tax charge due to a higher tax base resulting from the difference in cost bases of property, plant and equipment and prepaid lease payments and capitalization of mining rights, net of minority interest

   (64,311)  (64,188)  (64,034)

Amortization of negative goodwill on acquisition of Jining III

   —     —     (27,620)

Amortization of mining rights of Jining III

  6,624  6,624  6,624    6,624   6,624   6,624 

Amortization of mining rights of Shanxi Nenghua, net of minority interest

   402   —     —   

Amortization of goodwill arising on acquisition of Jining II

  —    777  777    —     —     777 

Amortization of goodwill arising on acquisition of the Railway Assets

  —    13,880  8,880    —     —     13,880 

Amortization of goodwill arising on acquisition of Yanmei Shipping

  —    1,116  —      —     —     1,116 

Loss of Heze Nenghua included in the Group using the pooling of interest method

  (17,071) (8,586) —      —     (17,071)  (8,586)

Loss of Shanxi Nenghua included in the Nenghua using the pooling of interest method

   (97,806)  (3,592)  —   
                    

Income under U.S. GAAP

  2,994,711  3,263,892  1,499,249 

‘Income under U.S. GAAP

   2,405,753   2,991,119   3,263,892 
                    

Earnings per share under U.S. GAAP, Basic and diluted

  RMB0.61  RMB0.69  RMB0.33   RMB0.49  RMB0.61  RMB0.69 
          

Earnings per ADS under U.S. GAAP, Basic and diluted

  RMB30.44  RMB34.40  RMB16.32   RMB24.46  RMB30.41  RMB34.40 
                    

  At December 31,   At December 31, 
  2005 2004   2006 2005 
  RMB’000 RMB’000   RMB’000 RMB’000 

Equity attributable to the equity holders of the Company as reported under IFRS

  17,618,577  15,523,751 

Equity attributable to our equity holders as reported under IFRS

  18,931,779  17,618,577 

U.S. GAAP adjustments:

      

Difference in cost bases of property, plant and equipment and prepaid lease rights

  (2,561,032) (2,561,032)

Difference in cost bases of property, plant and equipment and prepaid lease payments

  (2,561,032) (2,561,032)

Additional depreciation/amortization charged on fair valued property, plant and equipment and prepaid lease payments

  1,500,823  1,312,938   1,688,682  1,500,823 

Additional deferred tax asset due to a higher tax base resulting from the difference in cost bases of property, plant and equipment and prepaid lease payments

  349,869  411,871   287,876  349,869 

Goodwill arising on acquisition of Jining II

  (10,106) (10,106)  (10,106) (10,106)

Negative goodwill arising on acquisition of Jining III, net

  —    27,621 

Mining rights of Jining III

  (99,359) (105,983)  (92,735) (99,359)

Additional deferred tax asset due to a higher tax base resulting from capitalization of mining rights

  32,788  34,974   30,602  32,788 

Difference in cost bases of mining rights of Shanxi Nenghua, net of minority interest

  (130,640) __ 

Additional deferred tax due to a higher tax base resulting from capitalization of

mining rights of Shanxi Nenghua, net of minority interest

  43,112  —   

Goodwill arising on acquisition of Railway Assets

  (97,240) (97,240)  (97,240) (97,240)

Goodwill arising on acquisition of Heze Nenghua

  (35,645) (35,645)

Amortization of goodwill arising on acquisition of Yanmei Shipping

  1,116  1,116   1,116  1,116 

Net assets of Heze Nenghua incorporated under pooling of interest

   

Net assets of Shanxi Neng Hua incorporated under pooling of interest

   

— current assets

  —    442,355   —    252,476 

— property, plant and equipment, net

  —    192,963   —    426,798 

— prepaid lease payments

  —    1,366 

— current liabilities

  —    (44,292)  —    (60,895)

— non current liabilities

  —    (3,456)

— minority interests

  —    (25,592)  —    (17,423)
  —    565,434        
       —    598,866 

Consideration payable on acquisition of Heze Nenghua

  —    (584,008)

Goodwill arising on acquisition of Heze Nenghus

  (35,645) —   
       
  —    

Consideration payable on acquisition of Shanxi Nenghua

  —    (733,346)

Goodwill arising on acquisition of Shanxi Nenghua

  (142,547) —   
              

Shareholders’ equity under U.S. GAAP

  16,699,791  14,519,336   17,913,222  16,565,311 
              

ITEM 6. DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Director,Directors, Supervisors and Senior Management

The following table sets forth certain information concerning our board of directors (“Board of Directors”), board of supervisors (the “Board of Supervisors”) and executive officers as of June 30,December 31, 2006. Based on our articles of association (“Articles of Association”),Association, our Board of Directors currently consists of 13 directors, with one Chairman, two Vice Chairmen, four independent directors, and one employee director. All Directors serve a term of three years since their respective election dates or until the election of their respective successors. The current Directors were elected in the shareholders’ meeting held on June 28, 2005.

As more than 50% of our voting power is held by the Parent Company,Controlling Shareholder, we are not required to have a majority of independent directors in reliance on the exemption provided under Section 303A.00303A of the NYSE Listing Rules.

 

Name

      Age      

Position at the Company

  

Date Term of
Office Expires

  

Share Ownership

As of December 31, 2005*

  

Age

  

Position at the Company

  

Date Term of

Office Expires1

  

Share Ownership

As of December 31,
20062

Directors

                

WANG Xin

  47  

Chairman

  

June 28, 2008

  0  48  Chairman  June 28, 2008  0

GENG Jiahuai

  55  

Vice Chairman

  

June 28, 2008

  0  56  Vice Chairman  June 28, 2008  0

YANG Deyu

  57  

Vice Chairman and General Manager

  

June 28, 2008

  16,000  58  Vice Chairman and General Manager  June 28, 2008  20,000

SHI Xuerang

  51  

Director

  

June 28, 2008

  0  52  Director  June 28, 2008  0

CHEN Changchun

  53  

Director

  

June 28, 2008

  0  54  Director  June 28, 2008  0

WU Yuxiang

  44  

Director and Chief Finance Officer

  

June 28, 2008

  16,000  45  Director and Chief Finance Officer  June 28, 2008  20,000

WANG Xinkun

  53  

Director and Deputy General Manager

  

June 28, 2008

  0  54  Director and Deputy General Manager  June 28, 2008  0

ZHANG Baocai

  39  Director and Secretary of the Board of Directors  June 28, 2008  0

DONG Yunqing

  51  Director  June 28, 2008  0

Name

      Age      

Position at the Company

  

Date Term of
Office Expires

  

Share Ownership

As of December 31, 2005*

  

Age

  

Position at the Company

  

Date Term of

Office Expires1

  

Share Ownership

As of December 31,
20062

CHEN Guangshui

  40  Director and Secretary of the Board of Directors  June 28, 2008  1,600

DONG Yunqing

  50  Director  June 28, 2008  0

Independent Non-executive Directors

                

PU Hongjiu

  69  Director  June 28, 2008  0  70  Director  June 28, 2008  0

CUI Jianmin

  73  Director  June 28, 2008  0  74  Director  June 28, 2008  0

WANG Xiaojun

  51  Director  June 28, 2008  0  52  Director  June 28, 2008  0

WANG Quanxi

  50  Director  June 28, 2008  0  51  Director  June 28, 2008  0

Supervisory Committee

                

MENG Xianchang

  58  Chairman of Supervisory Committee  June 28, 2008  16,000  59  Chairman of Supervisory Committee  June 28, 2008  20,000

SONG Guo

  51  Vice Chairman of Supervisory Committee  June 28, 2008  0  52  Vice Chairman of Supervisory Committee  June 28, 2008  0

ZHANG Shengdong

  49  Supervisor  June 28, 2008  0  50  Supervisor  June 28, 2008  0

LIU Weixin

  55  Supervisor  June 28, 2008  0  56  Supervisor  June 28, 2008  0

XU Bentai

  47  Supervisor  June 28, 2008  0  48  Supervisor  June 28, 2008  0

Executive Officers

                

JIN Tai

  54  Deputy General Manager  —    0  55  Deputy General Manager  June 28, 2008  0

ZHANG Yingmin

  52  Executive Deputy General Manager  —    0  53  Executive Deputy General Manager  June 28, 2008  0

HE Ye

  48  Deputy General Manager  —    0  49  Deputy General Manager  June 28, 2008  0

QU Tianzhi

  44  Deputy General Manager  June 28, 2008  0

TIAN Fengze

  49  Deputy General Manager  —    0  50  Deputy General Manager  June 28, 2008  0

SHI Chengzhong

  43  Vice General Manager  —    0  44  Vice General Manager  June 28, 2008  0

LAI Cunliang

  45  Vice General Manager  —    0  46  Vice General Manager  June 28, 2008  0

NI Xinghua

  49  Chief Engineer  —    0  50  Chief Engineer  June 28, 2008  0

*1.The above date where term of office expires is determined by the date of the shareholders’ meeting when a new session of the Board is elected or a Board meeting where a senior executive is retired.
2.In the form of A Shares. Aggregate ownership less than 1% of the outstanding Shares.

Executive Directors

WANG Xin, aged 47,48, an engineering technique application researcher, doctor of engineering technology, ishas been a Director and the chairmanChairman of the Board andof Directors since 2004. Mr. Wang is also the vice chairman of the board of directors and the general manager of the Parent Company.Controlling Shareholder. Mr. Wang joined the predecessor of the Companyour Predecessor in 1982 and became the vice general manager of the Parent CompanyControlling Shareholder in 2000. HeIn 2002, he was appointed as thea director of the board of directors and vice general manager of the Parent CompanyControlling Shareholder, and in 2002, and2003 he was promoted to be the vice chairman of the board of directors and the general manager of the Parent Company in 2003. In 2004, he became a director and the chairman of the Board of the Company.Controlling Shareholder. He graduated from China University of Mining and Technology.

GENG Jiahuai, aged 55,56, an engineering technique application researcher, ishas been a Director of the vice chairmanCompany since 2002, and has been the Vice Chairman of the Board andof Directors since 2004. Mr. Geng is also the chairman of the board of directors and the party committee secretary of the Parent Company. During the period fromControlling Shareholder. From 1985 to 2002, Mr. Geng successively acted as the deputy director of Zibo Mining Bureau, the Director of the Safety and Supervision Bureau and the director general of Zibo Mining Bureau. Mr. Geng joined the Parent CompanyControlling Shareholder in 2002 and became theas a general manager, the vice chairman of the board of directors and the party committee deputy secretary of the Parent Company.Controlling Shareholder. In 2003, Mr. Geng became the chairman of the board of the directors and the party committee secretary of the Parent Company in 2003. Mr. Geng became a director of the Company in 2002 and the vice chairman of the Company in 2004.Controlling Shareholder. He graduated from Shandong Mining Institute.

YANG Deyu, aged 57,58, an engineering technique application researcher, ishas been an Executive Director and the vice chairmanGeneral Manager of the Company since 1997, and has been the Vice Chairman of the Board and the general manager of the Company, andDirectors since 2002. Mr. Yang has also been a director of the board of the Parent Company.Controlling Shareholder since 2004. Mr. Yang joined the Predecessor in 1968 and became the deputy director of Yanzhou Mining Bureau in 1994, and the deputy general manager of the Predecessor and the Director of the Safety and Supervision Bureau in 1996. Mr. Yang became an executive director and the general manager of the Company in 1997 and the vice chairman of the Board and the general manager of the Company in 2002. Mr. Yang became a director of the board of directors of the Parent Company in 2004. He graduated from Shandong Mining Institute.

SHI Xuerang, aged 51,52, a senior engineer, ishas been a directorDirector of the Company andsince 2005. Mr. Shi has also been the deputy general manager of the Parent Company.Controlling Shareholder since joining them in 2003. From 2001 to 2003, Mr. Shi has successively acted as the deputy general manager of

Xinkuang Group. He joined the Parent Company as the deputy general manager of the Parent Company in 2003 and became a director of the Company in 2005. He graduated from Shandong Mining Institute.

CHEN Changchun, aged 53,54, a senior accountant, ishas been a directorDirector of the Company andsince 2005. Mr. Chen is also a director, the chief accountant and the chief accountantlegal adviser of the Parent Company.Controlling Shareholder. Mr. Chen joined the Predecessor in 1984 and became the chief accountant of the Parent CompanyControlling Shareholder in 1998, and became a director ofin 2004, and the Parent Companychief legal advisor in 2004. Mr. Chen became a director of the Company in 2005.2006. He graduated from Beijing Coal Cadre Institute.

WU Yuxiang, aged 44,45, a senior accountant, ishas been a directorDirector and the chief financial officerChief Financial Officer of the Company.Company since 2002. Mr. Wu joined the Predecessor in 1981 and became the chief accountant of the finance department of the Predecessor in 1996. Mr. Wu became the Manager of the finance departmentFinance Department of the Company in 1997, and was promoted to be a director and the chief financial officer of the Company in 2002. He graduated from Shandong TV University.

WANG Xinkun, aged 53,54, a senior economist, ishas been a director and the deputy general managerDirector of the Company.Company since 2004 and has been the Deputy General Manager of the Company since 2002. Mr. Wang joined the Predecessor in 1977. Mr. Wang1977, and became the managerManager of the coal transportationCoal Transportation and sales departmentSales Department of the Company in 2000, and the deputy general manager of the Company in 2002. He became a director of the Company in 2004.2000. He graduated from Tianjin University.

CHEN GuangshuiZHANG Baocai, aged 40,39, a senior economist, ishas been a Director and the Secretary to the Board of Directors since 2006. Mr. Zhang joined the Predecessor in 1989 and acted as the head of the Planning And Finance Department of the Company in 2002. In 2006, he was promoted to become a director, the secretary to the Board. Mr. Chen joined the Predecessor in 1990. He became the secretary to the Board andof Directors, the head of the Secretariat of the Board of Directors and the Company in 1997. Mr. Chen became a directorhead of the Information Management Department of the Company in 2005. He2006. Mr. Zhan graduated from Fuxin Mining Institute.Nankai University.

DONG Yunqing, aged 50,51, a senior administrative officer, ishas been a directorDirector and the chairman of labor unionChairman of the Company.Labor Union of the Company since 2002. Mr. Dong joined the Predecessor in 1981 and was the vice chairman of the labor union of the Parent CompanyControlling Shareholder from 2001 to April 2003. Mr. Dong became a director and the chairman of labor union of the Company in 2002. He graduated from Shandong Mining Institute.

Independent Non-executive Directors

PU Hongjiu, aged 69,70, professor-level senior engineer, ishas been an independent non-executive directorIndependent Non-Executive Director of the Company.Company since 2005. He is the first vice chairman of the China Coal Industry Association, the chairman of Coal Industry Association of China International Association, the board chairperson of China Coal Academy. Mr. Pu was a party group member and the head of disciplinary inspection group in the State Administration of Work Safety and State Administration of Coal Mine Safety in 2001. He has been the board chairperson of China Coal Academy since 2001, the first vice chairman of the China Coal Industry Association since 2003 and the board chairperson of China Miner Pneumoconiosis Treatment Foundation since 2004. He became an independent non-executive director of the Company in 2005. He graduated from Hefei Mining Institute. He also acts as an independent non-executive director in Shanghai Datun Energy Company Limited and Shenhua Ningxia Coal Mining Group Corporation Limited.

CUI Jianmin, aged 73,74, a senior auditor and certified accountant, has been an Independent Non-Executive Director of the Company since 2002. Mr. Cui is a consultant for China Tax Expert Association, and part-time professor for colleges such as Central Finance and Economics University. Mr. Cui had previously beenacted as the deputy chief auditor of the PRC National Audit Office, of the PRC, the chairman of the Association of China Certified Accountant, and a committee member of the 8th National Committee of the Chinese People’s Political Consultative Conference. Mr. Cui became an independent non-executive director of the Company in 2002 and he has been a consultant in China Tax Expert Association since September 2004. Mr. Cui graduated from People’s University of China. Mr. Cui also acts as an independent non-executive director both in China Power Co., Ltd and CITIC Guoan Information Industry Co., Ltd. Mr. Cui graduated from People’s University of China.

WANG Xiaojun, aged 51,52, an admitted as a solicitor in England and Wales and Hong Kong, ishas been an independent non-executive director andIndependent Non-Executive Director of the Company since 2002. Mr. Wang is a partner of the Wang & Co., X. J. in Hong Kong and is an independent non-executive director of the Company. He has practiced PRC law in Beijing, and washas been admitted to practice law in the PRC, Hong Kong and England and Wales in 1988, 1995 and 1996, respectively. Mr. Wang has worked as a legal adviser into the Hong Kong Stock Exchange and Richards Bulter. He became an independent non-executive Director of the Company in 2002. He graduated from the People’s University of China and the Graduate School of the Chinese Academy of Social Sciences and holds a bachelor degree in lawslaw and a master degree in laws. Meanwhile, helaw. Mr. Wang also acts as an independent non-executive director of thefor Guangzhou Guangchuan International Company Limited, and Hong Kong Zhengqi InvestmentConcepta Investments Limited and Natural Gas Company Limited.Limited of Shaanxi Province.

WANG Quanxi, aged 50,51, professor of Nankai University, ishas been an independent non-executive directorIndependent Non-Executive Director of the Company. HeCompany since 2004. Mr. Wang is the director of financial management department of Nankai University, the director of

Enterprise Research Center of Nankai University, the

vice director of MBA Center of Nankai University, and the secretary-general of the Association of Management of Tianjin City. Mr. Wang became the independent non-executive director of the Company in 2004. He graduated from Tianjin Finance and Economics University. Meanwhile, heHe also acts as independent non-executive director offor YinzuoBohai Group Co., Ltd.

Board of Supervisors

MENG Xianchang, aged 58,59, a senior administrative officer, is the chairman of the supervisory committee of the Company and party committee deputy secretary of the Parent Company.Controlling Shareholder. Mr. Meng joined the Predecessor in 1981, and was promoted as party committee deputy secretary and a supervisor of the Predecessor in 1996, and became the chairman of the supervisory committee of the Company in 1997. He graduated from Shandong Mining Institute.

SONG Guo, aged 51,52, a senior administrative officer, is the vice chairman of the supervisory committee of the Company, and the party committee deputy secretary and the secretary of disciplinary inspection committee of the Parent Company.Controlling Shareholder. Mr. Song was the director of the office of Coal Management Bureau of Shandong Province in 2002. He joined the Parent CompanyControlling Shareholder as secretary of the disciplinary inspection committee in 2002,2003, and became the deputy secretary of party committee of the Parent Company.Controlling Shareholder in 2004. He became the vice chairman of the supervisory committee of the Company in 2005. He graduated from Shandong University.

ZHANG Shengdong, aged 49,50, a senior accountant, is a supervisor of the Company, and the deputy chief accountant and the head of the Parent Company.finance department and the finance company preparation department of the Controlling Shareholder. Mr. Zhang joined the Predecessor in 1981 and became the deputy chief accountant in 1997. He became a supervisor of the Company in 2002.2002, and the head of the finance department of the Controlling Shareholder in 2006. He graduated from China University of Mining and Technology.

LIU Weixin, aged 55,56, a senior accountant, is a supervisor of the Company and the vice director of the audit department of the Parent Company.Controlling Shareholder. Mr. Liu joined the Predecessor in 1971, and became the vice director of the audit affair office of the Parent CompanyControlling Shareholder in 2001, the chief of audit department of the Parent CompanyControlling Shareholder in 2003, and the deputy director of audit department of the Parent CompanyControlling Shareholder in 2005. Mr. Liu became a supervisor of the Company in 2002. He graduated from Shandong Youth Cadre Institute.

XU Bentai, aged 47,48, a senior administrative officer, is an employee supervisor of the Company and the chairman of Jining III Coal Mine’s labor union. Mr. Xu joined the Predecessor in 1978 and became the chairman of Jining III Coal Mine’s labor union in 1999. He became an employee supervisor of the Company in 2002. He graduated from the Central Communist Party School Correspondence Institute.

Other Executive Officers

JIN Tai, aged 54,55, a senior engineer, is the deputy general manger of the Company. Mr. Jin joined the Predecessor in 1968. He became the director of the dispatching office of the Predecessor in 1996, and became the head of Xinglongzhuang coal mineCoal Mine in 1998, and became the deputy general manager of the Parent CompanyControlling Shareholder in 2000. Mr. Jin became the deputy general manager of the Company in 2004. He graduated from China University of Mining and Technology.

ZHANG Yingmin, aged 52,53, an engineering technology application researcher, is the executive deputy general manager of the Company and a director of the Parent Company.Controlling Shareholder. Mr. Zhang joined the Predecessor in 1971. He became the head of Baodian coal mineCoal Mine in 2000. Mr. Zhang became the executive deputy general manager of the Company in 2002 and the deputy general manager of the Parent CompanyControlling Shareholder in 2003. MrIn 2004, Mr. Zhang became a director of the board of directorsControlling Shareholder and the chief of the Parent Company in 2004.safety supervision bureau of the Company. He graduated from Tianjin University.

HE Ye, aged 48,49, a senior engineer, is a deputy general manager of the Company. Mr. He joined the Predecessor in 1993. He became the head of Jining II Coal Mine in 1999, and became the executive deputy general manager of an industrial company subordinated to the Parent CompanyControlling Shareholder in 2002. Mr. He was promoted to be a deputy general manager of the Company in 2002. He graduated from Guizhou Institute of Technology.

QU Tianzhi, aged 44, an engineering technique application researcher, is the deputy general manager of the Company. Mr. Qu joined the Company’s predecessor in 1985 and became the head of Dongtan Coal Mine in 2000. He was appointed the deputy general manager of the Company in 2006. He graduated from China University of Mining and Technology.

TIAN Fengze, aged 49,50, a senior economist, is a deputy general manager of the Company. Mr. Tian joined the Predecessor in 1976. He became the head of Beixu coal mineCoal Mine in 1991. Mr. Tian became1991 and a deputy general manager of the Company in 2002. He graduated from Beijing Coal Cadre Institute.

SHI Chengzhong, aged 43,44, a senior engineer, is a deputy general manager of the Company. Mr. Shi joined the Predecessor in 1983, and became a deputy chief engineer of the Parent CompanyControlling Shareholder in 2000 and a deputy general manager of the Company in 2002. He graduated from Shandong Mining Institute. Mr. Shi also acts as a director of Guizhou Panjiang Coal Power Company Limited.

LAI Cunliang, aged 45,46, a senior engineer, master of mining engineer, is a deputy general manager of the Company. Mr. Lai joined the Predecessor in 1980 and became the head of Xinglongzhuang coal mineCoal Mine of the Company in 2000. Then he became a director and the general manager of YanCoalYancoal Australia Pty Limited in 2004. And he became a deputy general manager of the Company in 2005. He graduated from China University of Mining & Technology.

NI Xinghua, aged 49,50, an engineering technology application researcher, is the chief engineer of theour Company. Mr. Ni joined the Predecessor in 1975 and became the deputy chief engineer of the Parent CompanyControlling Shareholder in 2000. He was promoted to be the chief engineer of the Company in 2002. He graduated from Tianjin University.

On September 20, 2006, the Board received the written resignation of Mr. Chen Guangshui. Mr. Chen Guangshui tendered his resignation as the Director, the Board Secretary, Company Secretary and Authorized Representative of the Company due to his new job arrangement.

On September 20, 2006, the Seventh Meeting of the Third Session of the Board was held to appoint Mr. Zhang Baocai as the Board Secretary, Company Secretary and Authorized Representative of the Company. Mr. Zhang was also nominated as a director. On November 10, 2006, the Company held its Second Provisional Shareholders’ Meeting to elect Mr. Zhang as a director of the Company.

On April 21, 2006, the Fifth Meeting of the Third Session of the Board appointed Mr. Qu Tianzhi as the deputy general manager of the Company.

B. Compensation

The Directors, Supervisors and Executive Officers who are our employees receive compensation in the form of salaries, housing allowances, other allowances and benefits in kind, including our contribution to the pension plan for our Directors and Supervisors. The aggregate amount of cash remuneration paid by us to the 15 Directors (including a former independent non-executiveexecutive director who retired from the Board of Directors on June 28, 2005)September 2006), Supervisors and Executive Officers during the year ended December 31, 20052006 was RMB2.5RMB4.1 million. The aggregate amount of cash remuneration paid by us to the five highest-paid individuals in the Company (including two(none Directors) in 20052006 was RMB1.1RMB1.8 million. In addition, Directors and Supervisors receive certain other benefits in kind, such as subsidized or free health insurance and transportation, customarily provided by enterprises in the PRC to their employees. We did not pay any discretionary bonus during the reporting period of this Annual Report to our Directors, Supervisors or Executive Officers. Details of the directors’ and supervisors’ emoluments on a named basis are as follows:

   For the year ended December 31, 2005
   Fees  Salaries, allowance
and other benefits in
kind
  Retirement
benefit scheme
contribution
  Discretionary
bonus
  Total
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Independent non-executive directors

          

Pu Hongjiu

  43  —    —    —    43

Cui Jianmin

  81  —    —    —    81

Wang Xiaojun

  98  —    —    —    98

Wang Quanxi

  81  —    —    —    81

Fan Weitang

  39  —    —    —    39
               
  342        342
               

Executive directors

          

Wang Xin

  —    —    —    —    —  

Geng Jiahuai

  —    —    —    —    —  

Yang Deyu

  —    —    —    —    —  

Shi Xuerang

  —    —    —    —    —  

Chen Changchun

  —    —    —    —    —  

Wu Yuxiang

  —    144  65  —    209

Wang Xinkun

  —    144  65  —    209

Chen Guangshui

  —    144  65  —    209

Dong Yunqing

  —    144  65  —    209
               
  —    576  260  —    836
               

Supervisors

          

Meng Xianchang

  —    —    —    —    —  

Song Guo

  —    —    —    —    —  

Zhang Sheng Dong

  —    —    —    —    —  

Liu Wei Xin

  —    —    —    —    —  

Xu Bentai

  —    160  72  —    232
               
  —    160  72  —    232
               

   For the year ended December 31, 2005
   Fees  Salaries, allowance
and other benefits in
kind
  Retirement
benefit scheme
contribution
  Discretionary
bonus
  Total
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Other management team

          

Jin Tai

  —    —    —    —    —  

Zhang Yingmin

  —    —    —    —    —  

He Ye

  —    144  65  —    209

Tian Fengze

  —    144  65  —    209

Shi Chenzhong

  —    145  65  —    210

Lai Cunliang

  —    190  86  —    276

Ni Xinghua

  —    144  65  —    209
               
  —    767  364  —    1,113
               

   For the year ended December 31, 2006
   Fees  

Salaries,

allowance and
other

benefits in kind

  Retirement
benefit
scheme
contribution
  Total
   RMB’000  RMB’000  RMB’000  RMB’000

Independent Non-Executive Directors

        

Pu Hongjiu

  89  —    —    89

Cui Jianmin

  89  —    —    89

Wang Xiaojun

  106  —    —    106

Wang Quanxi

  89  —    —    89
            
  373  —    —    373
            

Directors

        

Wang Xin

  —    —    —    —  

Geng Jiahuai

  —    —    —    —  

Yang Deyu

  —    —    —    —  

Shi Xuerang

  —    —    —    —  

Chen Changchun

  —    —    —    —  

Wu Yuxiang

  —    182  82  264

Wang Xinkun

  —    238  107  345

Chen Guangshui

  —    187  84  271

Zhang Baocai

    170  77  247

Dong Yunqing

  —    205  92  297
            
  —    982  442  1,424
            

Supervisors

        

Meng Xianchang

  —    —    —    —  

Song Guo

  —    —    —    —  

Zhang Shengdong

  —    —    —    —  

Liu Weixin

  —    —    —    —  

Xu Bentai

  —    218  98  316
            
  —    218  98  316
            

Other Management Team

        

Jin Tai

  —    —    —    —  

Zhang Yingmin

  —    —    —    —  

He Ye

  —    208  94  302

Tian Fengze

  —    202  91  293

Shi Chengzhong

  —    229  103  332

Qu Tianzhi

  —    232  104  336

Ni Xinghua

  —    218  98  316

Lai Cunliang

  —    421  —    421
            
  —    1,510  490  2,000
            

C. Board Practices

Board of Directors

Directors are elected by shareholders at a general meeting. Directors are elected for a term of three years. We adopt a cumulative voting rights system for the election of the new session of the Board of Directors.

According to our Articles of Association, the Board of Directors is accountable to the shareholders in general meeting and exercises the following functions and powers:

 

 (i)to be responsible for the convening of shareholders’ meetings and reporting on its work to the shareholders at such meetings;

 

 (ii)to implement the resolutions passed by the shareholders in general meetings;

 

 (iii)to determine our business plans and investment proposals;

 

 (iv)to formulate our annual preliminary and final budgets;

 

 (v)to formulate our profit distribution proposal and loss recovery proposals;

 (vi)to formulate proposals for the increase or reduction of our registered capital and the issuance of our debentures or other forms of securities;

 

 (vii)to draw up plans for our merger, division, dissolution or change of corporate structure;

 

 (viii)to decide on our internal management structure;

 

 (ix)to appoint or remove our general manager and to appoint or remove the deputy general manager(s) and other senior officers (including the financial controller), based on the recommendation of the general manager, and to decide on their remuneration;

 

 (x)to formulate our basic management system;

 

 (xi)to formulate proposals for any amendment of the Articles of Association;

 

 (xii)to decide on our business involving overseas investments, acquisition and disposal of assets, mortgages of assets and other guarantees, financial management and connected transactions within the authority conferred by the general meeting;

 

 (xiii)to manage disclosure of our information;

 

 (xiv)to recommend to shareholders at shareholders’ general meetings the appointment or replacement of the independent auditors;

 

 (xv)to receive the working report from our management and examine their performance; and

 

 (xvi)to approve an aggregate amount of provision for impairment of assets not more than 10% of our latest audited consolidated net asset value, to clear an amount of provision for impairment of assets not more than 5% of our latest audited consolidated net asset value, and to execute in compliance with the relevant regulations on connected transactions of any provision and clearance of impairment of assets involving any connected transactions.

 

 (xvii)to exercise any other powers conferred by the shareholders in general meeting.

Except for items (vi), (vii) and (xi), which require the affirmative vote of more than two-thirds of all of the Directors, resolutions on any other items may be approved by the affirmative vote of a simple majority of Directors.

The Board of Directors should to decide on matters relating to foreign investment, purchase or sale of assets, mortgage of assets, provision of guarantees, entrusted assets management and connected transactions by the Company within the scope of authority conferred by the general meeting and submit such matters to the shareholders’ meeting for approval.

With the approval of over two-thirds of all directors, the Board of Directors may make decisions on the following matters:

(1)transactions falling within the following limit with respect to purchase or sale of assets, foreign investment (including entrusted financial management and entrusted loans), provision of financial assistance, entrusted or trusted asset or business management, entering of licence agreement, transfer or accept the transfer of research and development projects:

1.the total assets involved in a single transaction with amount more than 5% and below 25% of the Company’s latest audited total asset value;

2.a single investment more than 5% and below 25% of the Company’s latest audited net asset value;

3.the subject of a single transaction accounted for more than 5% and less than 25% of the Company’s latest audited income from principal operations for the latest financial year;

4.the subject of a single transaction accounted for more than 5% and less than 25% of the Company’s latest audited net profit for the latest financial year;

The above transactions which involve public offer of securities that requires the approval of the China Securities Regulatory Commission shall be subject to approval of the shareholders’ general meeting;

(2)a single loan of less than 10% of the Company’s most recently audited net asset value and the debt ratio to the Company’s assets remains under 60% after such financing;

(3)mortgages or pledges of assets the cumulative outstanding amount of which is less than 30% of the Company’s most recently audited net asset value;

(4)external guarantees not within the approval limit of the shareholders’ general meeting as provided in the Articles of Association;

(5)transactions involving connected transactions, which have to be conducted in accordance with the relevant regulations of competent securities authorities and the listing rules of the stock exchanges.

The transactions referred to in (1) of the first paragraph involving the provision of financial assistance and entrusted financial management, shall be calculated on accrued basis for twelve consecutive months according to the transaction categories and applicable approval limit proportion of the Board of Directors. When the Company conducts other transactions apart from the provision of financial assistance and entrusted financial management, applicable approval limit proportion of the Board of Directors regarding each transaction which is under the same category shall be calculated on the principle of accrued basis for twelve consecutive months. Transactions already approved by the Company in accordance with the principle of accrued basis shall not be included in the scope of accrual calculation.

Provision of regulatory authorities the Company is subject to within and outside the PRC that is of a stricter standard than this Article of Association shall apply accordingly.

In addition to obligations imposed by laws, administrative regulations or the listing rules of the stock exchanges on which our Shares are listed, the Articles of Association place on each Director, Supervisor, general manager, deputy general manager and any other senior officer a duty to each shareholder, in the exercise of our functions and powers entrusted to such person:

 

not to cause us to exceed the scope of business stipulated in our business license;

 

to act honestly in our best interests;

 

not to expropriate our property in any way, including (without limitation) usurpation of opportunities which benefit us; and

 

not to expropriate the individual rights of shareholders, including (without limitation) rights to distributions and voting rights, save and except pursuant to our restructuring which has been submitted to the shareholders for their approval in accordance with the Articles of Association.

The Articles of Association further place on each Director, Supervisor, general manager, deputy general manager and senior officer:

 

a duty, in the exercise of such person’s powers and discharge of such person’s duties, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances;

 

a fiduciary obligation, in the exercise of our powers entrusted to him or her, not to place himself or herself in a position where his or her duty to us and his or her interests may conflict; and

 

a duty not to direct a person or entity related or connected to the Director, Supervisor, general manager, deputy general manager or senior officer in certain relationships enumerated in the Articles of Association to act in a manner which such Director, Supervisor, general manager, deputy general manager or senior officer is prohibited from doing.

Subject to compliance with relevant laws and administrative regulations, the shareholders in general meeting may by ordinary resolution remove any Director before the expiration of his term of office. Subject to certain qualifications, a Director, Supervisor, general manager, deputy general manager or other senior officer of the Company may be relieved of liability for a specific breach of his or her duties by the informed consent of shareholders in a general meeting.

As approved by our shareholders in the 2004 annual shareholders general meeting held on June 28, 2005, we established a Directors’ Decision Making Risk Fund (“Risk Fund”) to compensate the Directors, Supervisors, Executive Officers and other applicable personnel for personal economic losses resulted from their performance of duties in accordance with the laws, regulations or our Articles of Association or while attempting to procure legitimate benefits for our company. According to the “Management Measures for the Directors’ Decision Making Risk Fund of Yanzhou Coal Mining Company Limited” which was filed with the Commission as an exhibit to our annual report on Form 20-F for the fiscal year ended December 31, 2004, with effective from January 1, 2005, RMB100,000 for each incumbent Director and RMB50,000 for each incumbent Supervisor, Executive Officer and other applicable personnel will be drawn annually to form the Risk Fund. The compensation paid from the Risk Fund will only be granted upon the Board’s approval.

Audit Committee of the Board of Directors

Pursuant to a resolution passedAs approved at the first Board Meeting of the Third Session of the Board held on October 29, 2002, our Board of Directors established an audit committee and an audit department asJune 28, 2005, the audit committee’s execution body.Company set up the Audit Committee (the “Audit Committee”). The audit committee comprised threeAudit Committee comprises four independent non-executive directors,Directors, namely Mr. Cui Jianmin, (being the chairman of the audit committee), Mr. Fan Weitang andPu Hongjiu, Mr. Wang Xiaojun and Mr. Wang Quanxi, and two non-executive directors,Directors, namely Mr. Wang BangjunChen Changchun and Mr. Dong Yunqing. As approved by the Board of Directors on June 28, 2005, we elected a new audit committee which is consisted of six members, including four independent non-executive directors, one affiliated director and one employee representative. Mr. Cui Jianmin who is a financial expert, was elected againserves as the chairmanChairman of the audit committee. Mr. Cui has extensive experience in financial accounting and audit management. Mr. CuiAudit Committee.

The Audit Committee is a senior auditor and certified accountant and ismainly responsible for proposing the chairman of the Association of China Certified Accountants. The primary duties of our audit committee as set out in the committee charter include (i) the engagementappointment or replacement of the external independent auditors, (ii) review and audit of ouragencies; reviewing the accounting policies and system,of the Company, the disclosure of the financial information and the procedures for preparing financial reporting channels, (iii) reviewreports; and audit ourreviewing the internal control system and risk management system. Detailssystem of the dutiesCompany. The details of our audit committee are availablethe responsibilities of the Audit Committee have been disclosed on our companythe Company’s website.

Currently, the members of our audit committee of the Board of Directors are:

 

Name

      Age      

Position

  Ownership of Shares  

Age

  

Position

  

Ownership

of Shares

CUI Jianmin

  73  Independent non-executive director  0  74  Independent non-executive director  0

PU Hongjiu

  69  Independent non-executive director  0  70  Independent non-executive director  0

WANG Xiaojun

  51  Independent non-executive director  0  52  Independent non-executive director  0

WANG Quanxi

  50  Independent non-executive director  0  51  Independent non-executive director  0

CHEN Changchun

  53  Affiliated Director  0  54  Affiliated Director  0

DONG Yunqing

  50  Employee director  0  51  Employee director  0

As a foreign private issuer, we rely on the exemption under Section 303A.00 of the NYSE Listed Company Manual as well as affiliated director and employee director exemptions as provided under Rule 10A-3 of the Securities Exchange Act of 1934 to be in compliance with the audit committee standards set out in Section 303A.06 of the NYSE Listed Company Manual. See “ Item 16. — D. Exemptions From The Listing Standards For Audit Committees”.

Supervisory Committee

We have a supervisory committee comprising five members, one of whom is an employee representative. Supervisors serve a term of three years. The supervisory committee shall be accountable to the shareholders in a general meeting and shall exercise the following functions and powers in accordance with law:

 

to review our periodic reports as prepared by the Board of Directors and to provide written comments;

 

to review our financial position;

 

to supervise the Directors, general manager, deputy general managers and other senior officers to ensure that they do not act in contravention of any law, regulation or our Articles of Association and to recommend for the dismissal of the Directors, general manger, deputy general managers and other senior officers for the breach of law, regulation or our Articles of Association when necessary;

 

to demand any Director, general manager, deputy general manager or any other senior officer who acts in a manner which is harmful to our interest to rectify such behavior;

 

to verify such financial information as financial reports, business reports and profit distribution plans to be submitted by the Board of Directors to shareholders’ general meetings and to authorize, in our name, publicly certified and practicing accountants to assist in the re-examination of such information should any doubt arise in respect thereof;

 

to propose to convene shareholders’ extraordinary general meetings and extraordinary board meetings;

 

to make proposals at the shareholders’ general meetings;

 

to represent us in negotiations with or in bringing actions against a Director or senior officers; and

 

other functions and powers specified in our Articles of Association.

Supervisors shall attend meetings of the Board of Directors.

Compensation Committee

Pursuant to a resolution passed on June 28, 2005, our Board of Directors approved and established a compensation committee. The compensation committee is consistedconsists of three members, includingmembers: two independent non-executive directors and one employee director. Mr. Wang Quanxi was elected to serve as the chairman of the compensation committee. The primary duties of our compensation committee as set out in the committee charter include (i) the drafting and establishment of the compensation policies for the Directors, Supervisors, and the senior officers of the Company and (ii) the recommendation of

compensation proposals for the Directors, Supervisors and the senior officers of the Company to the Board of Directors. Further details on the responsibilities of the compensation committee can be found on our website.

Nomination / Corporate Governance

As atof December 31, 2005,2006 the Parent CompanyYankuang Group held 2,672,000,000 Shares in the form of Legal Person Shares, representing 54.33% of our total Sharesshares on the same day. As more than 50% of our voting power is held by the Parent Company,Yankuang Group, we are a “controlled company” under NYSE Listing Rules 303A.00. As a result, we are not required to establish a Nomination Committee or Corporate Governance Committee under Sections 303A.04 and 303A.05 of the NYSE Listing Rules. As such, we currently do not have any such committees.

Arrangement to Purchase Equity or Debt Securities and Other Arrangements

At no time during the year ended December 31, 2005,2006, were we, our Parent CompanyControlling Shareholder or any of our fellow subsidiaries a party to any arrangement to enable our Directors or Supervisors to acquire benefits by means of the acquisition of our equity or debt securities or any other body corporate with the exception of the A Shares issued to certain of our Directors, Supervisors and senior management.

There is no arrangement or understanding between any Director and any major shareholder, customer or supplier in connection with the selection of such Director.

Service Contracts of Directors and Supervisors

Each of the Directors and Supervisors has entered into a service contract with us. Under such contracts, each executive director will receive a salary and a discretionary year-end bonus, at such levels as are proposed by the Board of Directors and approved by the shareholders of our company in general meetings, provided that the discretionary year-end bonuses paid to our Executive Directors and other employees (including, but not limited to, our other Directors, Supervisors and executive officers) do not, in aggregate, exceed 1% of the net profit after taxation and extraordinary losses but before extraordinary gains for that year.

Save as disclosed herein, no Director or Supervisor has entered into any service contract with our company which is not terminable by us within one year without payment other than statutory compensation.

D. Employees

General

The table below sets forth the number of our employees by function as of the period indicated:

 

  As of December 31,  As of December 31,
  2003  2004  2005  2003  2004  2005  2006

Coal Production employees

  21,419  22,369  23,060

Coal production employees

  21,419  22,369  23,060  26,548

Engineers and technicians

  923  1,023  1,069  923  1,023  1,069  1,333

Management and administrative personnel

  1,847  2,055  1,995  1,847  2,055  1,995  2,484

Support staff

  3,772  3,819  3,939  3,772  3,819  3,939  9,420
                     

Total

  27,961  29,266  30,063  27,961  29,266  30,063  39,785
                     

The table below sets forth the number of our employees by locations as of December 31, 2005:2006

 

Location

  Employees  % of Total 

PRC

    

Shandong

  29,990  99.7%

Shanxi

  58  0.2%

Australia

  15  0.1%
       

Total

  30,063  100.0%
       

Location

  Employees as of
December 31, 2006
  % of Total 

PRC

    

Shandong

  39,397  99.02%

Shaanxi

  76  0.20%

Shanxi

  286  0.72%

Australia

  26  0.06%
       

Total

  39,785  100.0%
       

The total remuneration of our employees includes wages and bonuses. We paid our employees an aggregate of approximately RMB875.7 million, RMB1,051.7 million, RMB1,161.4 million and RMB1,278.1RMB1,645.1 million in wages and bonuses in the years ended December 31, 2003, 2004, 2005 and 2005,2006, respectively. The compensation of an employee directly involved in underground mining is based on the production of such employee, as well as the production of the employee’s mining team. Employees and their families also receive certain social welfare benefits and education and health services from the Parent Company.Controlling Shareholder. These benefits are provided in some cases by the Parent Company,Controlling Shareholder, as required by PRC laws, and rules and regulations. We, in turn, pay the Parent CompanyControlling Shareholder for all such benefits.

The Parent CompanyControlling Shareholder is responsible for the administration of our employee pension fund and for the provision of retirement benefits to our retirees. According to the Pension Fund Agreement entered into between the Parent CompanyControlling Shareholder and us, we are obligated to set aside the pension fund which equals 45% of the total remuneration paid to our employees, for the Parent CompanyControlling Shareholder to pay the local pension fund authority for and on behalf of our employees and to pay for employee retirement benefits. The welfare of retired employees is administrated by the Parent Company.Controlling Shareholder. The Pension Fund Agreement was renewed in 2002. We and the Parent CompanyControlling Shareholder agreed that the foregoing pension fund scheme will be continuously applied from 2002 to 2006. Pursuant to the approval of the Board of Directors on January 6, 2006, we and the Parent CompanyControlling Shareholder entered into a new Agreement for the Administration of Pension Fund and Retirement Benefit on January 10, 2006, ,((“Pension Fund and Retirement Benefit Agreement”), to continue the administration of the foregoing pension fund scheme. The Pension Fund and Retirement Benefit Agreement is for a term of three years. We furtheralso carry personal injury insurance for employees.

Our subsidiaries are participants in a State-managed retirement scheme pursuant to which the subsidiaries pay a fixed percentage of their qualifying staff’s wages as a contribution to the scheme. The subsidiaries’ financial obligations under this scheme are limited to the payment of the employer’s contribution. In 2005,2006, contributions payable by the subsidiaries pursuant to this arrangement were insignificant.

In 2003, 2004, 2005 and 2005,2006, total contributions paid by us for our Directors, Supervisors, Executive Officers and senior management to the pension fund were approximately RMB0.1 million, RMB0.5 million, RMB0.7 million and RMB0.7RMB1.0 million, respectively. In addition, each employee of ours currently pays a percentage of his or her salary as an additional contribution. Upon retirement, our employees are entitled to the payment of a pension from the scheme.

Currently, all of our employees are employed under employment contracts which specify the employee’s position, responsibilities, remuneration and grounds for termination. We have a labor union that protects employees’ rights, aims to assist in the fulfillment of our economic objectives, encourages employee participation in management decisions and assists in mediating disputes between us and union members. Each of our operating units has a separate branch of the labor union. We have not experienced any strikes or other labor disturbances which have interferedinterfering with our operations, and we believe that our relations with our employees are good.

All employees who are unable to work due to illness or disability are entitled to receive certain benefits during the period of their absence from the workplace. In addition, the PRC Government requires us to provide casualty and life insurance for each of our employees who work in the underground mining areas. The premium is 2.0% of the total remuneration of the employees.

Medical Insurance Scheme

In accordance with the relevant regulations of the Shandong Provincial People’s Government, since January 1, 2002, we have established and commenced implementing a basic medical insurance scheme for employees, which comprises basic medical insurance and supplementary medical insurance schemes. The schemes are described below.

 

basic medical insurance scheme – we have set aside 8% of the total wages of employees as basic medical insurance fund, which was charged to “Wages and Employee Benefits” under “Cost of Sale and Services Provided” and “Selling, General and Administrative Expenses” in our statement of income; and

 

supplementary medical insurance scheme – we have set aside a supplementary medical insurance fund of 4% of the total wages of employees to “Supplementary Medical Insurance” under “Selling, General and Administrative Expenses” in our statement of income.

We also carry personal injury insurance for our employees.

Housing Scheme

Under the MaterialsLabor and Services Supply Agreement, and its Supplemental Agreement, entered into between the Parent Company and us, the Parent CompanyControlling Shareholder is responsible for providing accommodation to our employees. We and the Parent CompanyControlling Shareholder share the incidental expenses relating to the provision of such accommodation on a pro-rata basis based on our respective number of employees and mutual agreement. Such expenses amounted to RMB37.2 million, RMB37.2 million and RMB86.2 million for 2003, 2004, 2005 and 2005,2006, respectively.

Commencing from 2002, we have paid to our employees a housing allowance, which is based on a fixed percentage of employees’ wages, for the purchase of residential housing. In 2003, 2004, 2005 and 2005,2006, housing allowances paid by us to employees amounted to RMB136.5RMB135.7 million, RMB137.3RMB146.9 million and RMB1.369RMB165.6 million, respectively.

E. Share Ownership

No Director, Supervisor or member of senior management who received compensation as described in subsection B above owns more than one percent of our outstanding Shares. See “ Item 6. — A. DirectorDirectors, Supervisors and Senior Management”.

We have not granted and have no plan to grant options to our employees for our Shares or other equity-linked securities. We have not and have no plan to implement any share bonus scheme for employees.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

As of December 31, 2005,2006, the Parent CompanyControlling Shareholder owned 54.33%52.86% of our share capital (see table below). As a majority shareholder, the Parent CompanyControlling Shareholder is able to make most of the decisions adopted by us. Currently, all of our ordinary sharesshareholders enjoy equal voting rights.

The following table sets forth certain information regarding ownership of our capital stock as of December 31, 2005 and as of March 31, 2006, uponafter implementation of the share reform plan, by all persons who are known by us to own beneficially more than 5% of our capital stock and by the Directors, Supervisors and Executive officers. For details of the share reform plan, see Item 9 – “Share Reform Plan”. As of December 31, 2005 and March 31, 2006, the Directors, Supervisors and Executive Officers own, as a group, 49,600 A Shares and 62,00060,000 A Shares, representing 0.001% and 0.0013% of our share capital.

Identity of Person or Group

  

Title of Class

  

Shares Owned as of
December 31, 2005

  

Percentage of
Capital Stock as of
December 31, 2005

Parent Company

  Ordinary Shares in the form of Legal Person Shares, par value RMB1.00 each  2,672,000,000  54.33%

HKSCC Nominee Limited*

  Ordinary Shares in the form of H Shares, par value RMB1.00 each  1,953,593,196  39.72%

Directors, Supervisors and

Executive Officers

  Ordinary Shares in the form of A Shares, par value RMB1.00 each              49,600  0.001%

Identity of Person or Group

  

Title of Class

  

Shares Owned as of
March 31, 2006

  

Percentage of
Capital Stock as of
March 31, 2006

  

Title of Class

  Shares Owned as of
December 31, 2006
  Percentage of
Capital Stock as
of December 31,
2006
 

Parent Company

  Ordinary Shares in the form of Legal Person Shares, par value RMB1.00 each  2,600,000,000  52.86%

Controlling Shareholder

  

Ordinary Shares in the form of

Legal Person Shares, par value RMB1.00 each

  2,600,000,000  52.86%

HKSCC Nominee Limited*

  Ordinary Shares in the form of H Shares, par value RMB1.00 each  1,954,965,596  39.75%  Ordinary Shares in the form of H Shares, par value RMB1.00 each  1,953,593,196  39.72%

Directors, Supervisors and

Executive Officers

  Ordinary Shares in the form of A Shares, par value RMB1.00 each                62,000  0.0013%  Ordinary Shares in the form of A Shares, par value RMB1.00 each  60,000  0.001%

*As the nominee of the clearing and settlement agent for our H Shares, HKSCC Nominee Limited is the record holder of our H Shares.

Our major shareholders do not have different voting rights from other shareholders.

To our knowledge, other than the Parent Company,Controlling Shareholder, which owns 54.33%52.86% of our Shares, we are not owned or controlled, directly or indirectly, by any other corporation, by any government, or by any other natural or legal person or persons, severally or jointly.

To our knowledge, there areis no arrangements that would cause a change of the operationcontrol of which mayour Company at a subsequent date result in us undergoing a change in control.later date.

B. Related Party Transactions

The on-goingcontinuing connected transactions between theour Company and the Parent CompanyControlling Shareholder for the year 2005 including2006 include the following three aspects:categories:

1. Supply of Materials and Services

1.On-going Supply of Materials and Services:

The connected transactionsDetails of on-going supply of materials and services between usour Company and Yankuang Group as our Controlling Shareholder for the Parent Company were carried out in accordance with The Materials and Services Supply Agreement signed on 17th October, 1997 and its subsequent supplemental agreement, as approved by independent shareholders.

The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) has granted a conditional waiver (the “Waiver”) to our company on July 11, 2003 from strict compliance with the requirements of disclosure and approval as stipulatedyear 2006 are shown in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) in respect of the connected transactions under the above agreements between us and the Parent Company for a period of three financial years ending December 31, 2005. The upper limits of the Waiver were as follows: the value of connected transactions relating to the provision of materials and services by us to the Parent Company shall not exceed 13% of our audited consolidated net sales in the immediately preceding financial year, and the aggregate value of connected transactions relating to the provision of materials and servicesfollowing table.

No.

  

Types of Connected Transactions

  

Agreement

  

Annual cap for the
year 2006

(RMB’000)

  

Transaction for the
year 2006

(RMB’000)

Expenditure

      

1.

  Materials and water purchased from Yankuang Group  Provision of Materials and Water Supply Agreement  535,200  458,509

2.

  Fuel and power purchased from Yankuang Group  Provision of Electricity Agreement  380,000  349,095

3.

  Labor and services provided by Yankuang Group  Provision of Labor and Services Agreement  854,700  805,205

4.

  Maintenance and repair services provided by Yankuang Group  Provision of Equipment Maintenance and Repair Works Agreement  280,000  246,841

5.

  Products and materials sold to Yankuang Group  Provision of Products and Materials Agreement  2,850,000  1,566,100

2. Mining Rights Fee

Upon approval by the Parent Company to us shall not exceed 26% of our company’s audited consolidated net sales inrelevant state-owned assets management and coal industry management authorities when the immediate preceding financial year.

For the year ended December 31, 2005, the value of connected transactions relating to the provision of materials and services by us to the Parent Company was RMB1,255.4 millionincorporated, and accounted for 11.87% of our audited consolidated net sales in the year ended December 31, 2004, and the value of connected transactions relating to the provision of materials and services by the Parent Company to us was RMB1,293.2 million and accounted for 12.23% of our audited consolidated net sales in the year ended December 31, 2004.

2.Mining Rights Fee

During 2005, pursuant to the Mining RightsRight Agreement datedin October 17, 1997 and its supplemental agreement datedin February 18, 1998 entered into between the Parent Company and us, weYankuang Group, the Company shall pay RMB13 million per year to Yankuang Group as mining rights fee for the five mines owned by the Company: Nantun, Xinglongzhuang, Dongtan, Baodian and Jining II (the “Five Coal Mines”). Yankuang Group was commissioned to collect the mining rights fee for ten years since 1997. If there are any applicable new regulations governing the payment of mining rights fee promulgated by the State after the ten years, such regulations will apply.

During this reporting period, the Company paid RMB12.98RMB13.0 million to Yankuang Group as the Parent Company.

mining right fee for the Five Coal Mines.

3.3. Payment of Endowment Insurance Fund

Pursuant to Agreement of Endowment Insurance Fund

Pursuant to the Provision of Administrative Services for Pension Fund and Retirement Benefits Agreement entered into between usthe Company and the Parent CompanyYankuang Group dated October 17, 1997, the Parent CompanyJanuary 10, 2006, Yankuang Group undertakes to be responsible for the management of the pension insurance fund to our employees and payments of the pension and other benefits to our retirees of the Company (the “Endowment Insurance Fund”) on a free of charge basis. During 2005basis and pursuant tosuch transaction constitutes an exempt continuing connected transaction which has been approved by the Agreement of Endowment Insurance Fund, we have paidBoard. The annual amount for the Endowment Insurance Fund for the year 2006 paid by the Company as approved at the Fourth Meeting of RMB522.7the Third Session of the Board on March 4, 2006 was RMB605 million. The amount actually paid by the Company was RMB640.6 million, with an excess of RMB35.6 million approved by the Board on April 20, 2007.

Our independent non-executiveIndependent Non-executive Directors have reviewed the on-goingcontinuing connected transaction in the year 20052006 and confirmed that: (1) all such connected transactions have been: (a) entered into by us in the ordinary and usual course of our business; (b) conducted either on normal commercial terms, or where there are not sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourablefavorable to us than terms available to or from independent third parties; and (c) entered into in accordance with the relevant agreement governing them on terms that are fair and reasonable and in the interests of the Shareholders as a whole; (2) the value of the connected transactiontransactions in respect of the on-going supply of materials and services havestated under “1. Supply of Materials and Services” above has not exceeded the annual cap underfor the Waiver grantedyear 2006 approved by independent shareholders on March 24, 2006.

Pursuant to Rule 14A.38 of the Hong Kong Stock Exchange.

OurListing Rules, the Directors engaged the auditors has submittedof the reportCompany to perform certain agreed upon procedures in respect of the continuing connected transactions of the Company. The auditors have reported their factual findings on these procedures to the Board confirming that the above on-going connected transactions between us and the Parent Company (a) have received the approval by the Board; (b) are in accordance with our pricing policies; (c) have been entered into in accordance with the relevant agreement governing the connected transactions, and (d) have not exceeded the cap disclosed in the previous announcement.Directors.

For the years ended December 31, 2003, 2004, 2005 and 2005,2006, we had the following on-goingcontinuing connected transactions with the Parent CompanyControlling Shareholder and/or its subsidiary companies:

 

  Year ended December 31,  Year ended December 31,
  2003  2004  2005  2004  2005  2006
  (RMB’000)  (RMB’000)  (RMB’000)  (RMB’000)  (RMB’000)  (RMB’000)

Income

            

Sales of coal

  229,730  523,015  856,580  523,015  856,580  1,069,879

Sales of auxiliary materials

  472,899  350,873  369,855  350,873  369,855  496,221

Utilities and facilities

  29,000  29,000  29,000  29,000  29,000  —  

Railway transportation services

  66  —    —  

Expenditure

            

Utilities and facilities

  285,166  354,424  355,953  354,424  355,953  358,370

Annual fee for mining rights

  12,980  12,980  12,980  12,980  12,980  12,980

Purchases of supply materials and equipment

  373,710  303,549  341,935  303,549  341,935  458,329

Repair and maintenance services

  225,408  222,949  197,624  222,949  197,624  246,841

Social welfare and support services

  188,825  207,062  242,952  207,062  242,952  406,004

Technical support and training

  15,130  15,130  15,130  15,130  15,130  20,000

Road transportation services

  17,216  63,478  53,346  63,478  53,346  63,448

Construction services

  507,824  160,342  —    160,342  —    306,658

Approval of New On-goingContinuing Connected Transaction Agreements and the Annual Caps for Year 2006 to 2008

Pursuant to the regulations of Hong Kong Stock Exchange and Shanghai Stock Exchange on on-goingcontinuing connected transactions and the operation developmentsactual operations of us and the Parent Company,Controlling Shareholder, we completed the necessary review of its on-goingprocedures for our continuing connected transactions as required by

law and entered into six new continuing connected transaction agreements (“New On-goingContinuing Connected Transaction AgreementsAgreements”), including the materials and water supply agreement, electricity supply agreement, labor and service agreement, equipment maintenance and repair works agreement, products and materials agreement and administrative service for pension fund and retirement benefits agreement, with the Parent CompanyControlling Shareholder in the first quarter of 2006. ItWe also determined the Annual Caps on the connected transactionsannual caps for each New On-goingContinuing Connected Transaction Agreements in each year fromfor 2006 to 2008.

The New On-goingContinuing Connected Transaction Agreements and the Annual Caps were approved by the independent shareholders on March 24, 2006. The term for each of the New On-goingContinuing Connected Transaction Agreements is from January 1, 2006 until December 31, 2008. The Materials and Services Supply Agreement and its supplementary agreement and the Agreement of Endowment Insurance Fund originally entered into between us and the Parent Company have been terminated. The English translation of the New On-goingContinuing Connected Transaction Agreements are attached as Exhibit 4.4.4.1.

Acquisition of connected assets

1.Acquisition of Equity Interest of Heze Nenghua and Payments to the Parent Company

The 2005 first extraordinary general meeting of the Company was held on August 19, 2005, in which the “Equity Transfer Agreement between our Parent Company and us” and its “Supplemental Agreement” (collectively the “Heze Nenghua Acquisition Agreement”) were approved. According to the Heze Nenghua Acquisition Agreement,In November 2006, we have acquired 95.67%a 98% equity interest in HezeYankuang Shanxi Power Chemical Co., Ltd. (“Shanxi Nenghua”) and its subsidiaries (collectively referred as the “Shanxi Nenghua atGroup”) from the considerationControlling Shareholder. In February 2007, we acquired the remaining 2% equity interest in Shanxi Nenghua from Lunan Fertilizer Plant, a subsidiary of RMB584.01 millionour Controlling Shareholder, and became the sole owner of Shanxi Nenghua. Until the disclosure date, we had already completed all the procedures on December 7, 2005. Hezeequity transferring.

Shanxi Nenghua holds 81.31% equity interest in Shanxi Heshun Tianchi Energy Company Limited (“Tianchi Company”), which is mainly responsible for coal developmentthe production and operation of Tianchi Coal Mine. Tianchi Coal Mine commenced operations in Juye Coal FieldNovember 2006. Shanxi Nenghua holds 99.85% equity interest in Shandong province for us. AsShanxi Tianhao Chemicals Company Limited (“Tianhao Company”), whose main business is the construction and operation of 31 December 2005, we have fully paid RMB584.1 million toa methanol facility with 100,000 tonnes capacity per annum. The methanol project is still under the Parent Company forconstruction.

Relevant information, in connection with the acquisition of the Parent Company’sShanxi Nenghua, provided to our equity interest in Heze Nenghua. The English translation of the Heze Nenghua Acquisition Agreement areshareholder is attached as Exhibit 4.5.15.1.

2.Mining Right Consideration of Jining III Coal Mine and AmountAmounts due to the Parent Company and its Subsidiaries.

Pursuant to the Jining III Coal Mine Acquisition Agreement dated August 4, 2000 entered into between usControlling Shareholder and the Parent Company, the consideration of the mining right of Jining III coal mine is approximately RMB132.5 million, which shall be paid to the Parent Company in ten equal annual interest free installments commencing from 2001. For the years ended December 31, 2005, we paid RMB13.248 million to the Parent Company.its subsidiaries

The amounts due to the Parent Company and its subsidiary companies are non-interest bearing and unsecured. The amounts due to the Parent CompanyControlling Shareholder and its subsidiary companies as atof December 31, 20052006 included the present value of the outstanding balance that arose from the funding of the acquisition of the mining right of Jining III as of January 1, 2001 discounted using the market rate of bank borrowings. The following table sets forth the amounts due to the Parent CompanyControlling Shareholder and its subsidiary companies as atof December 31, 20042005 and 2005:2006:

 

  As of December 31, 
  As at December 31,  2005 2006 
  2004  2005  RMB’000 RMB’000 

Term for Repayment

  RMB’000  RMB’000   

Within one year

  —    508,254  508,254  982,347 

More than one year, but not exceeding two years

  9,230  8,689  8,689  8,181 

More than two years, but not exceeding five years

  24,574  23,138

Exceeding five years

  7,253  —  

More than two years, but not exceeding three years

  8,181  7,704 

More than three years, but not exceeding four years

  7,704  7,253 

More than four years, but not exceeding five years

  7,253  —   
             

Total due

  41,057  540,081  540,081  1,005,485 
             

Less: amount due within one year

  —    508,254  (508,245) (982,347)
      

Amount due after one year

  41,057  31,827  31,827  23,138 
             

Except for the payments disclosed above, there are no amounts due to the Parent CompanyControlling Shareholder and/or its subsidiary companies that have specific terms for repayment.

Expenditures for social welfare and support services (excluding medical and child care expenses) of RMB63.5 million, RMB63.3 million and RMB63.4 million forTransactions/balance with other state-controlled entities in the year ended December 31, 2003, 2004 and 2005, respectively, and for technical support and training of RMB15.1 million for the three years ended December 31, 2003, 2004 and 2005, have been charged to usPRC

We operate in an economic environment currently predominated by entities directly or indirectly owned or controlled by the Parent Company atPRC Government (“state-controlled entities”). In addition, we are part of a negotiated amount per annum, subjectlarger group of companies under the Controlling Shareholder which is controlled by the PRC Government. Apart from the transactions with the Controlling Shareholder and fellow subsidiaries and other related parties disclosed above, we also conduct business with other state-controlled entities. Our Directors consider those state-controlled entities are independent third parties so far as our business transactions with them are concerned.

In establishing our pricing strategies and approval process for transactions with other state-controlled entities, we do not differentiate whether the counter-party is a state-controlled entity or not.

Material transactions with other state-controlled entities are as follows:

   As of December 31,
   2004  2005  2006
   RMB’000  RMB’000  RMB’000

Trade sales

  4,466,519  3,855,545  4,600,606
         

Trade purchases

  1,541,147  1,607,729  1,568,658
         

Material balances with other state-controlled entities are as follows:

   As of December 31,
   2005  2006
   RMB’000  RMB’000

Amounts due from other state-controlled entities

  350,688  345,914
      

Amounts due to other state-controlled entities

  270,559  301,117
      

In addition, we have entered into various transactions, including deposits placements, borrowings and other general banking facilities, with certain banks and financial institutions which are state-controlled entities in its ordinary course of business. In view of the nature of those banking transactions, our Directors are of the opinion that separate disclosure would not be necessary.

Except as disclosed above, our Directors are of the opinion that transactions with other state-controlled entities are not significant to changes every year.our operations.

The above transactions were charged either at market prices or based on terms agreed by both parties.

Interest of Management in certain transactions

None of the Directors or Supervisors or Executive Officers had, either directly or indirectly, any material interest in any significant material contract to which we were a party during the year ended December 31, 2005.2006.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

The selected income statement data and cash flow data for the five years ended December 31, 2005 and the selected balance sheet data as of December 31, 2001, 2002, 2003, 2004 and 2005 set forth below are derived from, and should be read in conjunction with, and are qualified in their entirety by reference to the Financial Statements, including the notes thereto. The Financial Statements are prepared and presented in accordance with IFRS. For a discussion of certain differences between IFRS and U.S. GAAP, see Note 47 to the Financial Statements. For full consolidated statements and other financial information, see pages F-1 to F-71 following Item 19. In 2005, the International Accounting Standards Board issued a number of new or revised IFRS which are effective for accounting periods beginning on or after January 1, 2005. We have adopted these new IFRS in the financial statements for the year ended December 31, 2005. See Note 3 to the Financial Statements.

   As of and for the Year Ended December 31, 
   2002  2003  2004  2005  2006  2006 
   RMB  RMB  RMB  RMB  RMB  U.S.$ 
   

(Amounts in millions except numbers of Shares and ADSs, and per Share,

per ADS and operating data)

 

INCOME STATEMENT DATA

       

IFRS

       

Net Revenue

       

Net sales of coal

  6,213.9  6,794.3  10,354.3  11,353.5  11,846.9  1,518.0 

the Company(2)

  6,213.9  6,794.3  10,354.3  11,353.5  11,710.7  1,500.6 

Domestic

  3,414.0  4,337.1  7,407.0  8,421.5  9,365.9  1,200.1 

Export(3)

  2,799.9  2,457.2  2,947.3  2,932.0  2,344.8  300.5 

Yancoal Australia

  —    —    —    —    114.4  14.7 

Shanxi Nenghua

  —    —    —    —    21.8  2.7 

Railway transportation service income

  142.5  154.6  220.8  163.4  160.4  20.5 

Total net revenue(4)

  6,356.4  6,948.9  10,575.1  11,516.9  12,007.3  1,538.5 

Gross profit

  2,993.5  3,193.9  6,023.4  6,228.3  5,817.3  745.4 

Interest expenses

  (117.9) (60.0) (35.9) (24.6) (26.3) (3.4)

Income before income taxes

  1,748.2  1,974.9  4,673.3  4,420.0  3,726.6  477.5 

Net income attributable to our equity holders

  1,222.0  1,386.7  3,154.3  2,881.5  2,373.0  304.1 

Net income/Earnings per Share

  0.43  0.30  0.66  0.59  0.48  0.06 

Net income/Earnings per ADS

  21.29  15.1  33.25  29.29  24.12  3.09 

Operating income per Share

  0.65  0.44  0.99  0.90  0.76  0.10 

Income from continuing operation per ADS

  32.51  22.16  49.64  45.18  37.88  4.85 

U.S. GAAP

       

Net income(5)

  1,325.7  1,499.2  3,263.9  2991.1  2,405.8  308.3 

Net income per Share

  0.46  0.33  0.69  0.61  0.49  0.06 

Net income per ADS

  23.10  16.32  34.40  30.41  24.46  3.13 

CASH FLOW DATA

       

IFRS

       

Net cash provided by operating activities

  2,239.7  2,701.2  4,418.4  3,939.3  3,767.2  482.7 

Depreciation

  851.1  920.5  958.7  952.1  1,062.0  136.1 

Net cash used in investing activities

  (2,165.5) (1,310.3) (2,300.8) (2,262.5) (3,625.5) (464.6)

Net cash (used in) provided by financing activities

  345.2  (911.4) 1,075.4  (1,009.3) (1,291.5) (165.5)

OTHER FINANCIAL DATA

       

Income before income tax

  1,748.2  1,974.9  4,673.3  4,420.0  3,726.6  477.5 

Add: Interest expenses

  117.9  60.0  35.9  24.6  26.3  3.4 

Less: Interest income

  30.2  17.8  92.7  91.7  94.3  12.1 

Add: Depreciation and amortisation

  858.5  950.1  994.3  971.9  1,088.2  139.4 

EBITDA(6)

  2,694.4  2,967.2  5,610.8  5,324.8  4,746.8  608.2 

EBITDA margin(7)

  42.4% 42.7% 53.1% 46.2% 39.5% 39.5%

OPERATING DATA

       

Raw coal production (‘000 tonnes)

  38,435  43,279  39,146  34,655  36,051  N/A 

The Company(2) (‘000 tonnes)

  38,435  43,279  39,146  34,655  35,485  N/A 

Yancoal Australia (‘000 tonnes)

  —    —    —    —    447  N/A 

Shanxi Nenghua (‘000 tonnes)

  —    —    —    —    119  N/A 

Net sales (‘000 tonnes)

  35,048  39,408  38,004  32,485  34,663  N/A 

The Company(2) (‘000 tonnes)

  35,048  39,408  38,004  32,485  34,330  N/A 

Domestic (‘000 tonnes)

  20,582  25,776  27,988  25,234  28,194  N/A 

Export (‘000 tonnes)

  14,466  13,632  10,016  7,251  6,136  N/A 

Yancoal Australia (‘000 tonnes)

  —    —    —    —    192  N/A 

Shanxi Nenghua (‘000 tonnes)

  —    —    —    —    141  N/A 

BALANCE SHEET DATA

       

IFRS

       

Total current assets

  3,873.4  4,430.5  8,319.6  10,951.1  9,871.9  1,265.0 

Total current liability

  1,662.7  2,372.0  2,545.1  3,429.0  3,828.0  490.5 

   As of and For the Year Ended December 31, 
   2001  2002  2003  2004  2005  2005 
   RMB  RMB  RMB  RMB  RMB  U.S.$ 
   (Amounts in millions except numbers of Shares and ADSs, and per Share,
per ADS and operating data)
 

INCOME STATEMENT DATA

       

IFRS

       

Net Revenue

       

Net sales of coal

       

Domestic

  2,599.8  3,414.0  4,337.1  7,407.0  8,421.5  1,043.5 

Export(2)

  2,276.2  2,799.9  2,457.2  2,947.3  2,932.0  363.3 

Railway transportation service income

  —    142.5  154.6  220.8  163.4  20.2 

Total net revenue(3)

  4,876.0  6,356.4  6,948.9  10,575.1  11,516.9  1,427.1 

Gross profit

  2,063.4  2,993.5  3,193.9  6,023.4  6,228.3  771.8 

Interest expenses

  (61.5) (117.9) (60.0) (35.9) (24.6) (3.0)

Income before income taxes

  1,360.2  1,748.2  1,974.9  4,673.3  4,420.0  547.7 

Net income attributable to equity holders of the Company

  970.9  1,222.0  1,386.7  3,154.3  2,881.5  357.1 

Net income/Earnings per Share

  0.35  0.43  0.30  0.66  0.59  0.07 

Net income/Earnings per ADS

  17.29  21.29  15.1  33.25  29.29  3.63 

Operating income per Share

  0.51  0.65  0.44  0.99  0.90  0.11 

Income from continuing operation per ADS

  25.32  32.51  22.16  49.64  45.18  5.60 

U.S. GAAP

       

Net income(4)

  1,227.6  1,325.7  1,499.2  3,263.9  2,994.7  371.1 

Net income per Share

  0.44  0.46  0.33  0.69  0.61  0.08 

Net income per ADS

  21.86  23.10  16.32  34.40  30.44  3.77 

CASH FLOW DATA

       

IFRS

       

Net cash provided by operating activities

  1,610.2  2,239.7  2,701.2  4,418.4  3,939.3  488.1 

Depreciation

  819.6  851.1  920.5  958.7  952.1  118.0 

Net cash used in investing activities

  (1,948.2) (2,165.5) (1,310.3) (2,300.8) (2,262.5) 280.4 

Net cash (used in) provided by financing activities

  618.0  345.2  (911.4) 1,075.4  (1,009.3) (125.1)

OTHER FINANCIAL DATA

       

Income before income tax

  1,360.2  1,748.2  1,974.9  4,673.3  4,420.0  547.7 

Add: Interest expenses

  61.5  117.9  60.0  35.9  24.6  3.0 

Less: Interest income

  39.9  30.2  17.8  92.7  91.7  11.4 

Add: Depreciation and amortisation

  827.0  858.5  950.1  994.3  971.9  120.4 

EBITDA(5)

  2,208.8  2,694.4  2,967.2  5,610.8  5,324.8  659.7 

EBITDA margin(6)

  45.3% 42.4% 42.7% 53.1% 46.2% 46.2%

OPERATING DATA

       

Raw coal production (‘000 tonnes)

  34,018  38,435  43,279  39,146  34,655  N/A 

Net sales (‘000 tonnes)

       

Domestic

  18,369  20,582  25,776  27,988  25,234  N/A 

Export

  12,666  14,466  13,632  10,016  7,251  N/A 

Total

  31,035  35,048  39,408  38,004  32,485  N/A 

BALANCE SHEET DATA

       

IFRS

       

Total current assets

  3,221.7  3,873.4  4,430.5  8,319.6  10,951.1  1,357.0 

Total current liability

  2,047.6  1,662.7  2,372.0  2,545.1  3,429.0  424.9 

Net current assets

  1,174.1  2,170.7  2,058.5  5,774.5  7,522.1  932.1 

Property, plant and equipment

  7,479.8  8,276.9  8,616.4  8,537.2  9,318.5  1,154.7 

Total assets

  11,182.6  12,924.0  13,909.9  18,336.7  21,254.4  2,633.7 

  As of and For the Year Ended December 31,  As of and for the Year Ended December 31,
  2001  2002  2003  2004  2005  2005  2002  2003  2004  2005  2006  2006
  RMB  RMB  RMB  RMB  RMB  U.S.$  RMB  RMB  RMB  RMB  RMB  U.S.$
  (Amounts in millions except numbers of Shares and ADSs, and per Share,
per ADS and operating data)
  (Amounts in millions except numbers of Shares and ADSs, and per Share,
per ADS and operating data)

Total long-term borrowings

  72.5  1,261.3  650.9  441.1  231.8  28.7

Equity attributable to equity holders of the Company

  9,060.0  9,995.0  11,083.2  15,523.8  17,618.6  2,183.2

Net current assets

  2,170.7  2,058.5  5,774.5  7,522.1  6,043.9  774.5

Property, plant and equipment, net

  8,276.9  8,616.4  8,537.2  9,318.5  12,139.9  1,555.6

Total assets

  12,924.0  13,909.9  18,336.7  21,254.4  23,458.7  3,005.9

Total long-term borrowing

  1,261.3  650.9  441.1  231.8  403.1  51.7

Equity attributable to our equity holders

  9,995.0  11,083.2  15,523.8  17,618.6  18,931.8  2,425.9

U.S. GAAP

                        

Property, plant and equipment and prepaid lease payment, net

  7,176.7  7,271.4  7,785.8  8,073.7  8,851.5  1,096.8  7,271.4  7,785.8  8,073.7  9,279.7  11,860.3  1519.8

Total assets

  11,071.0  11,787.5  12,845.8  17,379.1  20,189.4  2,501.7  11,787.5  12,845.8  17,379.1  20,136.7  22,134.1  2,836.2

Equity attributable to equity holders of the Company

  7,668.9  8,858.5  10,019.2  14,519.3  16,699.8  2,069.3

Equity attributable to our equity holders

  8,858.5  10,019.2  14,519.3  16,565.3  17,913.2  2,295.4

Number of Shares

                        

Domestic Shares

  1,850.0  1,850.0  1,850.0  1,850.0  2,960.0  2,960  1,850.0  1,850.0  1,850.0  2,960.0  2,960.0  2,960

H Shares (including H Shares represented by ADS)

  1,020.0  1,020.0  1,020.0  1,224.0  1,958.4  1,958.4  1,020.0  1,020.0  1,224.0  1,958.4  1,958.4  1,958.4

ADS

  20.4  20.4  20.4  24.5  39.2  39.168  20.4  20.4  24.48  39.168  39.168  39.168

Dividend per

                        

Domestic Share/H Share(7)

  0.082  0.100  0.104  0.164  0.260  0.032

ADS(8)

  4.10  5.00  5.20  8.20  13.00  1.611

Domestic Share/H Share(8)

  0.100  0.104  0.164  0.260  0.220  0.028

ADS(9)

  5.00  5.20  8.20  13.00  11.0  1.410

(1)The above financial highlights as of and for the year 2004 represent the data resulting from the consolidation of the financial statements of Yanmei Shipping, Yulin Nenghua and Yancoal Australia . The above financial highlights as of and for the year 2005 represent the data resulting from the additional consolidation of the financial statements of Yankuang Heze Power Chemical Company Limited (“Heze Nenghua”), Shandong Yanmei Shipping Co. Ltd. (“Yanmei Shipping”), Yanzhou Coal Yulin Power Chemical Co. Limited, Yancoal Australia Pty LimitedNenghua. The above financial highlights as of and Austar Coal Mine Pty Limited.for the year 2006 represent the data resulting from the additional consolidation of the financial statements of Shanxi Nenghua. The gross profit, taxes and surcharges resulting from the principal businesses of Yanmei Shipping are calculated as theour transportation cost of coal of us.coal. As the sales income, operation results, and assets of Yanmei Shipping have only limited impact on us, they are not separately set out and analyzed in this report. Heze Nenghua Yanzhou Coaland Yulin Power Chemical Co. Limited, Yancoal Australia Pty Limited and Austar Coal Mine Pty LimitedNenghua are currently in the preparation stage or in the construction stage and have limited impact on our financial results, and hence are not separately set out and analyzed in this report.
(2)“The Company” does not include the subsidiaries that have been consolidated into our accounts for the purposes of the consolidated financial statements. The subsidiaries that have been consolidated into our accounts for the purposes of the consolidated financial statements include: Yanmei Shipping, Zhongyan Trading, Yulin Nenghua, Yancoal Australia, Shanxi Nenghua, and Heze Nenghua.
(3)Export sales constituted 46.7%, 44.0%, 35.4%, 27.9%, 25.5% and 25.5%20.0% of total net revenue in 2001, 2002, 2003, 2004, 2005 and 2005, respectively.2006.
(3)(4)Total net revenue is the sum of net sales of coal and railway transportation service income.
(4)(5)The net income for the year ended December 31, 2001 under U.S. GAAP included the loss of Jining III acquired in 2001 using the pooling of interest method. The net income for the years ended December 31, 2001 under U.S. GAAP included the profit of Railway Assets using the pooling of interest method. The net income for the year ended December 31, 2004 and the total assets value and owners’ equity as atof December 31, 2004 under U.S. GAAP included the loss and net assets of Heze Nenghua acquired in 2005 using the pooling of interest method. The net income for the year ended December 31, 2005 and the total assets value and owners’ equity as of December 31, 2005 under U.S. GAAP included the loss and net assets of Shanxi Nenghua acquired in 2006 using the pooling of interest method.
(5)(6)EBITDA refers to earnings before interest income, interest expense, taxes, depreciation and amortization. EBITDA should not be construed as an alternative to operating income or any other measure of performance or as an indicator of our operating performance, liquidity or cash flows generated by operating, investing and financing activities. The items of net income excluded from EBITDA are significant components in understanding and assessing our financial performance, and EBITDA does not take into account capital expenditures or changes in working capital, which could have a material impact on our operating cash flow. Our computation of EBITDA may not be comparable to other similarly titled measures of other companies. We have included the information concerning EBITDA because management believes it is a useful supplement to cash flow data as a measure of our performance.
(6)(7)EBITDA margin represents EBITDA as a percentage of our total net revenue.
(7)(8)The calculation of Dividend per Domestic Share/H Share is based on the dividend paid in the relevant year and total number of Domestic Shares and H Shares ranking for the dividend.
(8)(9)Dividend per ADS is calculated at 50 times Dividend per Domestic Share/H Share based on one ADS being equivalent to 50 H Shares.

Export Sales

Please see “Item 4 – Information on the Company – B. Business Overview – Sales and Marketing.”Marketing”.

Legal Proceedings and Arbitration

In the pastOn December 13, 2004, we have entered into lending transactions wherein we make loans through PRC financial institutions to unrelated third-party corporate borrowers, and for which guarantees are provided by other unrelated third-party corporate entities. On January 19, 2005, Shandong Xinjia Industry Co., Ltd. (“Shandong Xinjia”), the borrower under one suchmade an entrusted loan (the “Defaulted Loan”) defaulted on the payment of principal of RMB640 million and interest. Paymentto Shandong Xin Jia Industrial Company Limited (the “Entrusted Loan”). On September 6, 2005, the Higher People’s Court of Shandong Province auctioned the Defaulted Loan is guaranteed by Lianda Group

Co., Ltd. (“Lianda”) and secured by pledges of the following289 million shares owned by Lianda: (i) 170 million state legal person shares ofin Huaxia Bank Company Limited (“Huaxia Bank”Shares”) held by Shandong Lianda Group Co., Ltd. (the “Lianda Group”), a PRC banking company whose shares are listed on the Shanghai Stock Exchange; and (ii) controlling equity interests in an unlisted PRC company (together, the “Pledged Shares”).

At our request, the People’s High Court of Shandong Province (the “High Court”) granted an order sequestering a total of 289 million Huaxia Bank shares owned by Lianda, including the 170 million shares pledged to us, and on January 22, 2005 we filed an application with the High Court for execution of the court order. On March 28, 2005, the High Court issued judgment allowing for the auction of the sequestered Huaxia Bank shares, with the auction proceeds to be used among others to pay outstanding principal, interest and premium on the Defaulted Loan. On September 6, 2005, the High Court appointed Shandong Yinxing Auction Company Limited and auctioned the 289 million Huaxia Bank shares owned by Liandaguarantor, in accordance with the relevant PRC laws and regulations. The final auction price is RMB3.5 per Pledged Share and the total proceeds from the auction is RMB1,011.5 million.

The transfer of the Pledge Shares are subject to the approval of the China Banking Regulatory Commission (“CBRC”). Upon receiving the approval from the CBRC and the completion of the transfer procedures, the successful bidder of the Pledged Shares will remit the full auction amount, which will be administered by the High Court. We expect to receiverepay the principal, interest, penalty interest and relevant expenses associated withon the DefaultedEntrusted Loan upon(the “Creditor’s Rights and Interests”). The final auction price was RMB3.5 per Huaxia Share and the completiontotal final auction amount was RMB1,011.5 million. As of all necessary legal procedures. As at the date of this annual report,Annual Report, the successful bidder of the Huaxia Shares is still undergoing qualification review by the China Banking Regulatory Commission (“CBRC”).

We recently became aware that while the successful bidder of the Huaxia Shares is undergoing the qualification review by CBRC, a privately-owned enterprise, Shandong Runhua Group Co., Ltd. (“Runhua Group”), has commenced a legal proceeding to claim ownership of the 240 million of the Huaxia Shares. It is reported that the Supreme People’s Court has ruled that 240 million of the Huaxia Shares should be transferred to Runhua Group. However, pursuant to the notice of the Supreme People’s Court, the Higher People’s Court of Shandong Province also informed us that enforcement of the Entrusted Loan case shall continue.

The State-owned Asset Supervision and Administration Commission of the State Council and the People’s Government of Shandong Province have respectively sent a letter to the Supreme People’s Court and have formally requested the Supreme People’s Court: (i) to support our proposition and give priority to the execution of the Entrusted Loan case and repay the Creditor’s Rights and Interests from the auctioned funds from the auctioning of the Huaxia Shares; and (ii) that any transfer of the Huaxia shares to Runhua Group shall be subject to requisite legal and approval procedures. Further, ownership of the Huaxi shares should not be transferred to the Runhua Group without first obtaining asset valuation and approvals by the state-owned asset supervision and administration organizations and other related authorities, to avoid the great loss of state-owned assets.

In view of the same subject matter in the two legal proceedings and in light of the fact that our Company has already seized the Huaxia Shares prior to the legal procedures have notproceeding initiated by Runhua Group, the Supreme People’s Court is mediating between the two legal proceedings, and the People’s Government of Shandong Province is also trying to resolve the disputes through negotiations with the concerned parties, in order to protect the state-owned assets and interests of the related parties. The final result has yet been completed yet.determined.

Considering the significant rise in equity value of the Huaxia Shares, we are confident that through the disposal of the Huaxia Shares it can satisfy its Creditor’s Rights and Interests. We will promptly disclose any significant progress concerning the Entrusted Loan.

Save as disclosed above, we wereour Company was not involved in any other significant litigation andor arbitration in 2005.during this reporting period.

Dividends Policy

According to our Articles of Associations, the shareholders shall by way of an ordinary resolution authorize our Board of Directors to declare and pay the interim and final dividends. Dividend shall be paid once a year. We may distribute dividends in the form of cash or shares. Pursuant to the amended Articles of Association as approved during the annual shareholders general meeting on June 28, 2006, our after-tax profit shall be allocated in accordance with the following order: (1) compensation of losses; (2) allocation to the statutory common reserve fund; (3) allocation to the discretionary common reserve fund upon approval by resolution of the shareholders’ general meeting; (4) payment of dividends in respectdividend payments of ordinary shares. If our statutory common reserve fund is not sufficient to compensate our losses from the previous year, we shall utilize our after-tax profit to compensate our losses before we make any provision for the statutory common reserve fund.

B. Significant Changes

On June 28, 2005,15, 2007, our shareholders approved a special resolution granting the Board of Directors an unconditional general mandate to issue and allot additional H Shares in our capital in an amount up to 20% of the aggregate nominal amount of H Shares in issue.

Other than events disclosed above and elsewhere in this annual report,Annual Report, there have been no significant changes since the date of the financial statements attached to this Form 20-F .

ITEM 9. THE OFFER AND LISTING

A. Offer and Listing Details

The issuance history of our shares is as follows:

 

  H Shares  A Shares  H Shares  A Shares
  Initial offering  Second offering  Third offering  Initial offering  Second offering  

Initial

offering

  

Second

offering

  

Third

offering

  

Initial

offering

  

Second

offering

Time of issue

  March 1998  May 2001  July 2004  June 1998  January 2001  March 1998  May 2001  July 2004  June 1998  January 2001

Issue amount

  850,000,000  170,000,000  204,000,000  80,000,000  100,000,000  850,000,000  170,000,000  204,000,000  80,000,000  100,000,000

As atof December 31, 2005,2006, our share capital structure is as follows:

Type

Amount of shares

Listed shares with restricted trading condition

2,600,000,000

Listed shares

2,318,400,000

A Shares

360,000,000

H Shares

1,958,400,000

Total

4,918,400,000

As of December 31, 2006, we have 2,672,000,000 state-owned2,600,000,000 tradable shares with restricted trading conditions, all of which wereare held by our Parent Company.Controlling Shareholder on behalf of the State.

Capitalization of capital reserve and our capital structure as of December 31, 2005:2006:

Pursuant toDuring the resolutionsperiod of our annual general meeting held on June 28, 2005, the shareholders approved that the issuance of bonus shares by us through capitalization ofthis report, the capital reserve on the basis of six bonus shares for every ten existing shares for the year ended December 31, 2004. After the issuance of the bonus shares, our total share capital increased from 3,074,000,000 shares (our share capital for the year ended December 31, 2004) to 4, 918, 400,000 shares, out of which 2,246,400,000 shares were listed shares starting from July 28, 2005. During 2005, our share capital has been changed as follows:

Type

  Amount of shares as at
January 1, 2005
  Increase of shares as a
result of capitalization of
the capital reserve
  Amount of shares as at
December 31, 2005

State legal person shares

  1,670,000,000  1,002,000,000  2,672,000,000

A Shares

  180,000,000  108,000,000  288,000,000

H Shares

  1,224,000,000  734,400,000  1,958,400,000

Total

  3,074,000,000  1,844,400,000  4,918,400,000

Implementation of share reform plan

Our share reform plan was implemented on March 31, 2006. Our Parent Company has paid a consideration of 2.5 non-tradable shares for every 10 A Shares held by each holder of A shares whose name appears on the register of member of A share 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 Company did not offer similar consideration to the Holders of H shares and Holders of our ADSs.changed. Our shareholding structure before and after the implementation of finalized share reform plan was as follows:

 

Before the Implementation of
the Share Reform Plan

  

After the Implementation of
the Share Reform Plan

 
   

Number

of shares

  Percentage of
the registered
share capital
     

Number

of shares

  Percentage of
the registered
share capital
 

1.      Total of unlisted tradable shares State-owned shares

  2,672,000,000  54.33% 

1.      Total of tradable shares with trading moratorium State-owned shares

  2,600,000,000  52.86%

2.      Total of listed tradable shares

         A Shares

         H Shares

  2,246,400,000
288,000,000
1,958,400,000
  45.67
5.85
39.82
%
%
%
 

2.      Total of tradable shares without trading moratorium

         A Shares

         H Shares

  2,318,400,000
360,000,000
1,958,400,000
  47.14
7.32
39.82
%
%
%

3.      Total of shares

  4,918,400,000  100.00% 

3.      Total number of shares

  4,918,400,000  100.00%

As of January 1, 2006

  

After the Implementation of

the Share Reform Plan

   Amount of shares as of
January 1, 2006
  

Increase of shares as a
result of capitalization
of

the capital reserve

  

Amount of shares as
of

December 31, 2006

1. Unlisted shares

  2,672,000,000  (2,672,000,000) —  

Initiation shares

  2,672,000,000  (2,672,000,000) —  

2. Listed shares with restricted trading condition

  —    2,600,000,000  2,600,000,000

Initiation shares

  —    2,600,000,000  2,600,000,000

3. Listed shares

  2,246,400,000  72,000,000  2,318,400,000

A Shares

  288,000,000  72,000,000  360,000,000

H Shares

  1,958,400,000  —    1,958,400,000

Total

  4,918,400,000  —    4,918,400,000

Set out below is certain market information relating to the H Shares, ADSs and A Shares in respect of 2001, 2002, 2003, each quarterly period within the fiscal years ended December 31, 2004, and 2005 and 2006 each monthly period ended May 31, 2006:2007:

   

Price per H
Share

(HK$)

  Price per ADS
(U.S.$)
  

Price per A
Share

(RMB)

   High  Low  High  Low  High  Low

2002

  3.55  2.40  22.30  15.80  11.10  8.00

2003

  8.20  2.625  53.20  17.80  11.29  7.53

2004

            

First quarter

  9.70  6.50  60.65  42.00  15.30  10.88

Second quarter

  9.85  5.20  62.80  33.25  15.82  12.38

Third quarter

  10.25  7.55  66.28  50.86  15.50  12.00

Fourth quarter

  12.45  9.40  79.50  61.18  15.55  11.65

   

Price per H
Share

(HK$)

  Price per ADS
(U.S.$)
  Price per A
Share (RMB)
   High  Low  High  Low  High  Low

2005

            

First quarter

  12.30  10.30  78.95  66.00  14.09  11.25

Second quarter

  11.20  5.90  71.86  61.10  12.98  9.52

Third quarter

  6.95  5.55  71.78  35.50  10.30  6.08

Fourth quarter

  6.35  4.75  40.95  30.70  7.08  4.92

2006

            

First quarter

  6.90  5.00  44.14  32.43  7.79  5.91

Second quarter

  7.50  4.58  48.80  29.31  8.90  6.00

Third quarter

  5.96  5.04  38.25  32.63  7.77  5.70

Fourth quarter

  6.54  5.10  42.45  33.09  7.48  5.90

December

  6.54  5.48  42.45  35.50  7.48  6.28

2007

            

January

  7.78  6.28  49.31  40.03  8.61  7.07

February

  8.45  6.77  53.42  43.18  9.95  7.71

March

  7.56  6.52  48.61  41.44  9.70  8.36

April

  8.35  7.57  52.76  48.63  12.32  9.23

May

  10.54  8.06  66.03  51.22  17.29  11.75

June (through June 22, 2007)

  12.08  10.00  74.83  63.60  16.23  11.500

Notes:

 

   Price per H Share
(HK$)
  Price per ADS
(U.S.$)
  Price per A Share
(RMB)
   High  Low  High  Low  High  Low

2001

  3.95  1.90  24.65  12.60  13.10  8.28

2002

  3.55  2.40  22.30  15.80  11.10  8.00

2003

  8.20  2.625  53.20  17.80  11.29  7.53

2004

            

First quarter

  9.70  6.50  60.65  42.00  15.30  10.88

Second quarter

  9.85  5.20  62.80  33.25  15.82  12.38

Third quarter

  10.25  7.55  66.28  50.86  15.50  12.00

Fourth quarter

  12.45  9.40  79.50  61.18  15.55  11.65
1.In 2005, we carried out a resolution approved at the 2004 annual general meeting in relation to issuance of bonus shares through capitalization of the capital reserve. Based on the total share capital of 3,074,000,000 shares of the Company as of December 31, 2004, six bonus shares were issued for every ten existing shares. As a result of capitalization of capital reserve, our share capital has been changed as follows: i) number of state legal person shares increased from 1,670,000,000 shares to 2,672,000,000 shares; ii) number of A Shares increased from 180,000,000 shares to 288,000,000 shares; iii) number of H Shares increased from 1,224,000,000 shares to 1,958,400,000 shares.

2.On March 31, 2006, we implemented the Share Reform Plan, pursuant to which, Yankuang Group which held non-tradable shares of the Company, paid a consideration of 2.5 non-tradable shares for every ten shares held by each holder of A Shares whose name appear on the register of members of A Share on March 30, 2006 in exchange for the right to list and trade the non-tradable shares held by Yankuang Group. The non-tradable shares held by Yankuang Group were granted the right to list and trade on the Shanghai Stock Exchange on the undertaking from Yankuang Group that the original non-tradable Shares would be subject to a trading moratorium of 48 months from the date of the implementation of the share reform plan. Upon the implementation of the Share Reform Plan, State Legal Person Shares changed from unlisted to tradable shares subject to a trading moratorium and our share capital has been changed as follows: i) number of state legal person shares decreased from 2,672,000,000 shares to 2,600,000,000 shares; ii) number of A Shares increased from 288,000,000 shares to 360,000,000 shares; iii) number of H Shares remains 1,958,400,000 shares.

   Price per H Share
(HK$)
  Price per ADS
(U.S.$)
  Price per A
Share (RMB)
   High  Low  High  Low  High  Low

2005

            

First quarter

  12.30  10.30  78.95  66.00  14.09  11.25

Second quarter

  11.20  5.90  71.86  61.10  12.98  9.52

Third quarter

  6.95  5.55  71.78  35.50  10.30  6.08

Fourth quarter

  6.35  4.75  40.95  30.70  7.08  4.92

December

  5.35  4.875  35.18  31.00  6.02  5.16

2006

            

January

  5.95  5.00  38.90  32.43  6.78  5.91

February

  6.60  5.75  41.74  37.22  7.79  6.99

March

  6.90  6.10  44.14  40.18  —    —  

April

  7.50  6.25  48.80  41.22  7.12  6.00

May

  7.30  5.55  48.00  35.91  8.90  6.58

June (through June 22)

  5.70  4.575  36.01  29.31  8.04  6.75

Notes:

1. In 2005, we carried out a resolution approved at the 2004 annual general meeting in relation to issuance of bonus shares through capitalization of the capital reserve. Based on the total share capital of 3,074,000,000 shares of the Company as at December 31, 2004, six bonus shares were issued for every ten existing shares. As a result of capitalization of capital reserve, our share capital has been changed as follows: i) number of state legal person shares increased from 1,670,000,000 shares to 2,672,000,000 shares; ii) number of A shares increased from 180,000,000 shares to 288,000,000 shares; iii) number of H shares increased from 1,224,000,000 shares to 1,958,400,000 shares.

2. On March 31, 2006, we implemented the Share Reform Plan, pursuant to which, Yankuang Group, our Parent Company which held non-tradable shares of the Company, has paid a consideration of 2.5 non-tradable shares for every 10 shares held by each holder of A shares whose name appear on the register of members of A share on March 30, 2006 in exchange for the right to list and trade the non-tradable shares of the Parent Company. The non-tradable shares held by Yankuang Group were granted the right to listing and trading on the Shanghai Stock Exchange and our Parent Company also undertook that the original non-tradable Shares 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. Upon the implementation of the Share Reform Plan, state legal person shares changed from unlisted to tradable shares subject to a trading moratorium and our share capital has been changed as follows: i) number of state legal person shares decreased from 2,672,000,000 shares to 2,600,000,000 shares; ii) number of A shares increased from 288,000,000 shares to 360,000,000 shares; iii) number of H shares remains 1,958,400,000 shares.

As of December 31, 2005,2006, a total of 1,958,400,000 H Shares were outstanding, 92,298,700 Shares273,058,950 shares of which, representing 4.7%13.9% of the outstanding H Shares, were held in the form of ADSs (a total of 1,845,9745,461,179 ADSs). The outstanding ADSs were held by 1613 holders of record on May 31, 2006.2007.

B. Plan of Distribution

Not applicable.

C. Markets

Our Shares are currently listed on the Shanghai Stock Exchange under the approval of the China Securities Regulatory Commission. The principal trading market for the H Shares is the Hong Kong Stock Exchange. The ADSs have been issued by The Bank of New York as Depositary and are listed on the New York Stock Exchange under the symbol “YZC”. Prior to the initial public offering and subsequent listings on the Hong Kong and New York Stock Exchanges on April l, 1998 and March 31, 1998, respectively, there was no market for the H Shares or the ADSs. For market price information foron the exchanges where our securities are listed, please see “Item A – Offer and Listing Details.”Details”.

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

General

Since our Articles of Association took effect on September 25, 1997, the PRC Government and other regulatory authorities have promulgated various rules, regulations and opinions which primarily include The Securities Laws of the PRC, the General Meeting Opinions, the Independent Director Guiding Opinions, Regulations in connection with Protection of Public Shareholders, and the Guide for Articles of Association of Listed Companies, as amended in 2006. The supervisory authorities require listed companies to incorporate such rules, regulations and opinions into their articles of associations as appropriate.

A copy of the English translation of our Articles of Association was filed with the Commission as an exhibit to the registration statement on Form F-1 under the Securities Act in connection with a global offering of our H sharesShares and related American depositary shares on October 17, 1997. WeThe following is a summary of the dates when the Articles of Association were amended and filed with the Commission:

Date of amendment of the Articles of Association

Method of filing

April 22, 2002

Appendix to 2001 20-F

June 25, 2004

Appendix to 2003 20-F

July 8, 2004

Appendix to 2004 20-F

June 28, 2005

August 22, 2005

Appendix to 2005 20-F

June 28, 2006

November 10, 2006

Appendix to this 20-F

During the reporting period of this Annual Report, we made amendments to our Articles of Association at an extraordinary general meeting on April 22, 2002, and the full text of the English translation of the Revised Articles of Association was filed with the Commission on our 2001 Form 20-F filed on June 27, 2002. We further revised28, 2006 and November 10, 2006 respectively. Certain amendments to our Articles of Association were resolved at an annualour general meeting held on June 25, 2004,15, 2007. However, the amendments made on June 15, 2007 have not been approved by the relevant authorities and the full texthave not taken effect as of the English translationdate of the amended Articles of Association was filed with the Commission on our 2003 20-F. We subsequently revised our Articles of Association at the shareholders meeting held on July 8, 2004 and June 28, 2005, and the full text of the English translation of the amended Articles of Association are filed with 2004 Form 20-F. For this reporting period, we revised our Articles of Association at the shareholders meeting held on August 22, 2005 and June 28, 2006, and the full text of the English translation of the amended Articles of Association are filed with this Form 20-F as Exhibit 1.1.Annual Report.

Selected Summary of the Articles of Association

We are a joint stock limited company established in accordance with the “Company Law of the People’s Republic of China” (the “Company Law”), “State Council’s Special Regulations Regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Share” (the “Special Regulations”) and other relevant laws and regulations of the State. We were established by way of promotion with the approval of the former State Commission for Restructuring the Economic System on September 24, September 1997, as evidenced by approval document Ti Gai Sheng (1997) no. 154 of 1997. We were registered with and have obtained a business license from China’s State Administration Bureau of Industry and Commerce on September 25, 1997. Our business license number is: Qi Gu Lu Zong Fu Zi No. 003929-1/1.

Our scope of business includes: mining, selection and the sale of coal; transportation of cargo; the production, sale and leasing of machinery equipments and parts, electronic products; the sale of metal materials, chemical products, construction materials, timber, flammable materials, grease and rubber products; the production and sale of other mining materials; the production and sale of knitted products; composite of mining, science and technology services; property development within the mining areas; the provision of dining, accommodation and tourist services; the storage and discharge of coals at sea ports; the provision of inland water transports; the provision of commodity logistics services; and the provision of ships repairing work.work; production and sale of coal residual stones as construction material products..

Board of Directors

Directors who are not staff representative shall be elected or removed at the shareholders’ general meeting. The staff directors shall be elected by the staff in the staff representative meeting or by other ways democratically. Directors shall be elected for a term of three years. At the expiry of the term, it shall be renewable upon re-election. A director may not be removed by the shareholders in a general meeting without any reason before his term of office expires. The Board of Directors is accountable to the shareholders in general meeting.

We have established a system of independent Directors and currently have four independent Directors. The independent Directors do not hold any positions in our companyCompany other than as director and do not maintain with us and our substantial shareholders a connection which may hamper their independent and objective judgment. Apart from the powers granted to directors by the Company Law and other relevant laws, regulations and the Articles of Association, the independent Directors shall have the following special powers:

 

Substantial connected transactions (determined in accordance with the standard promulgated from time to time by the regulatory organizations of the place where the Company’s shares are listed), and engaging or ceasing to engage an accounting firm, shall be agreed by more than one-half of the independent Directors before submitting to the Board of Directors for discussion;
(i)Substantial connected transactions (determined in accordance with the standard promulgated from time to time by the regulatory organizations of the place where the Company’s shares are listed), and engaging or ceasing to engage an accounting firm, shall be agreed by more than one-half of the independent Directors before submitting to the Board of Directors for discussion;

 

The independent Directors may request the Board of Directors to convene an extraordinary general meeting, and suggest the convening of a board meeting , and publicly collect voting rights from the shareholders before the shareholders’ general meeting, which shall all be agreed by more than one-half of the independent Directors;
(ii)The independent Directors may request the Board of Directors to convene an extraordinary general meeting, and suggest the convening of a board meeting, and publicly collect voting rights from the shareholders before the shareholders’ general meeting, which shall all be agreed by more than one-half of the independent Directors;

With the consent of all the independent Directors, the independent Directors may engage external audit institutions or consultative institutions independently to provide audit and consultation for specific matters of the Company, the relevant costs of which shall be undertaken by the Company.
(iii)With the consent of all the independent Directors, the independent Directors may engage external audit institutions or consultative institutions independently to provide audit and consultation for specific matters of the Company, the relevant costs of which shall be undertaken by the Company.

If the above recommendationrecommendations are not accepted or the above powers can notcannot be exercised ordinarily, the Company shall disclose the circumstances accordinglyaccordingly.

The Articles do not contain any requirement for (i) the Directors to retire by a specified age, or (ii) the Directors to own any or a specified number of our shares.

Our Articles provide that when passing a resolution in relation to connected transaction at a board meeting, or where any Director or any of its Associates (as defined under the Listing Rules of the Stock Exchange of Hong Kong) is connected with such resolution, such connected director shall excuse himself from the Board of Directors’ meeting, shall not have any voting rights in respect thereof, , shall not exercise any voting rights on behalf of other Directors and shall not be counted as part of the quorum of the Board of Directors’ meeting. A quorum is formed when majority of the non-connected Directors attended and the resolution can be passed when majority of the non-connected Directors approve such transaction. If less than three non-connected Directors attended at the Board of Directors’ meeting as a result of the absence of the connected Director, such transaction shall be submitted for resolutions at a shareholders’ general meeting of the Company.

With the approval of over two-thirds of all Directors, the Board of Directors may make decisions on the following matters:

(1) Transactions falling within the following limit with respect to purchase or sale of assets, foreign investment (including entrusted financial management and entrusted loans), provision of financial assistance, entrusted or trusted asset or business management, entering of licence agreement, transfer or accept the transfer of research and development projects:

(1)Transactions falling within the following limit with respect to purchase or sale of assets, foreign investment (including entrusted financial management and entrusted loans), provision of financial assistance, entrusted or trusted asset or business management, entering of licence agreement, transfer or accept the transfer of research and development projects:

 

The total assets involved in a single transaction with amount more than 5% and below 25% of our Company’s latest audited total asset value;
1.The total assets involved in a single transaction with amount more than 5% and below 25% of our Company’s latest audited total asset value;

 

A single investment more than 5% and below 25% of our Company’s latest audited net asset value;

The subject of a single transaction accounted for more than 5% and less than 25% of our Company’s latest audited income from principal operations for the latest financial year;
2.A single investment more than 5% and below 25% of our Company’s latest audited net asset value;

 

The subject of a single transaction accounted for more than 5% and less than 25% of our Company’s latest audited net profit for the latest financial year;
3.The subject of a single transaction accounted for more than 5% and less than 25% of our Company’s latest audited income from principal operations for the latest financial year;

4.The subject of a single transaction accounted for more than 5% and less than 25% of our Company’s latest audited net profit for the latest financial year;

The above transactions which involve public offer of securities that requires the approval of the China Securities Regulatory Commission shall be subject to approval of the shareholders’ general meeting.

(2)a single loan of less than 10% of our Company’s latest audited net asset value and the debt ratio to our Company’s assets remains under 60% after such financing;

(2)a single loan of less than 10% of our Company’s latest audited net asset value and the debt ratio to our Company’s assets remains under 60% after such financing;

(3)mortgages or pledges of assets the cumulative outstanding amount of which is less than 30% of our Company’s latest audited net asset value;

(4)external guarantees not within the approval limit of the shareholders’ general meeting as provided in our Articles of Association;

(3) mortgages or pledges of assets the cumulative outstanding amount of which is less than 30% of our Company’s latest audited net asset value;

(4) external guarantees not within the approval limit of the shareholders’ general meeting as provided in our Articles of Association;

(5) transactions involving connected transactions, which have to be conducted in accordance with the relevant regulations of competent securities authorities and the listing rules of the stock exchanges.

(5)transactions involving connected transactions, which have to be conducted in accordance with the relevant regulations of competent securities authorities and the listing rules of the stock exchanges.

The transactions referred to in (1) of the first paragraph involving the provision of financial assistance and entrusted financial management, shall be calculated on accrued basis for twelve consecutive months according to the transaction categories and applicable approval limit proportion of the boardBoard of directors.Directors. When our Company conducts other transactions apart from the provision of financial assistance and entrusted financial management, applicable approval limit proportion of the boardBoard of directorsDirectors regarding each transaction which is under the same category shall be calculated on the principle of accrued basis for twelve consecutive months. Transactions already approved by our Company in accordance with the principle of accrued basis shall not be included in the scope of accrual calculation.

Provision of regulatory authorities our Company is subject to within and outside the PRC that is of a stricter standard than this Article of Association shall apply accordingly.

Description of the Shares

As atof December 31, 2005, our share capital structure is as follows: 4,918,400,000 ordinary shares, of which (a) 2,672,000,000 shares, which represent 54.33% of our share capital, are held by Yankuang Group Corporation Limited as domestic legal person shares; (b) 1,958,400,000 shares, which represent 39.82% of our share capital, are held by the H Shares shareholders; and (c) 288,000,000 shares, which represent 5.85% of our share capital, are held by the A Shares shareholders.

Upon implementation of the our share reform plan on March 31, 2006, our share capital structure is as follows: 4,918,400,000 ordinary shares, of which (a) 2,600,000,000 shares, which represent 52.86% of our share capital, are held by Yankuang Group Corporation Limited as domestic legal person shares; (b) 1,958,400,000 shares, which represent 39.82% of our share capital, are held by the H Shares shareholders; and (c) 360,000,000 shares, which represent 7.32% of our share capital, are held by the A Shares shareholders. For details of our share reform plan, see “Item 9 - Offer and Listing.”

Our ordinary shareholders shall enjoy the following rights:

 

the right to receive dividends and other distributions in proportion to the number of shares held;
(i)the right to receive dividends and other distributions in proportion to the number of shares held;

 

the right to demand for the convening of a shareholders’ meeting, convene a shareholders’ meeting, attend or appoint a proxy to attend shareholders’ meetings and to vote thereat;;
(ii)the right to demand for the convening of a shareholders’ meeting, convene a shareholders’ meeting, attend or appoint a proxy to attend shareholders’ meetings and to vote thereat;

 

the right of supervisory management over our business operations and the right to present proposals or to raise queries;

the right to transfer, grant or pledge shares so held in accordance with laws, administrative regulations and provisions of our Articles of Association;
(iii)the right of supervisory management over our business operations and the right to present proposals or to raise queries;

 

the right to obtain relevant information in accordance with the provisions of our Articles of Association;
(iv)the right to transfer, grant or pledge shares so held in accordance with laws, administrative regulations and provisions of our Articles of Association;

 

in the event of our termination or liquidation , the right to participate in the distribution of our surplus assets in accordance with the number of shares held;
(v)the right to obtain relevant information in accordance with the provisions of our Articles of Association;

 

for shareholders who disagree with the resolutions for the merger and separation of the Company made in a general meeting, they may demand the Company to purchase their shares; and
(vi)in the event of our termination or liquidation, the right to participate in the distribution of our surplus assets in accordance with the number of shares held;

 

other rights conferred by laws, administrative regulations and our Articles of Association.
(vii)for shareholders who disagree with the resolutions for the merger and separation of the Company made in a general meeting, they may demand the Company to purchase their shares; and

(viii)other rights conferred by laws, administrative regulations and our Articles of Association.

A shareholder (including a proxy), when voting at a shareholders’ general meeting, may exercise such voting rights as are attached to the number of voting shares which he represents. Each share shall have one vote. Shares held by our Company do not have voting rights and these shares will not count as the total number of shares entitled to voting rights. Resolutions of shareholders’ general meetings shall be divided into ordinary resolutions and special resolutions. An ordinary resolution must be passed by votes representing more than one-half of the voting rights represented by the shareholders (including proxies) present at the meeting. A special resolution must be passed by votes representing more than two-thirds of the voting rights represented by the shareholders (including proxies) present at the meeting. Our ordinary shareholders are entitled to dividends and other distributions in proportion to the number of shares held, and they are not liable for making any further contribution other than the subscription amount. Our Articles provide that a controlling shareholder (as defined in the Articles) shall not approve certain matters which will be prejudicial to the interests of all or some of other shareholders by exercising his/her voting rights.

The Listing Agreement between us and the Hong Kong Stock Exchange further provides that we may not permit amendments to certain sections of the Articles of Association subject to the Mandatory Provisions. These sections include provisions relating to (i) varying the rights of existing classes of shares; (ii) voting rights; (iii) the power of us to purchase our own shares; (iv) rights of minority shareholders; and (v) procedures upon liquidation. In addition, certain amendments to the Articles of Association require the approval and assent of relevant PRC authorities.

Shareholders’ Meeting

Shareholders’ general meetings are divided into annual general meetings and extraordinary general meetings. Shareholders’ general meetings shall be convened by the Board of Directors. Annual general meetings are held once every year and within six months from the end of the preceding financial year. The Board of Directors shall convene an extraordinary general meeting within two (2) months of the occurrence of any one of the following events:

 

where the number of Directors is less than the number stipulated in the Company Law or two-thirds of the number specified in our Articles of Association;
(i)where the number of Directors is less than the number stipulated in the Company Law or two-thirds of the number specified in our Articles of Association;

 

where our unrecovered losses amount to one-third of the total amount of our share capital;
(ii)where our unrecovered losses amount to one-third of the total amount of our share capital;

 

where shareholder(s) singly or jointly holding 10% or more of our issued and outstanding voting shares request(s) in writing for the convening of an extraordinary general meeting;
(iii)where shareholder(s) singly or jointly holding 10% or more of our issued and outstanding voting shares request(s) in writing for the convening of an extraordinary general meeting;

 

whenever the Board of Directors deems necessary or the supervisory committee so requests;
(iv)whenever the Board of Directors deems necessary or the supervisory committee so requests;

 

other cases as provided in laws, administrative regulations and these Articles of Association; or
(v)other cases as provided in laws, administrative regulations and these Articles of Association; or

 

whenever more than a half of the independent Directors so request.
(vi)whenever more than a half of the independent Directors so request.

When we convene a shareholders’ general meeting, written notice of the meeting shall be given 45 days before the date of the meeting (when calculating the 45 days’ period, the date on which the meeting is held shall not be included) to notify all of the shareholders whose names appear in the share register of the matters to be considered and the date and place of the meeting, along with the matters to be resolved in the meeting. A shareholder who intends to attend the meeting shall deliver to us his written reply concerning his attendance at such meeting 20 days before the date of the meeting. When we convene an annual general

meeting, a shareholder singly or shareholders jointly holding 5% or more of the voting shares of the Company may propose new motions in writing, and we shall include in the agenda those issues in the motions which are within the functionsauthority of the shareholders’ general meeting.

When we convene a shareholders’ general meeting, the boardBoard of directors,Directors, the supervisory committee and shareholder(s) individually and jointly holding more than 5% of our shares have the right to propose resolutions to the Company. Shareholder(s) individually and jointly holding more than 5% of our shares may propose special resolutions in writing to the convenor 20 days before the shareholders’ general meeting is convened. The convenor shall issue a supplementary notice of the general meeting within two days after receiving the resolutions to announce the contents of the resolutions. Apart from the above, no amendment to the resolutions as set out in the notice of general meeting or proposal of new resolutions shall be made after the convenor has issued the notice of general meeting. The resolutions not set out in the notice of general meeting or failing to comply with Article 79 of these Articles of Association shall be not voted and resolved in the shareholders’ general meeting.

Set forth below is certain information relating to the H Shares, including a brief summary of certain provisions of the Articles, and selected laws and regulations applicable to us.

Sources of Shareholders’ Rights.The rights and obligations of holders of H Shares and other provisions relating to shareholder protection are principally provided in the Articles of Association and the PRC Company Law. The Articles of Association incorporate mandatory provisions in

accordance with the Mandatory Provisions for the Articles of Association of Companies Listed Overseas promulgated by the State Council Securities Commission and the State Restructuring Commission on August 27, 1994 (the “Mandatory Provisions”). We are further subject to management ordinances applicable to the listed companies in Hong Kong SAR and the United States, as our H Shares are listed on the Hong Kong Stock Exchange and the New York Stock Exchange (in the form of ADSs).

In addition, for so long as the H Shares are listed on The Hong Kong Stock Exchange, we are subject to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “HKSE Rules”), the Securities and Futures Ordinance of Hong Kong (the “SFO”) and the Hong Kong Code on Takeovers and Mergers and Share Repurchases.

Unless otherwise specified, all rights, obligations and protections discussed below derived from the Articles of Association, the PRC Company Law and abovementioned laws and regulations.

Significant Differences in the H Shares and A Shares.Holders of H Shares and Domestic Shares, with minor exceptions, are entitled to the same economic and voting rights. However, the Articles of Association provide that holders of H sharesShares will receive dividends in HK dollars while holders of Domestic Shares will receive dividends in Renminbi. In addition, the H Shares can only be traded only by investors of Taiwan, Hong Kong, Macau and any country other than the PRC, while A Shares may be traded only by PRC investors and qualified foreign institutional investors (“QFII”). The state-owned Legal Person Shares are not transferable without the approval of the PRC Government.

Restrictions on Transferability and the Share Register.H Shares may be traded only by investors from Taiwan, Hong Kong and Macau and any country or territories other than the PRC and may not be sold to PRC investors. The Articles of Association provide that PRC investors are not entitled to be registered as holders of H Shares. The consequences under PRC law of a purported transfer of H Shares to PRC investors are unclear.

Pursuant to the Articles of Association, we may refuse to register a transfer of H Shares unless (i) any relevant transfer fee and stamp duty is paid; (ii) the instrument of transfer is only in respect of H Shares; (iii) share certificates or such other evidence is given as may be reasonably necessary to show the right of the transferor to make the transfer; (iv) if it is intended that the shares be transferred to joint owners, the maximum number of joint owners shall not be more than four; and (v) we do not have any lien on the relevant shares.

Merger and Acquisition

In the event of the merger or division of our company, a plan shall be presented by our Board of Directors and shall be approved in accordance with the procedures stipulated in our Articles of Association. We shall then go through the relevant approval process. A shareholder who objects to the plan of merger or division shall have the right to demand us or the shareholders who consent to the plan of merger or division to acquire such dissenting shareholders’ shareholding at a fair price. The contents of the resolution of merger or division of our company shall constitute special documents which shall be available for inspection by our shareholders.

Repurchase of Shares

We may, in accordance with the procedures set out in these Articles of Association and with the approval of the relevant governing authority of the State, repurchase our issued shares under the following circumstances:

(i)cancellation of shares for the purposes of reducing its capital;

(ii)merging with another company that holds shares in our Company;

(iii)granting the shares as incentives to our Company’s staff;

(iv)shareholders who disagree with the resolutions for the merger and separation of our Company made in a general meeting may demand our Company to purchase their shares;

(v)other circumstances permitted by laws and administrative regulations.

We shall not repurchase its issued shares except under the circumstances stated above.

We may repurchase shares in one of the following ways, with the approval of the relevant governing authority of the State:

 

 (i)by making a general offer for the repurchase of shares to all our shareholders on a pro rata basis;

 

 (ii)by repurchasing shares through public dealing on a stock exchange;

 

 (iii)by repurchasing shares outside of the stock exchange by means of an off-market agreement; and

 

 (iv)by other means as authorized by the competent securities authorities under the State Council.

Interested Shareholders

Articles 140 and 141 of our Articles of Associations provide the following:

Article 140:

The following circumstances shall be deemed to be variation or abrogation of the rights attaching to a particular class of shares:

 

 (i)to increase or decrease the number of shares of that class, or to increase or decrease the number of shares of a class having voting or equity rights or privileges equal or superior to those of shares of that class;

 

 (ii)to exchange all or part of the shares of that class for shares of another class or to exchange or to create a right to exchange all or part of the shares of another class for shares of that class;

 

 (iii)to remove or reduce rights to accrued dividends or rights to cumulative dividends attached to shares of that class;

 

 (iv)to reduce or remove preferential rights attached to shares of that class to receive dividends or to the distribution of assets in the event that we are liquidated;

 

 (v)to add, remove or reduce conversion privileges, options, voting rights, transfer or pre-emptive rights, or rights to acquire our securities attached to shares of that class;

 

 (vi)to remove or reduce rights to receive payment payable by us in particular currencies attached to shares of that class;

 

 (vii)to create a new class of shares having voting or equity rights or privileges equal or superior to those of the shares of that class;

 

 (viii)to restrict the transfer or ownership of shares of that class or to increase the types of restrictions attaching thereto;

 

 (ix)to allot and issue rights to subscribe for, or to convert the existing shares into, shares in our company of that class or another class;

 

 (x)to increase the rights or privileges of shares of another class;

 

 (xi)to restructure our company in such a way so as to result in the disproportionate distribution of obligations between the various classes of shareholders;

 

 (xii)to vary or abrogate the provisions of this Chapter.

Article 141:

Shareholders of the affected class, whether or not otherwise having the right to vote at shareholders’ general meetings, have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 140, but interested shareholder(s) shall not be entitled to vote at such class meetings.

(An) interested shareholder(s)”, as such term is used in the preceding paragraph, means:

 

 (i)in the case of a repurchase of shares by way of a general offer to all our shareholders or by way of public dealing on a stock exchange pursuant to Article 32, a “controlling shareholder” within the meaning of Article 61;

 

 (ii)in the case of a repurchase of shares by an off-market agreement pursuant to Article 32, a holder of the shares to which the proposed agreement relates;

 

 (iii)in the case of our restructuring, a shareholder who assumes a relatively lower proportion of obligations than the obligations imposed on shareholders of that class under the proposed restructuring or who has an interest in the proposed restructuring different from the general interests of the shareholders of that class.

Ownership Threshold

There are no ownership thresholds above which shareholder ownership is required to be disclosed.

Changes in Capital

Article 107 provides that theany increase or reduction in share capital shall be resolved by a special resolution at a shareholders’ general meeting.

Changes in Registered Capital

The Company may reduce its registered share capital. InIt shall do so doing, it shall act according toin accordance with the Company Law, any other relevant regulatory provisions and these Articles of Association.

C. Material Contracts

Placing and Underwriting Agreement for new H Shares in July 2004

We entered into a Placing and Underwriting Agreement with BNP Paribas Peregrine Capital Limited on July 7, 2004, pursuant to which we placed 204,000,000 new H shares, par value RMB1.00 each, at a price of HK$8.30 per share (the “Placing”). The net proceeds of the Placing were HK$1,656.3 million (approximately RMB1,756.9 million). The new H Shares were placed to more than six independent professional and institutional investors located in Hong Kong, Europe and the United States. We used the net proceeds to invest in two new coal mine projects in Shandong Province and Shaanxi Province, and the methanol project in Shaanxi Province. The Placing shares were listed on the Hong Kong Stock Exchange on July 15, 2004. Our total share capital increased to 3,074 million shares from 2,870 million shares, and the percentage of our listed share capital to our total share capital increased from 41.81% to 45.67%. The Placing and Underwriting Agreement is filed with this Form 20-F as Exhibit 4.1.

Asset Sale Agreement

We entered into the Asset Sale Agreement with the receivers and managers and the liquidators of Southland Coal Pty Limited in Australia in October 2004, pursuant to which we acquired the entire assets of Southland Colliery previously owned by Southland Coal Pty Limited in liquidation. The aggregate consideration for the acquisition is AUD32.0 million. We completed the acquisition of Southland Colliery assets on December 24, 2004. Please see “ Item 4. Information of the Company - D. Property, Plants and Equipment,” for more details of Austar Coal Mine. The Asset Sale Agreement is filed with this Form 20-F as Exhibit 4.2.

Jining III Mining Rights

Pursuant to the Jining III Coal Mine Acquisition Agreement dated August 4, 2000 entered into between us and the Parent Company, the consideration of the mining right of Jining III coal mine is approximately RMB132.5 million, which shall be paid to the Parent Company in ten equal annual interest free installments commencing from 2001. During 2005, we paid RMB13.248 million to the Parent Company.

Loan Agreement

We entered into the Loan Agreement with Bank of China Jining Branch, Shandong Xinjia and the Lianda Group on December 13, 2004 to provide a RMB640.0 million loan to Shandong Xinjia. The loan was guaranteed by Lianda Group and secured by pledges. The annual interest rate of the loan is 7%. The period of the loan was from December 20, 2004 to January 19, 2005. Shandong Xinjia defaulted on the payment of principal of RMB640 million and interest. The English translation of the summary of the Loan Agreement is filed with this Form 20-F as Exhibit 4.3.

Mining Rights

The Parent Company and we have entered into a mining rights agreement dated October 17, 1997 (the “Mining Rights Agreement”) pursuant to which we agreed to pay to the Parent Company an annual fee (the “Annual Fee”) of approximately RMB13.0 million as compensation for the Parent Company’s agreement to relinquish the mining rights associated with five of our mines in China (Nantun Mine, Xinglongzhuang Mine, Baodian Mine, Dongtan Mine and Jining II). The terms of the mining rights are 67 years for Baodian, 70 years for Dongtan, 45 years for Nantun, 80 years for Xinglongzhuang and 64 years for Jining II. All such terms commenced on October 14, 1997, the date on which the mining rights permits were issued. The Annual Fee is fixed for a period of 10 years (the “Initial Period”) commencing from 1997, after which the Annual Fee will be revised if new national legislation is passed in respect thereof. The Parent Company and we also entered into a compensation agreement dated October 17, 1997 (the “Compensation Agreement”) whereby the Parent Company has agreed to compensate us in respect of any amounts in excess of the Annual Fee which we may, following the Initial Period, be required to pay as a result of any such new national legislation. For payment information, see “Item 5. Operating and Financial Review and Prospects - F. Contractual Obligations”.

Approval of New On-goingContinuing Connected Transaction Agreements and the Annual Caps for Year 2006 to 20082008.

Pursuant to the regulations of Hong Kong Stock Exchange and Shanghai Stock Exchange on on-goingcontinuing connected transactions and the operation developmentsactual operations of us and the Parent Company,Controlling Shareholder, we completed the necessary review of its New On-going Connected Transactionsprocedures for our continuing connected transactions as required by law and entered into six new continuing connected transaction agreements (“New On-goingContinuing Connected Transaction Agreements”), including the materials and water supply agreement, electricity supply agreement, labor and service agreement, equipment maintenance and repair works agreement, products and materials agreement and administrative service for pension fund and retirement benefits agreement, with the Controlling Shareholder in the first quarter of 2006. We also determined the annual caps for each New Continuing Connected Transaction Agreements with the Parent Company on January 28, 2005. It also determined the Annual Caps on the connected transactions for each New On-going Connected Transaction Agreements in each year from 2006 to 2008.

TheIn accordance with the various listing rules, the New On-goingContinuing Connected Transaction Agreements and the Annual Caps were approved byobtained approval from the independentboard meeting held on January 6, 2006, and the shareholders meeting held on March 24, 2006. The term for each of the New On-goingContinuing Connected Transaction Agreements is from January 1, 2006 tilluntil December 31, 2008. The Materials and Services Supply Agreement and its supplementary agreement and the Agreement of Endowment Insurance Fund originally entered into between us and the Parent CompanyYankuang Group have been terminated. The New On-goingContinuing Connected Transaction Agreements are filed with this annual reportAnnual Report as Exhibit 4.4.

Acquisition of Equity Interest of Heze Nenghua and Payments to the Parent Company

The 2005 first extraordinary general meeting of the Company was held on August 19, 2005, in which the “Equity Transfer Agreement between our Parent Company and us” dated November 16, 2004 and its “Supplemental Agreement” (collectively the “Heze Nenghua Acquisition Agreement”) dated June 28, 2005 were approved. According to the Heze Nenghua Acquisition Agreement, we have acquired 95.67% equity interest in Heze Nenghua at the consideration of RMB584.01 million. Heze Nenghua is responsible for coal development in Juye Coal Field in Shandong province for us. As of 31 December 2005, we have fully paid RMB584.1 million to the Parent Company for the acquisition of the Parent Company’s equity interest in Heze Nenghua. The Heze Nenghua Acquisition Agreement is filed with this annual report as Exhibit 4.5.

Save for the foregoing and except as disclosed in our 2003 and 2004 Form 20-F, we were not a party to any material contract during the two years preceding the date of this annual report.4.1.

D. Exchange ControlsControls

Our Articles of Association require that we shall pay dividends and other amount to holders of Foreign-Invested Shares in accordance with the relevant foreign exchange control regulations. If there is no applicable regulation, the applicable exchange rate shall be the average exchange reference rate of Renminbi to the relevant foreign currency announced by the Bank of China during five working days prior to the announcement of the payment of dividends and other amounts.

Renminbi currently is not generally a freely convertible currency. The PRC State Administration of Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of Renminbi into foreign currency. In general, under existing foreign exchange regulations, unless otherwise approved by the State Administration of Foreign Exchange or exempted by relevant regulations, PRC enterprises must price and sell their goods and services in the PRC in Renminbi. We have established a limited independent foreign currency account since 2001. The primary sources of our foreign currency are the U.S. dollar revenues from sales of coal products. Our foreign currency is mainly used for the settlement of equipment and machinery purchases and payment of cash dividends in connection with our H Shares (in HK dollars). We have not experienced any shortage of foreign currency. In addition, we are entitled to exchange Renminbi for additional foreign currency from designated banks for current account transactions by presenting relevant documents to evidence foreign currency requirements in accordance with relevant regulations. We do not intend to hedge exchange rate fluctuations between Renminbi and HK dollars.

The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends. We may undertake current account foreign exchange transactions without prior approval from the State Administration of Foreign Exchange by producing commercial documents evidencing such transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. However, we cannot predict whether the PRC Government will continue its existing foreign exchange policy and when the PRC Government will allow free conversion of Renminbi to foreign currency.

Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, are subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.

E. Taxation

China Taxation

The following discussion summarizes the material PRC tax provisions relating to the ownership and disposition of H sharesShares or ADSs purchased in connection with the global offering and held by the investor as capital assets.

Dividends Paid to Individual Investors

Under the Provisional Regulations of China Concerning Questions of Taxation on Enterprises Experimenting with the Share System (the “Provisional Regulations”) and other applicable tax laws and regulations, dividends paid by Chinese companies to individuals are generally subject to a PRC withholding tax of 20%. However, on July 21, 1993, the PRC State Administration of Taxation issued the Notice Concerning the Taxation of Gains on Transfer and Dividends from Shares (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals (the “Tax Notice”). Under the Tax Notice, dividends paid by a Chinese company to foreign persons with respect to shares listed on an overseas stock exchange, or Overseas Shares, including the H sharesShares and ADSs, are exempt from PRC withholding taxes for the time being. However, if the Tax Notice is withdrawn, we will withhold such taxes as required by law.

The Individual Income Tax Law of China was amended effective January 1, 1994 and states that it supersedes any contradictory prior administrative regulation concerning individual income tax. The

amended Individual Income Tax Law can be interpreted as providing that all non-PRC individuals are subject to the 20% withholding tax on dividends paid by a Chinese company on its Overseas Shares unless specifically exempted by the financial authority of the State Council of the PRC. However, in a letter dated July 26, 1994 to the former State Commission for Restructuring the Economic System, the former State Council Securities Committee and the CSRC, the PRC State Administration of Taxation restated the exemption. In the event that the letter is withdrawn, a 20% tax may be withheld on dividends paid to

non-PRC individual holders of H Shares or ADSs, subject to reduction by an applicable tax treaty between China and the country where such holders reside. To date, the relevant tax authorities have not collected withholding tax from dividend payments on such shares exempted under the Tax Notice.

Dividends Paid to Non-PRC Enterprises

According to the Provisional Regulations and other applicable tax laws and regulations, dividends paid by Chinese companies to non-PRC enterprises are ordinarily subject to a China withholding tax levied at a flat rate of 20%. However, according to the Tax Notice, a non-PRC enterprise with no permanent establishment in China receiving dividends paid on Overseas Shares is currently exempt from the 20% withholding tax. If the Tax Notice is withdrawn and such withholding tax becomes applicable in the future, such rate may still be reduced under relevant tax treaties, if applicable.

Tax Treaties

Non-PRC shareholders who are residents or citizens of a country that has entered into a double-taxation treaty with China may be entitled to a reduction in the amount of tax withheld, if any, imposed on the payment of dividends. China currently has such treaties with a number of countries, including:

 

the United States;

 

Australia;

 

Canada;

 

France;

 

Germany;

 

Japan;

 

Malaysia;

 

Singapore;

 

the United Kingdom; and

 

the Netherlands.

Under each one of such treaties, the rate of withholding tax imposed by China’s taxation authorities is generally reduced. For example, under the double taxation treaty between China and the United States, China may tax dividends paid by us to an eligible U.S. holder up to a maximum of 10% of the gross amount received by such person. Under the treaty, an eligible U.S. holder is a person who, by reason of domicile, residence, place or head office, place of incorporation or any other criterion of similar nature is subject to taxation in the United States, as applicable under the treaty’s “treaty shopping provisions”.

Capital Gains

The Tax Notice provides that gains realized by non-PRC enterprises upon the sale of Overseas Shares which are not held by entities established by such enterprises in China and gains realized by non-PRC individuals upon the sale of Overseas Shares are not subject to withholding tax for the time being. However, as far as individuals are concerned, the Individual Income Tax Law of China, as amended on October 31, 1993 and effective on January 1, 1994, provides for a capital gains tax of 20% on individuals. On January 28, 1994, the Provisions for Implementing the Individual Income Tax Law of China was promulgated which provides that the measures to levy individual income tax on the gains realized on the sale of shares will be made in the future by the Ministry of Finance and subject to the approval of the State Council. On June 20, 1994, February 9, 1996 and March 30, 1998, the

Ministry of Finance and the State Administration of Taxation issued notices providing that temporarily no capital gains tax will be imposed on gains from the sale of shares by individuals. However, it is uncertain whether the above exemption for non-PRC enterprises and non-PRC individuals will continue to apply or to be renewed in the future. If such exemption does not

apply or is not renewed, and the Tax Notice is found not to apply, holders of H sharesShares or ADSs might be subject to a 20% tax on capital gains, unless reduced by an applicable double taxation treaty.

Under the Tax Reduction Notice, beginning from January 1, 2001, enterprise income tax at a reduced 10% rate will apply to interest, rental, license fees and other income obtained in China by non-PRC enterprises without agencies or establishments in China or by non-PRC enterprises of which such incomes do not have any substantive relationship with their agency or establishment in China. Therefore, if the exemption as described in the preceding paragraph does not apply or is not renewed, and the Tax Reduction Notice is found not to apply, a non-PRC enterprise shareholder might be subject to a 20% tax on capital gains, unless reduced by an applicable double taxation treaty.

Additional China Tax Considerations

Under the Provisional Regulations of the PRC Concerning the Stamp Duty, a stamp duty is not imposed by China on the transfer of shares, such as the H sharesShares or ADSs, of Chinese publicly traded companies that take place outside of China.

United States Federal Income Taxation

Each potential investor is strongly urged to consult his or her own tax advisor to determine the particular United States federal, state, local, treaty and foreign tax consequences of acquiring, owning or disposing of the H sharesShares or ADSs.

U.S. Holders

The following is a general discussion of material United States federal income tax consequences of purchasing, owning and disposing of the H sharesShares or ADSs if you are a U.S. holder, as defined below, and hold the H sharesShares or ADSs as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This discussion does not address all of the tax consequences relating to the purchase, ownership and disposition of the H sharesShares or ADSs, and does not take into account U.S. holders who may be subject to special rules including:

 

tax-exempt entities;

 

partnerships or other entities treated as partnerships for United States federal income tax purposespurposes;

 

certain

banks, financial institutions, and insurance companies;

 

financial institutions;

regulated investment companies;

real estate investment trusts, regulated investment companies, and grantor trusts;

 

broker-dealers;

dealers or traders in securities, that elect to mark to market;commodities or currencies;

 

U.S. holders liable for alternative minimum tax;

 

U.S. holders that own, actually or constructively, 10% or more of our voting stock;

 

banks;

grantor trusts;

dealers or traders in securities or currencies;

persons who receive the H sharesShares or ADSs as compensation for services;

U.S. holders that hold the H sharesShares or ADSs as part of a straddle or a hedging or conversion transaction; or

 

certain U.S. expatriates; or

U.S. holders whose functional currency is not the U.S. dollar.

Moreover, this description does not address United States federal estate and gift taxes or any state or local tax consequences of the acquisition, ownership and disposition of the H sharesShares or ADSs.

This discussion is based on the Code, its legislative history, final, temporary and proposed United States Treasury regulations promulgated thereunder, published rulings and court decisions as in effect on the date hereof, all of which are subject to change, or changes in interpretation, possibly with retroactive effect. In addition, this discussion is based in part upon representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreements will be performed according to its terms.

You are a “U.S. holder” if you are a beneficial owners of H Shares or ADSs and are:

 

a

an individual citizen or resident of the United States for United States federal income tax purposes;

 

a corporation or other entity treated as a corporation for United States federal income tax purposes created or organized under the laws of the United States or any political subdivision thereof;

 

any entity created or organized in or under the laws of any other jurisdiction if treated as a United States corporation pursuant to United States federal income tax laws;

 

an estate the income of which is subject to United States federal income tax without regard to its source; or

 

a trust:

 

subject to the primary supervision of a United States court and the control of one or more United States persons; or

subject to the primary supervision of a United States court and the control of one or more United States persons; or

 

that has elected to be treated as a United States person under applicable United States Treasury regulations.

that has elected to be treated as a United States person under applicable United States Treasury regulations.

If a partnership (including any entity treated as a partnership for United States federal tax purposes) is a beneficial owner of the H sharesShares or ADSs, the treatment of the partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. If an investor is a partner in a partnership that holds H sharesShares or ADSs, such investor should consult its tax advisor.

We urge you to consult your tax advisors regarding the United States federal, state, local and non-United States tax consequences of the purchase, ownership and disposition of the H sharesShares or ADSs.

In general, if you hold ADRs evidencing ADSs, you will be treated as the owner of the H sharesShares represented by the ADSs. The following discussion assumes that we are not a passive foreign investment company, or PFIC, as discussed under “PFIC Rules” below.

Distributions on the H Shares or ADSs

The gross amount of any distribution (without reduction for any Chinese tax withheld) we make on the H sharesShares or ADSs out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) will be includible in your gross income as ordinary dividend income when the distribution is actually or constructively received by you, or by the depositary in the case of ADSs. Distributions that exceed our current and accumulated earnings and profits will be treated as a return of capital to you to the extent of your basis in the H sharesShares or ADSs and thereafter as capital gain. Any dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from United States corporations. The amount of any distribution of property other than cash will be the fair market value of such property on the date of such distribution.

Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual, trust or estate prior to January 1, 20092011 with respect to the H sharesShares or ADSs will be subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends.”dividends”. Dividends paid on H sharesShares or ADSs will be treated as qualified dividends if either (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service, or IRS, has approved for the purposes of the qualified dividend rules, or (ii) the dividends are with respect to ADSs readily tradable on a U.S. securities market, provided that we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a PFIC. The income tax treaty between ChinaAgreement Between the Government of the United States of America and the United StatesGovernment of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the “Treaty”) has been approved for the purposes of the qualified dividend rules, and we expect to qualify for benefits under the income tax treaty between China and the United States.Treaty. Moreover, the ADSs are currently traded on the NYSE. Finally, based on our audited financial statements and relevant market data, we believe that we did not satisfy the definition for PFIC status for U.S. federal income tax purposes with respect to our 20052006 taxable year. In addition, based on our

audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market data, we do not anticipate becoming a PFIC for our 20062007 taxable year or any future year. However, our status in future years will depend on our income and assets (which for this purpose depends in part on the market value of the H sharesShares or ADSs) in those years. See the discussion of the PFIC rules below.

The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of common stock and intermediaries through whom such stock is held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them. Holders of H sharesShares or ADSs should consult their own tax advisers regarding the availability of the reduced dividend tax rate in light of their own particular circumstances.

If we make a distribution paid in HK dollars, you will be considered to receive the U.S. dollar value of the distribution determined at the spot HK dollar/U.S. dollar rate on the date such distribution is received by you or by the depositary, regardless of whether you or the depositary convert the distribution into U.S. dollars. Any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is includible in your income to the date you or the depositary convert the distribution into U.S. dollars will be treated as United States source ordinary income or loss.loss from U.S. sources.

Subject to various limitations, any Chinese tax withheld from distributions in accordance with the Agreement Between the Government of the United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on IncomeTreaty will be deductible or creditable against your United States federal income tax liability. For foreign tax credit limitation purposes, dividends paid on the H sharesShares or ADSs will be foreign source income, and generally will be treated as “passive income” or, in the case of someother U.S. holders, “financial services income” for taxable years ending on or before December 31, 2006. With respect to taxable years beginning after December 31, 2006, the foreign tax credit limitation categories will be limited to “passive category income” and “general category income””. To the extent dividends are qualifying dividend income, in computing foreign tax credit limitations, individuals, trusts and estates must take into account the gross amount of the dividend multiplied by a fraction, the numerator of which is the special reduced rate described above, and the denominator of which is the highest ordinary income rate. Whether this partial exclusion will affect your ability to claim a foreign tax credit for subsequent taxable years. the full amount of any Chinese tax withheld will depend on your particular circumstances. Each such recipient should consult its own tax adviser concerning the foreign tax credit limitation implications of the receipt of a qualifying dividend.

You may not be able to claim a foreign tax credit (and instead may claim a deduction) for non-United States taxes imposed on dividends paid on the H Shares or ADSs if you (i) have held the H sharesShares or ADSs for less than a specified minimum period during which you are not protected from risk of loss with respect to such shares, (ii) are obligated to make payments related to the dividends (for example, pursuant to a short sale) or (iii) hold the H sharesShares or ADSs in an arrangement in which your expected economic return, after non-United States taxes, is insubstantial.

Sale, Exchange or Other Disposition

Upon a sale, exchange or other disposition of the H sharesShares or ADSs, you will generally recognize capital gain or loss for United States federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized and your tax basis, determined in U.S. dollars, in such H sharesShares or ADSs. Any gain or loss will generally be United States source gain or loss for foreign tax credit limitation purposes.purposes and as a result of the U.S. foreign tax credit limitation, foreign taxes, if any, imposed upon capital gains in respect of H Shares or ADSs may not be currently creditable. Capital gain of certain non-corporate U.S. holders, including individuals, is generally taxed at a maximum rate of 15 percent where the property has been held more than one year. Your ability to deduct capital losses is subject to significant limitations.

If you are paid in a currency other than U.S. dollars, any gain or loss resulting from currency exchange fluctuations during the period from the date of the payment resulting from sale, exchange or other disposition is made to the date you convert the payment into U.S. dollars will be treated as United States source ordinary income or loss.

PFIC Rules

In general, a foreign corporation is a PFIC for any taxable year in which, after applying relevant look-through rules with respect to the income and assets of subsidiaries:

 

75% or more of its gross income consists of passive income, such as dividends, interest, rents, royalties, and royalties;gains from the sale of assets that give rise to such income; or

 

50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income.

We believe that we will not meet either of the PFIC tests in the current or subsequent taxable years and therefore will not be treated as a PFIC for such periods. However, there can be no assurance that we will not be a PFIC in the current or subsequent taxable years.

If we were a PFIC in any taxable year that you held the H sharesShares or ADSs, you generally would be subject to special rules with respect to “excess distributions” made by us on the H sharesShares or ADSs and with respect to gain from your disposition of the H sharesShares or ADSs. An “excess distribution” generally is defined as the excess of the distributions you receive with respect to the H sharesShares or ADSs in any taxable year over 125% of the average annual distributions you have received from us during the shorter of the three preceding years, or your holding period for the H sharesShares or ADSs. Generally, you would be required to allocate any excess distribution or gain from the disposition of the H sharesShares or ADSs ratably over your holding period for the H sharesShares or ADSs. The portion of the excess distribution or gain allocated to a prior taxable year, other than a year prior to the first year in which we became a PFIC, would be taxed at the highest United States federal income tax rate on ordinary income in effect for such taxable year, and you would be subject to an interest charge on the resulting tax liability, determined as if the tax liability had been due with respect to such particular taxable years. The portion of the excess distribution or gain that is not allocated to prior taxable years, together with the portion allocated to the years prior to the first year in which we became a PFIC, would be included in your gross income for the taxable year of the excess distribution or disposition and taxed as ordinary income.

The foregoing rules with respect to excess distributions and dispositions may be avoided or reduced if you are eligible for and timely make a valid “mark-to-market” election. If your H sharesShares or ADSs were treated as shares regularly traded on a “qualified exchange” for United States federal income tax purposes and a valid mark-to-market election was made, in calculating your taxable income for each taxable year you generally would be required to take into account as ordinary income or loss the difference, if any, between the fair market value and the adjusted tax basis of your H sharesShares or ADSs at the end of your taxable year. However, the amount of loss you would be allowed is limited to the extent of the net amount of previously included income as a result of the mark-to-market election. The NYSE in which the ADSs will be traded is a qualified exchange for United States federal income tax purposes.

Alternatively, a timely election to treat us as a qualified electing fund under Section 1295 of the Code could be made to avoid the foregoing rules with respect to excess distributions and dispositions. You should be aware, however, that if we become a PFIC, we do not intend to satisfy record keeping requirements that would permit you to make a qualified electing fund election.

If you own the H sharesShares or ADSs during any year that we are a PFIC, you must file IRS Form 8621. We encourage you to consult your own tax advisor concerning the United States federal income tax consequences of holding the H sharesShares or ADSs that would arise if we were considered a PFIC.

Backup Withholding and Information Reporting

In general, information reporting requirements will apply to dividends in respect of the H sharesShares or ADSs or the proceeds of the sale, exchange, or redemption of the H sharesShares or ADSs paid within the United States, and in some cases, outside of the United States, other than to various exempt recipients, including corporations. In addition, you may, under some circumstances, be subject to “backup withholding” with respect to dividends paid on the H sharesShares or ADSs or the proceeds of any sale, exchange or transfer of the H sharesShares or ADSs, unless you

 

are a corporation or fall within various other exempt categories, and, when required, demonstrate this fact; or

Provide a correct taxpayer identification number on a properly completed IRS Form W-9 or a substitute form, certify that you are exempt from backup withholding and otherwise comply with applicable requirements of the backup withholding rules.

Any amount withheld under the backup withholding rules generally will be creditable against your United States federal income tax liability provided that you furnish the required information to the IRS in a timely manner. If you do not provide a correct taxpayer identification number you may be subject to penalties imposed by the IRS.

Hong Kong Taxation

The following discussion summarizes the material Hong Kong tax provisions relating to the ownership of H sharesShares or ADSs purchased in connection with the global offering and held by you.

Dividends

Under current practice, no tax will be payable in Hong Kong in respect of dividends paid by us.

Taxation of Capital Gains

No tax is generally imposed in Hong Kong in respect of capital gains from the sale of property (such as the H shares)Shares). Trading gains from the sale of property by persons carrying on a trade, profession or business in Hong Kong, where such gains are derived from or arise in Hong Kong from such trade, profession or business, will be chargeable to Hong Kong profits tax, which is currently imposed at the rate of 17.5% on corporations and at a maximum rate of 16.0% on individuals. Gains from sales of the H sharesShares effected on the Hong Kong Stock Exchange will be considered to be derived from or arise in Hong Kong. Liability for Hong Kong profits tax would thus arise in respect of trading gains from sales of H sharesShares realized by persons carrying on a business of trading or dealing in Hong Kong in securities.

There will generally be no liability for Hong Kong profits tax in respect of profits from the sale of ADSs, where purchases and sales of ADSs are effected outside Hong Kong, e.g. on the NYSE.

Hong Kong Stamp Duty

Hong Kong stamp duty will be payable by each of the seller and the purchaser for every sale and purchase, respectively, of the H shares.Shares. Stamp duty is charged at the rate of 0.2% of the value of the H sharesShares transferred (the buyer and seller each paying half of such stamp duty). In addition, a fixed duty of HK$5 is currently payable on an instrument of transfer of H shares.Shares. If one of the parties to a sale is a non-resident of Hong Kong and does not pay the required stamp duty, the duty not paid will be assessed on the instrument of transfer (if any), and the transferee will be liable for payment of such duty.

The withdrawal of H sharesShares when ADSs are surrendered, and the issuance of ADSs when H sharesShares are deposited, may be subject to Hong Kong stamp duty at the rate described above for sale and purchase transactions, unless the withdrawal or deposit does not result in a change of beneficial ownership in the H Shares under Hong Kong law. The issuance of ADSs for deposited H sharesShares issued directly to the depositary or for the account of the depositary should not lead to a Hong Kong stamp duty liability. You are not liable for the Hong Kong stamp duty on transfers of ADSs outside of Hong Kong so long as it does not result in a change of beneficial interest in the H shares.Shares.

Hong Kong Estate Duty

Hong Kong estate duty was abolished with effect from February 11, 2006.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

In accordance with the Exchange Act, we are obligated to file reports, including annual reports on this Form 20-F, and other information with the Commission. The reports and other information we have filed under the Exchange Act and the Registration Statement and exhibits thereto we have previously filed with the Commission may be inspected and copied by the public at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, U.S.A. and will also be available for inspection and copying at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048, U.S.A. and at Northwest Atrium Center, 500 Madison Street (Suite 1400), Chicago, Illinois 60661, U.S.A. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549, U.S.A. at prescribed rates. The Form 20-F and other information filed with the Commission are also available at the Commission’s website at www.sec.gov. Such reports and other information may also be inspected at the office of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, U.S.A.

I. Subsidiaries

As of March 31, 2007, we own the following subsidiaries:

Name of Subsidiary

  

Country of
incorporation/

registration
and operation

  Issued and fully
paid capital/
registered capital
  Proportion of registered
capital/issued share capital
held by the Company
  Proportion of
voting power
held
  

Principal activities

         Directly  Indirectly      

Austar

  Australia  AUD30,000,000  —    100% 100% Coal mining business

Heze Nenghua

  PRC  RMB600,000,000  95.67% —    95.67% Development of ancillary projects

Yancoal

  Australia  AUD30,000,000  100% —    100% Investment holding

Yanmei Shipping

  PRC  RMB5,500,000  92% —    97% Transportation via rivers and lakes and the sales of coal and construction materials

Yulin

  PRC  RMB800,000,000  97% —    97% Development of 600,000 tonnes Methanol Project

Zhongyan Trade Co.,

Ltd. (“Zhongyan”)

  PRC  RMB2,100,000  52.38% —    52.38% Trading and processing of mining machinery

Name of Subsidiary

  

Country of
incorporation/

registration
and operation

  

Issued and fully

paid capital/
registered capital

  Proportion of registered
capital/issued share
capital held by the
Company
  

Proportion

of voting
power
held

  

Principal activities

         Directly  Indirectly      

Heze Nenghua

  PRC  RMB600,000,000  95.67% —    95.67% Development of ancillary projects

Yancoal Australia

  Australia  AUD64,000,000  100% —    100% Investment holding

Austar

  Australia  AUD64,000,000  —    100% 100% Coal mining business

Yanmei Shipping

  PRC  RMB5,500,000  92% —    92% Transportation via rivers and lakes and the sales of coal and construction materials

Yulin Nenghua

  PRC  RMB800,000,000  97% —    97% Development of 600,000 tonnes Methanol Project

Zhongyan Trading

  PRC  RMB2,100,000  52.38% —    52.38% Trading and processing of mining machinery

Shanxi Nenghua

  PRC  RMB600,000,000  100% —    100% Investment holding

Shanxi Tianchi

  PRC  RMB90,000,000  —    81.31% 81.31% Coal mining business

Shanxi Tianhao

  PRC  RMB150,000,000  —    99.85% 99.85% Development of methanol project

In 2005,2006, we acquired a 95.67%98% equity interest in Shanxi Nenghua from Yankuang Heze Power Chemical Company LimitedGroup and in February 2007, we acquired the remaining 2% equity interest in Shanxi Nenghua from Lunan Fertilizer Plant, a subsidiary of Yankuang Group. As of December 31, 2006, the Parent Company. The projects developed by YankuangYulin Nenghua and Heze Power Chemical Company Limited, Yanzhou Coal Yulin Power Chemical Co., Limited and Yancoal Australia Pty Limited and Austar Coal Mine Pty Limited are currently in construction or preparation.Nenghua had not yet officially commenced operations.

J. Compliance and Exemption of Corporate Governance Standards Imposed by the New York Stock Exchange

New York Stock Exchange (“NYSE”) has based on its listing rules imposed a series of corporate governance listing standards for companies listed in the NYSE (Section 303A). However, NYSE provides that listed companies that are foreign private issuers, subject to certain limitations and conditions, are permitted to follow “home country” practice in lieu of the provision of Section 303A. One of the conditions is that a listing foreign private issuer must disclose any significant ways in which their corporate governance practices differ from those followed by U.S. companies under NYSE listing standards.

As of the date of this annual report, 52.86%Annual Report, 52.9% of our voting rights are vested in the Parent Company.Controlling Shareholder. We therefore are exempt from certain requirements of Section 303A of the NYSE Listed Company Manual: (i) we are not required to comply with Section 303A.01’s requirements to form a

Board with the majority of independent directors,directors; (ii) we are not required to comply with Section 303A.04’s requirements to form a nominating/corporate governance committee entirely consisted of independent directors,directors; and (iii) we are not required to comply with Section 303A.05’s requirements to form a compensation committee entirely consisted of independent directors, and disclose herein.

We have established an audit committee pursuant to the requirements of Section 303A.06 of the NYSE Listed Company Manual. As a foreign private issuer, we rely on the exemption under Section 303A.00 of the NYSE Listed Company Manual as well as affiliated director and employee director exemptions as provided under Rule 10A-3 of the Securities Exchange Act of 1934 to be in compliance with the audit committee standards set out in Section 303A.06 of the NYSE Listed Company Manual.

As a foreign private issuer, we set out below material differences between our corporate governance practices and the NYSE’s corporate governance requirements as set out in Section 303A of the Listed Company Manual:

 

   

NYSE Listed Company Manual

Requirements on Corporate

Governance

  

Company’s Practices

Non-management directors must meet at regularly scheduled executive sessions without management  Section 303A.03 of the NYSE Listed Company Manual requires non-management directors of each listed company to meet at regularly scheduled executive sessions without management participation.  There is no identical corporate governance requirement in the PRC. We have established a reporting system to the Board to ensure that the Directors are informed of the our business and operations. We believe that the convening of Board meetings on a regularly basis offers the non-management Directors a well-established communication forum to voice their concerns and engage in full and open discussions regarding our business affairs.
Corporate Governance Guidelines  

Section 303A.09 of the NYSE Listed Company Manual requires that a listed company must adopt and disclose corporate governance guidelines. In addition, Section 303A.09 lists out matters that must be addressed in the guidelines:

 

•      Director qualification standards;

 

•      Director responsibilities;

 

•      Director access to management and independent advisors;

 

•      Director compensation;

 

•      Director orientation and continuing education;

 

•      Management succession; and

 

•      Annual performance evaluation of the Board.

  Although we have not adopted a separate set of corporate governance guidelines encompassing all corporate governance requirements required by the NYSE, our shareholders has approved relevant corporate rules and measures to address issues pertaining to: the operations, powers and responsibilities of the Shareholders, the Board, the Board of Supervisors, and the independent Directors; the disclosure of information; and connected transactions. We believe that collectively, the aforementioned rules and measures have adequately addressed the corporate governance requirements required by the NYSE and provide wider, more detailed corporate governance requirements that can further facilitate the effective operation of the Company.
Code of Business
Conduct and Ethics
  

Section 303A.10 of the NYSE Listed Company Manual requires that a listed company must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.

Topics must be addressed in the a code of business conduct and ethics:

*       Conflicts of Interest

*       Corporate Opportunities;

*       Confidentiality;

*       Fair dealing;

*       Protection and proper use of company assets;

*       Compliance with laws, rules and regulations (including insider trading laws); and

*       Encouraging the reporting of any illegal or unethical behavior.

  We have adopted a Code of Ethics in compliance with PRC laws and regulations as well as the rules of the relevant listing stock exchanges. The Code of Ethics is published on the our website. Although our current Code of

NYSE Listed Company Manual

Requirements on Corporate

Governance

Company’s Practices

code for directors or executive officers.

Topics must be addressed in the a code of business conduct and ethics:

Conflicts of Interest;

Corporate Opportunities;

Confidentiality;

Fair dealing;

Protection and proper use of company assets;

Compliance with laws, rules and regulations (including insider trading laws); and

Encouraging the reporting of any illegal or unethical behavior.

Ethics as adopted does not completely conform to the NYSE rules, we believe that the existing Code of Ethics can adequately protect the interests of the Company and the Shareholders.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. As a global concern, we face exposure to adverse movements in foreign currency exchange rates, interest rates and commodity price risk. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results.

Interest Rate Risk. We are exposed to interest rate riskrisks resulting from fluctuations in interest rates on our debt, primarily on long-term debt obligations. We undertake debt obligations to support general corporate purposes including capital expenditures and working capital needs. Upward fluctuations in interest rates increase the cost of new debt and the interest cost of outstanding variable rate borrowings. Fluctuations in interest rates can also lead to significant fluctuations in the fair values of our debt obligations. On April 28 and August 25, 2006, the People’s Bank of China (“PBOC”) adjusted interest rates twice, to 6.4% and 6.8%, respectively (“the 2006 PBOC interest rate adjustments”). We do not currently use any derivative instruments to modify the nature of our debt so as to manage the interest rate risk.

We entered into a long-term loan agreement with the Bank of China on December 3, 2001 and borrowed a total of RMB1.2 billion from the Bank of China on January 4, 2002. The initial interest rate of the loans was 6.2% per annum, subject to adjustment in accordance with statutory interest rate or changes by the State in the method of calculating interest during the term of the loan agreement. On August 25, 2006, we had already paid off the remaining amounts on the loan agreement.

On December 28, 2005, Shanxi Tianchi, a subsidiary of Shanxi Nenghua, entered into a long-term loan agreement with the Taiyuan branch of China Minsheng Bank, for an amount of RMB160 million. The initial interest rate of the loans was adjusted5.9% per annum but was subject to 5.76% first in 2003, then to 6.12% on October 29, 2004 and recently adjusted to 6.39% on April 28, 2006.the 2006 PBOC interest rate adjustments. The loan iswill be repayable in sixby three installments of RMB200.0 million each over a period of 96 months, commencing August 2004.three years, with the first installment due in December 22, 2007. the first two installments are for amounts of RMB50 million each, and the third installment is RMB60 million. Interest is calculated on a monthly basis.

Shanxi Tianchi, a subsidiary of Shanxi Nenghua, entered into a long-term loan agreement with the State Development Bank on February 13, 2006, and borrowed a total of RMB220 million on February 20, 2006. The initial interest rate of the loans was 6.1% per annum and is subject to adjustment based on the interest rate stipulated by the PBOC. The 2006 PBOC interest rate adjustments did not affect the interest payable on a quarterly basis. We made a partial repayment of RMB600.0 million in June 2003. According to the terms of the loan agreement,for the balance ofyear 2006. From May 20, 2008, the principal for the loan becomes payable in 20 installments over a period of 117 months, with each installment amounting to RMB11 million. Interest is repayable in three annual installments of RMB200 million, i.e. on August 25, of each year beginning 2004 to 2006. We have paid RMB200 million on August 2004 and 2005, respectively, and we plan to repaycalculated by the balance of the loan, RMB200 million, on August 2006.quarter.

We have prepared a sensitivity analysis to assess the impact of interest rate fluctuations on our 20052006 operating results. Based on this analysis, we estimate that an increase in the interest rate to 1% would have decreased our reported net income attributable to theour equity holders of the Company for 20052006 by approximately RMB3.6RMB39.7 million.

Foreign Currency Exchange Rate Risk. Since July 21, 2005, the PRC Government has announcedChina adopts a reform of itsmanaged floating exchange rate system. Under the reform, the Renminbi would no longer be effectively linkedregime based on market supply and demand with reference to the U.S. dollars but instead would allow to fluctuate within a narrow and managed band against a basket of foreign currencies. The PRC Government may adopt further reforms

Impact of its exchange rate system, including making the Renminbi freely convertible in the future.

The foreign exchange fluctuations mainly affect (i) exported coal product sales, quoted in U.S. dollars, (ii)imported machinery and equipment purchases and (iii) foreign currency deposits. We have not entered into any material foreign exchange contracts to minimize or mitigate the effects of foreign exchangeRMB fluctuations on our operations.Company is mainly reflected in (a) income from coal export after conversion into RMB since coal exports of our Company are calculated in US dollar; (b) conversion loss of foreign currency deposit; and (c) our Company’s import costs of equipment and fittings.

Our Company has no plans to make hedging arrangements for the exchange rates of RMB to foreign currencies.

As of December 31, 2006, we had RMB4,624.3 million, U.S.$102.7 million, EUR6.7million, AUD11.4 million, HK$455.4 million and £ 0.2 million. Most of our sales are domestic and as such we have a limited amount of foreign currency denominated accounts receivable. In 2005,2006, our sales of exported coal products accounted for 25.5% of our total revenue.amounted to RMB3,086.5 million. Our export sales agents exchange 70%30% of the export sales proceeds from foreign currency to RMB and remit RMB and foreign currency to us. In addition, we purchased only small amount of machinery and equipment in the past years. A substantial portion of our imported machinery and equipment purchases were made by us in foreign currencies. As of December 31, 2005, we had Renminbi, U.S. Dollar, Euro, Australian Dollar Hong Kong Dollar and Pound denominated savings accounts of RMB4,516.0 million, U.S.$1,74.4 million, EUR28.4 million, AUD15.1 million HK$950.1 million and £ 0.2 million.

We have prepared a sensitivity analysis to assess the impact of exchange rate fluctuation on our 20052006 operating results. Based on this analysis, we estimate that a 10% decrease in the exchange rate for the U.S. dollar to RMB would have decreased our reported net income attributable to theour equity holders of the Company for 20052006 by approximately RMB255.5RMB300.7 million.

Commodity Price Risk.Coal prices are subject to cyclical fluctuations from time to time due to imbalances between demand and supply. Fluctuations in prices directly affect our operating and financial performance. We have experienced substantial price fluctuations in the past and believe that such fluctuations will continue. The average selling price of our coal products was RMB172.4 per tonne in 2003, RMB272.5 in 2004, and RMB349.5 in 2005.2005 and RMB341.77 in 2006. As certain portionportions of our total sales are derived from export coal sales, any significant changes in the international coal industry may have a material adverse effect on our export sales and results of operations.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

As of December 31, 2005,2006, we were not in default in the payment of principal or interest of any lenders.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15. CONTROLS AND PROCEDURES

AsEvaluation of the end of the period covered by this annual report, our management carried out an evaluation, underDisclosure Controls and Procedures

Under the supervision and with the participation of our chief executive officerGeneral Manager and chief financial officer,Chief Financial Officer, our management conducted an evaluation of the effectiveness of the design and operation of our Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underof the U.S. Securities Exchange Act of 1934, as adopted pursuant to Section 302amended (the “Exchange Act”)), as of the Sarbanes-Oxley Act of 2002).December 31, 2006. Based on thisour management’s evaluation, our chief executive officerGeneral Manager and chief financial officer haveChief Financial Officer concluded that, as of December 31, 2006, our Company’s disclosure controls and procedures arewere not effective in timely alerting them to material information about us required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, and effectively ensure the recording, processing, summarizing and reporting of such material information in accordance with the rules and forms of the Securities and Exchange Commission.

There have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequentdue to the dateidentification of their evaluation, although we are committed to ongoing periodic review and enhancement of our existing controls and expect to consider from time to time making changes we believe will increase the efficiency and reliability of our controls in the future.

During the period covered by this Annual Report, no significant change has occurred in our internal controls over financial reporting that has materially affected, or reasonably likely to materially affect, our internal controls over financial reporting. We are required under Section 404 of the Sarbanes-Oxley Act to complete an assessment of the effectiveness of our internal controls over financial reporting by the end of 2006. We have set up a special panel and a project management committee to consider the design, implementation and testing of a comprehensive system of internal controls, including, among others, the introduction and implementation of risk management programs. We are in the process of identifying and correcting the deficiencies and weaknesses existing in our internal control, including the effectiveness of our information system, the efficiency of our audit committee and the efficiency of our internal control department. In the event that necessary improvements in our internal control system cannot be fully completed by the end of 2006, there may be matters which could constitute material weaknesses in our internal control over financial reporting, and we would be required to disclose any material weakness in our internal control over financial reporting described below.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act and have designed internal control over financial reporting or caused internal control over financial reporting to be designed under its supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with applicable lawsgenerally accepted accounting principles, as applicable.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. In addition, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision of and regulations.with the participation of our General Manager and our Chief Financial Officer, our management conducted its evaluation of the effectiveness of our Company’s internal control over financial reporting as of December 31, 2006 using the criteria in theInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that, as of December 31, 2006, our Company’s internal control over financial reporting was not effective due to the material weakness described below.

We have excluded Yankuang Shanxi Power Chemical Co., Ltd. (“Shanxi Nenghua”) from our assessment of internal control over financial reporting as of December 31, 2006 because the entity was acquired in November 2006 and qualified under the current United States Securities and Exchange Commission regulations for exclusion from our assessment of internal control over financial reporting. The entity is a subsidiary of our Company and its financials statements constitute 3.1% and 5.1% of net and total assets, respectively, 0.2% of revenues, and -0.3% of net income of our consolidated financial statements amounts as of and for the year ended December 31, 2006.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, our management identified the following material weakness:

A number of audit adjustments and additional disclosures have been made to our Company’s 2006 consolidated financial statements, principally including the adjustment to property, plant and equipment from construction in progress, for timely transfer of completed construction projects in two subsidiaries and one of our Company’s coal mines, the adjustment to construction in progress for the unqualified expenditures being capitalised and recorded in two subsidiaries, the adjustment to income tax expense for the provision of tax liabilities for the year, and the reclassifications between certain short-term and long-term assets and liabilities. Management has determined that these adjustments and reclassifications have resulted from the control deficiency that there are inadequate accounting and finance personnel or consultants sufficiently trained to address certain of the major transactions and complex accounting and financial reporting matters that arise from time-to-time and this control deficiency constitutes a material weakness.

Our independent registered public accounting firm, Deloitte Touche Tohmatsu, has audited the financial statements included in this Annual Report and has issued an attestation report on pages F-2 to F-3 of this Annual Report on management’s assessment of our Company’s internal control over financial reporting as of December 31, 2006.

Management’s Plan for Remediation of Material Weakness

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

(1)enhancing our IFRS and U.S. GAAP training program for the accounting and finance personnel or consultants of our Company and of our subsidiaries and recruiting additional professional personnel; and

(2)engaging third-party accounting professionals to provide IFRS and U.S. GAAP consulting services and conduct timely check and evaluation.

Changes in Internal Control over Financial Reporting

During the reporting period covered by this Annual Report, no change was made to our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our audit committee members are Mr. Cui Jianming, Mr. Pu Hongjiu, Mr. Wang Xiaojun, Mr. Wang Quanxi, Mr. Chen Changchun and Mr. Dong Yunqing withYunqing. Mr. Cui Jianming, who is a financial expert, servingserves as the chairman of the committee. Mr. Cui has extensive experience in financial accounting and audit management. Mr. Cui is a senior auditor and certified accountant and is a consultant for the Association of China Certified Accountant. See “Item 6. Directors, Supervisors, Senior Management and Employees.”Employees”.

ITEM 16B. CODE OF ETHICS

We have adopted a Code of Ethics that applies to our Chairman, Vice Chairman, chief executive officer, chief financial officer,Chief Executive Officer, Chief Financial Officer, Board Secretary, chief engineer, controllerChief Engineer, Controller and other senior officers of the finance and audit department. Our Code of Ethics is subject to review by the Board of Directors from time to time and is subject to amendment. Our Code of Ethics has been posted on our corporate website: http://www.yanzhoucoal.com.cn/mygsbak/index.asp. A copy of this Code of Ethics is available to any person, without charge, upon request to the address on the cover of this Form 20-F.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

For the year 2006, the Company has retained Deloitte Touche Tohmatsu Certified(Certified Public Accountants in Hong Kong) and Deloitte Touche Tohmatsu Certified Public Accountants Ltd. (collectively, “Deloitte Touche Tohmatsu”(Certified Public Accountants in the PRC (excluding Hong Kong)) served as ourits international and domestic independent registered accounting firms forauditors, respectively. In 2006, the 2005 fiscal year. A descriptionCompany has paid an annual financial audit, review and other related services fee of HKD12 million, which covering the services of auditing our consolidated financial statements of the fees billed to us by Deloitte Touche Tohmatsu for professional servicesyear 2006, reviewing our Company’s adjusted statement differences of consolidated shareholder’s equity in each ofaccordance with the last two fiscal years is set forth below:

   Year ended December 31,
   2004  2005
   (thousands)

Audit fees

  RMB5,000  RMB9,229

Audit-related fees

  —    —  

Tax fees

  —    —  
      

All other fees

  —    —  
      

“Audit Fees” arenew PRC accounting standards and the aggregate fees billed by Deloitte Touche Tohmatsu for theold standards and audit of our consolidatedinternal controls over financial reporting required by Sarbanes-Oxley Act, and paid RMB0.3 million as audit fee for acquisition of Shanxi Nenghua. Save as disclosed above, the auditors did not provide any other nonauditing services to the Company in 2006.

In 2005 the Company paid HK$7 million for annual financial statements,audits, review of interim financial statements and attestation services that are providedother related services; and paid RMB0.4 million for related auditing fees in connection with statutory and regulatory filings or engagements. “Audit-Related Fees” are fees charged by Deloitte Touche Tohmatsu for services that are reasonably relatedrelation to the performanceacquisition of the audit or review of our financial statements but are not reported under “Audit Fees.” WeHeze Nenghua. There have not paid Deloitte Touche Tohmatsu any Audit-Related Fees for 2004 and 2005 fiscal years.been other fees.

Audit Committee Pre-Approval Policies and Procedures

The audit committee of our Board of Directors is responsible, among other things, for the recommendation or termination of external auditor subject to the requirements of applicable domestic and overseas listing rules and regulations. Before we can engage external auditors to perform audit or non-audit services, we must obtain the necessary pre-approval from the audit committee. For 2005,2006, all of the audit services provided by Deloitte Touche Tohmatsu were pre-approved by our audit committee. As of the date of this report, we did not engage any accounting firms to provide non-audit services.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Our audit committee consists of four independent non-executive directors, namely, Mr. Cui Jianming, Pu Hongjiu, Wang Xiaojun and Wang Quanxi; one affiliated director, Mr.Chen Changchun; and one employee director, namely, Mr. Dong Yunqing. As a foreign private issuer, we rely on the exemption under Section 303A.00303A.06 of the NYSE Listed Company Manual as well as affiliated director and employee director exemptions as provided under Rule 10A-3 of the Securities Exchange Act of 1934 to be in compliance with the audit committee standards set out in Section 303A.06 of the NYSE Listed Company Manual.

The affiliated director meets the requirements of independence requirement under Rule 10A-3(b)(1)(ii)(A) of the Securities Exchange Act of 1934 because, except in his capacity as a member of the Company’s Board of Directors and audit committee, he does not receive, directly or indirectly, any consulting, advisory or other compensatory fee from us or any of our subsidiaries. In addition, the affiliated director is not a voting member or the chairman of the audit committee pursuant to our audit committee charter. The affiliated director is not our executive officer. Accordingly, we believe the affiliated director qualifies for the exemption under Rule 10A-3(b)(1)(iv)(D).

Rule 10A-3(b)(1)(iv)(C) of the Securities Exchange Act of 1934 provides an exemption to the independence requirement and permits an employee director of a foreign private issuer, who is not an executive officer of that foreign private issuer to serve as a member of the audit committee if such employee director is elected or named to the

board of directors or audit committee of the foreign private issuer pursuant to the issuer’s governing law or documents, an employee collective bargaining or similar agreement or other home country legal or listing requirements.

The employee director qualifies for the exemption under Rule 10A-3(b)(1)(iv)(C) of the Securities Exchange Act of 1934 because he is not our executive officer and is elected to the Board of Directors of the Company pursuant to the Advisory Opinion Regarding the Establishment of Sound Corporate Procedures for Company Employee Directors and Supervisors, promulgated by the Shandong Economic and Trade Commission on July 20, 2000 (“Shandong Advisory Opinion”). The employee director is not a voting member or the chairman of the audit committee pursuant to our audit committee charter. Accordingly, we believe that the employee director is exempt from the independence requirement pursuant to Rule 10A-3(b)(1)(iv)(C) of the Securities Exchange Act of 1934.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Not applicable.

PART III

ITEM 17. FINANCIAL STATEMENTS

We have elected to provide the Financial Statements and related information specified in Item 18 in lieu of Item 17.

ITEM 18. FINANCIAL STATEMENTS

References are made to pages F-1 to F-71F-68 for year-end financial statements.

ITEM 19. EXHIBITS

Documents filed as exhibits to this annual report:Annual Report:

 

Exhibit

Number

  

Description

1.1  -  Amended Articles of Association of Yanzhou Coal Mining Company Limited as approved by the Shareholders on July 8, 2004 and June 28, 2005, respectivelyNovember 11, 2006 (English translation)
4.1  -  Placing and Underwriting Agreement between us and BNP Paribas Peregrine Capital Limited dated July 7, 2004 (English original)
4.2-Southland Colliery Asset Sale Agreement by and among us, the receivers, managers and the liquidators of Southland Coal Pty Limited dated October 5, 2004 (English original)
4.3-Loan Agreement by and among us, Bank of China Jining Branch, Shandong Xinjia and the Lianda Group dated December 13, 2004 (English translation summary)
4.4-The New On-goingContinuing Connected Transaction Agreements (Incorporated by reference to Exhibit 4.4 to Registrant’s Form 20-F dated (English translation)
4.5-Heze Nenghua Acquisition Agreement (including Supplemental Agreement) (English translation)
7.1-Statement explaining how certain ratios were calculated in annual reportJune 29, 2006)
8.1  -  List of subsidiaries of Yanzhou Coal Mining Company Limited
12.1  -  Certification of chief executive officergeneral manager pursuant to Rule 13a-14(a) promulgated under the U.S. Securities Act of 1934
12.2  -  Certification of chief financial officer pursuant to Rule 13a-14(a) promulgated under the U.S. Securities Act of 1934
13.1  -  Certification of chief executive officergeneral manager pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the U.S. Sarbanes-Oxley Act of 2002
13.2  -  Certification of chief financial officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the U.S. Sarbanes-Oxley Act of 2002
14.1  -  Revised Independent Technical Review and Resource and Reserve Assessment in respect of Zhaolou Coal Mine and Tianchi Coal Reserve ReportMine Coal
15.1-Circular to the shareholder regarding the acquisition of equity interest in Shanxi NengHua
99.1  -  Statement explaining how earnings per share information was calculated in this annual reportAnnual Report

SIGNATURES

The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual reportAnnual Report on its behalf.

YANZHOU COAL MINING COMPANY LIMITED
(Registrant)

 

YANZHOU COAL MINING COMPANY LIMITED

(Registrant)        
Date:

Date:June 29, 20062007

 By: 

/s/ YANG Deyu

 Name: YANG Deyu
 Title: General Manager


YANZHOU COAL MINING COMPANY LIMITED

LOGO

Consolidated Financial Statements

For the years ended December 31, 2005, 2004

and 2003 and Report of

Independent Registered

Public Accounting Firm


YANZHOU COAL MINING COMPANY LIMITEDLOGO

LOGO

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARSYEAR ENDED DECEMBER 31, 2006, 2005 2004 AND 2003 2004

AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

CONTENTS

  PAGE(S)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  F-2F-2–F-3

CONSOLIDATED STATEMENTSSTATEMENT OF INCOME

  F-3F-4

CONSOLIDATED BALANCE SHEETSSHEET

  F-4F-5

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

  F-5F-6

CONSOLIDATED STATEMENT OF CASH FLOWS

  F-6F-7–F-8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  F-7 - F-71F-9 –F-68


YANZHOU COAL MINING COMPANY LIMITED

LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

(A joint stock company with limited liability established in the People’s Republic of China)

We have audited the accompanying consolidated balance sheets of Yanzhou Coal Mining Company Limited and its subsidiarysubsidiaries (the “Company”) as of December 31, 20052006 and 20042005, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005,2006, all expressed in Renminbi. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our 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 auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.AnAn audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,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, such consolidated financial statements present fairly, in all material respects, the financial position of Yanzhou Coal Mining Company Limited and its subsidiary as ofsubsidiaries at December 31, 20052006 and 2004,2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20052006, in conformity with International Financial Reporting Standards.

International Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of net income for each of the three years in the period ended December 31, 20052006 and the determination of shareholders’ equity and financial position at December 31, 20052006 and 2004,2005, to the extent summarized in note 47.46.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based onInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated June 22, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness.

Deloitte Touche Tohmatsu

Certified Public Accountants

Hong Kong

April 21, 2006June 22, 2007

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

CONSOLIDATED STATEMENTSREPORT OF INCOMEINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

      Year ended December 31, 
   NOTES  2005  2004  2003 
      RMB’000  RMB’000  RMB’000 

RAILWAY TRANSPORTATION SERVICE INCOME

     163,437   220,771   154,585 

GROSS SALES OF COAL

  7   12,283,588   11,757,052   8,386,629 
               
     12,447,025   11,977,823   8,541,214 

TRANSPORTATION COSTS OF COAL

  7   (930,103)  (1,402,715)  (1,592,294)

COST OF SALES AND SERVICE PROVIDED

  8   (5,288,588)  (4,551,703)  (3,755,023)
               

GROSS PROFIT

     6,228,334   6,023,405   3,193,897 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

  9   (1,918,788)  (1,479,863)  (1,264,858)

OTHER INCOME

  10   135,038   165,732   105,845 

INTEREST EXPENSE

  11   (24,611)  (35,942)  (59,966)
               

INCOME BEFORE INCOME TAXES

     4,419,973   4,673,332   1,974,918 

INCOME TAXES

  12   (1,538,036)  (1,518,762)  (587,710)
               

INCOME FOR THE YEAR

  13   2,881,937   3,154,570   1,387,208 
               

Attributable to:

      

Equity holders of the Company

     2,881,461   3,154,317   1,386,686 

Minority interest

     476   253   522 
               
     2,881,937   3,154,570   1,387,208 
               

APPROPRIATIONS TO RESERVES

     755,530   737,782   425,566 
               

DIVIDEND

  15   799,240   470,680   298,480 
               

EARNINGS PER SHARE, BASIC

  16  RMB0.59  RMB0.66  RMB0.30 
               

EARNINGS PER ADS, BASIC

  16  RMB29.29  RMB33.25  RMB15.10 
               

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

(A joint stock company with limited liability established in the People’s Republic of China)

CONSOLIDATED BALANCE SHEETS

       At December 31, 
   NOTES  2005  2004 
      RMB’000  RMB’000 

ASSETS

      

CURRENT ASSETS

      

Bank balances and cash

    5,885,581  5,216,738 

Term deposits

  17  1,326,335  —   

Restricted cash

  17  30,505  24,877 

Bills and accounts receivable

  18  2,224,836  1,223,788 

Inventories

  19  470,501  485,429 

Other loans receivable

  20  640,000  850,000 

Amounts due from Parent Company and its subsidiary companies

  39  —    213,871 

Prepayments and other current assets

  21  202,417  188,296 

Prepaid lease payments

  23  13,465  13,171 

Prepayment for land subsidence, restoration, rehabilitation and environmental costs

  33  157,511  103,407 
         

TOTAL CURRENT ASSETS

    10,951,151  8,319,577 

MINING RIGHTS

  22  153,265  138,617 

PREPAID LEASE PAYMENTS

  23  579,773  578,547 

PROPERTY, PLANT AND EQUIPMENT, NET

  24  9,318,486  8,537,150 

GOODWILL

  25  153,037  117,392 

NEGATIVE GOODWILL

  26  —    (27,621)

INVESTMENTS IN SECURITIES

  28  62,181  62,181 

RESTRICTED CASH

  17  36,551  36,854 

DEPOSIT MADE ON INVESTMENT

  29  —    574,000 
         

TOTAL ASSETS

    21,254,444  18,336,697 
         

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

CURRENT LIABILITIES

      

Bills and accounts payable

  31  497,660  478,281 

Other payables and accrued expenses

  32  1,575,869  1,337,565 

Amounts due to Parent Company and its subsidiary companies

  39  508,254  —   

Unsecured bank borrowing - due within one year

  34  200,000  200,000 

Taxes payable

    647,247  529,265 
         

TOTAL CURRENT LIABILITIES

    3,429,030  2,545,111 

AMOUNTS DUE TO PARENT COMPANY AND ITS SUBSIDIARY COMPANIES - DUE AFTER ONE YEAR

  39  31,827  41,057 

UNSECURED BANK BORROWING - DUE AFTER ONE YEAR

  34  —    200,000 

DEFERRED TAX LIABILITY

  30  146,279  23,104 
         

TOTAL LIABILITIES

    3,607,136  2,809,272 

COMMITMENTS

  40    

CAPITAL AND RESERVES

      

SHARE CAPITAL

  35  4,918,400  3,074,000 

RESERVES

    12,700,177  12,449,751 
         

EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

    17,618,577  15,523,751 

MINORITY INTEREST

    28,731  3,674 
         

TOTAL EQUITY

    17,647,308  15,527,425 
         

TOTAL LIABILITIES AND EQUITY

    21,254,444  18,336,697 
         

YANZHOU COAL MINING COMPANY LIMITED

LOGO

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

   Share
capital
  Share
premium
  Future
development
fund
  Statutory
common
reserve
fund
  Statutory
common
welfare
fund
  Translation
reserve
  Retained
earnings
  Attributable
to equity
holders of
the
Company
  Minority
interest
  Total 
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000 
         (note)  (note 35)  (note 35)                

Balance at January 1, 2003

  2,870,000  3,272,527  855,237  388,201  194,141  —    2,414,927  9,995,033  4,937  9,999,970 

Net income and total recognized income and expenses for the year

  —    —    —    —    —    —    1,386,686  1,386,686  522  1,387,208 

Appropriations to reserves

  —    —    259,674  110,580  55,312  —    (425,566) —    —    —   

Dividends

  —    —    —    —    —    —    (298,480) (298,480) (1,765) (300,245)

Acquisition of a subsidiary

  —    —    —    —    —    —    —    —    46  46 
                               

Balance at December 31, 2003

  2,870,000  3,272,527  1,114,911  498,781  249,453  —    3,077,567  11,083,239  3,740  11,086,979 
                               

Balance at January 1, 2004

  2,870,000  3,272,527  1,114,911  498,781  249,453  —    3,077,567  11,083,239  3,740  11,086,979 

Net income and total recognized income and expenses for the year

  —    —    —    —    —    —    3,154,317  3,154,317  253  3,154,570 

Appropriations to reserves

  —    —    331,548  270,812  135,422  —    (737,782) —    —    —   

Dividends

  —    —    —    —    —    —    (470,680) (470,680) (319) (470,999)

Share issued at premium

  204,000  1,591,977  —    —    —    —    —    1,795,977  —    1,795,977 

Share issue expenses

  —    (39,102) —    —    —    —    —    (39,102) —    (39,102)
                               

Balance at December 31, 2004

  3,074,000  4,825,402  1,446,459  769,593  384,875  —    5,023,422  15,523,751  3,674  15,527,425 
                               

Balance at January 1, 2005

  3,074,000  4,825,402  1,446,459  769,593  384,875  —    5,023,422  15,523,751  3,674  15,527,425 

Effect of change in accounting policy

  —    —    —    —    —    —    27,621  27,621  —    27,621 
                               

As restated

  3,074,000  4,825,402  1,446,459  769,593  384,875  —    5,051,043  15,551,372  3,674  15,555,046 

Exchange difference arising on translation of foreign operations recognized directly in equity

  —    —    —    —    —    (15,016) —    (15,016) —    (15,016)

Net income

  —    —    —    —    —    —    2,881,461  2,881,461  476  2,881,937 
                               

Total recognized income and expenses for the year

  —    —    —    —    —    (15,016) 2,881,461  2,866,445  476  2,866,921 

Appropriations to reserves

  —    —    381,208  249,548  124,774  —    (755,530) —    —    —   

Bonus issue of shares

  1,844,400  (1,844,400) —    —    —    —    —    —    —    —   

Dividends

  —    —    —    —    —    —    (799,240) (799,240) (237) (799,477)

Acquisition of a subsidiary

  —    —    —    —    —    —    —    —    24,818  24,818 
                               

Balance at December 31, 2005

  4,918,400  2,981,002  1,827,667  1,019,141  509,649  (15,016) 6,377,734  17,618,577  28,731  17,647,308 
                               

Note:

According to a clarificationWe have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting disclosed in Item 15 of the relevant regulations obtained from the Ministry of Finance during the year 2002,Form 20-F, that Yanzhou Coal Mining Company Limited and its subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of December 31, 2006, because of the effects of the material weakness identified in management’s assessment, based on criteria established inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As described in Management’s Report on Internal Control over Financial Reporting disclosed in Item 15 of the Form 20-F, management excluded from its assessment the internal control over financial reporting at Yankuang Shanxi Power Chemical Co., Ltd., which was acquired in November 2006 and whose financial statements constitute 3.1% and 5.1% of net and total assets, respectively, 0.2% of revenues, and -0.3% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2006. Accordingly, our audit did not include the internal control over financial reporting at Yankuang Shanxi Power Chemical Co., Ltd. The Company’s management is requiredresponsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to transfer annuallyexpress an amountopinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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 the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future development fund at RMB6 per tonneperiods are subject to the risk that the controls may become inadequate because of rawchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment:

A number of audit adjustments and additional disclosures have been made to the Company’s 2006 consolidated financial statements, principally including the adjustment to property, plant and equipment from construction in progress, for timely transfer of completed construction projects in two subsidiaries and one of the Company’s coal mined. The fund can only be usedmines, the adjustment to construction in progress for the future developmentunqualified expenditures being capitalised and recorded in two subsidiaries, the adjustment to income tax expense for the provision of tax liabilities for the year, and the reclassifications between certain short-term and long-term assets and liabilities. Management has determined that these adjustments and reclassifications have resulted from the control deficiency that there are inadequate accounting and finance personnel or consultants sufficiently trained to address certain of the coal mining businessmajor transactions and is not available for distribution to shareholders.

Pursuant to the relevant regulations of the Shandong Province Finance Bureau, State-owned Assets Supervisioncomplex accounting and Administration Commission of Shandong Provincefinancial reporting matters that arise from time-to-time and Shandong Province Coal Mining Industrial Bureau, the Company is required to transfer an additional amount at RMB5 per tonne of raw coal mined from July 1, 2004 to the future development fund for the future improvement of the mining facilities and is not distributable to shareholders.this control deficiency constitutes a material weakness.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2006, of the Company and this report does not affect our report dated June 22, 2007 on such financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWSIn our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2006, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

We do not express an opinion or any other form of assurance on management’s statements regarding corrective actions taken by the Company after December 31, 2006.

      Year ended December 31, 
   NOTES  2005  2004  2003 
      RMB’000  RMB’000  RMB’000 

OPERATING ACTIVITIES

      

Income for the year

    2,881,937  3,154,570  1,387,208 

Adjustments to reconcile income for the year to net cash from operating activities:

      

Depreciation of property, plant and equipment

    952,096  958,667  920,533 

Amortization of prepaid lease

    13,171  13,194  13,294 

Amortization of goodwill

    —    15,773  9,657 

Release of negative goodwill to income

    —    (27,620) (27,620)

Amortization of mining rights

    6,624  6,624  6,624 

Recognition (utilization) of deferred tax asset

    44,436  44,436  (65)

Recognition of deferred tax liability

    78,739  67,540  —   

Impairment loss on accounts receivables

    —    49,104  80,272 

Loss (gain) on disposal of property, plant and equipment

    527  104,597  (6,872)

Gain on disposal of investments in securities

    —    —    (1,424)

(Increase) decrease in assets:

      

Bills and accounts receivable

    (1,001,048) (10,437) (506,885)

Inventories

    59,989  27,129  93,153 

Prepayment for land subsidence, restoration, rehabilitation and environmental cost

    (53,377) —    —   

Prepayments and other current assets

    (17,261) 324,273  224,674 

Amounts due from Parent Company and its subsidiary companies

    213,871  (213,871) —   

Prepaid lease payment

    (14,691) —    —   

Increase (decrease) in liabilities:

      

Bills and accounts payable

    19,379  50,673  (175,117)

Other payables and accrued expenses

    157,833  (13,333) 569,651 

Provision for land subsidence, restoration, rehabilitation and environmental costs

    —    (178,361) (2,194)

Amounts due to Parent Company and its subsidiary companies

    479,067  (368,939) 58,794 

Taxes payable

    117,982  414,362  57,553 
            

NET CASH FROM OPERATING ACTIVITIES

    3,939,274  4,418,381  2,701,236 
            

INVESTING ACTIVITIES

      

Increase in term deposits

    (1,326,335) —    —   

Purchase of property, plant and equipment

    (1,315,431) (743,022) (1,317,856)

Decrease (increase) in other loans receivable

    210,000  (750,000) (100,000)

Acquisition of Heze

  36  170,247  (574,000) —   

(Increase) decrease in restricted cash

    (5,325) (44,210) 34,240 

Proceeds on disposal of property, plant and equipment

    4,378  17,009  34,399 

Acquisition of Southland

  37  —    (136,302) —   

Acquisition of Yanmei Shipping

  38  —    —    (11,186)

Proceeds on disposal of investments in securities

    —    —    90,126 

Acquisition of Railway Assets

    —    (40,000) (40,000)

Acquisition of investment in securities

    —    (30,283) —   
            

NET CASH FLOW USED IN INVESTING ACTIVITIES

    (2,262,466) (2,300,808) (1,310,277)
            

FINANCING ACTIVITIES

      

Dividend paid

    (799,240) (470,680) (298,480)

Repayments of bank borrowings

    (200,000) (200,000) (600,000)

Repayment to Parent Company and its subsidiary companies in respect of consideration for acquisition of Jining III

    (9,802) (10,483) (11,115)

Dividend paid to a minority shareholder of a subsidiary

    (237) (319) (1,765)

Issues of shares, net of share issue expenses

    —    1,756,875  —   
            

NET CASH FLOW FROM (USED IN) FINANCING ACTIVITIES

    (1,009,279) 1,075,393  (911,360)
            

NET INCREASE IN CASH AND CASH EQUIVALENTS

    667,529  3,192,966  479,599 

CASH AND CASH EQUIVALENTS, BEGINNING

    5,216,738  2,023,772  1,544,173 

EFFECT OF FOREIGN EXCHANGE RATE CHANGES

    1,314  —    —   
            

CASH AND CASH EQUIVALENTS, ENDING, REPRESENTED BY BANK BALANCES AND CASH

      
    5,885,581  5,216,738  2,023,772 
            
      

Additional cash flow information:

      

Cash paid during the year for

      

Interest

    24,199  34,157  56,838 

Income taxes

    1,296,879  992,424  530,222 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2006, of the Company and our report dated June 22, 2007 expressed an unqualified opinion on those consolidated financial statements.

Deloitte Touche Tohmatsu

Certified Public Accountants

Hong Kong

June 22, 2007

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

CONSOLIDATED STATEMENT OF INCOME

   Year ended December 31, 
   NOTES  2006  2005  2004 
      RMB’000  RMB’000  RMB’000 

GROSS SALES OF COAL

  7  12,783,567  12,283,588  11,757,052 

RAILWAY TRANSPORTATION SERVICE INCOME

    160,399  163,437  220,771 
            

TOTAL REVENUE

    12,943,966  12,447,025  11,977,823 

TRANSPORTATION COSTS OF COAL

  7  (936,619) (930,103) (1,402,715)

COST OF SALES AND SERVICE PROVIDED

  8  (6,190,069) (5,288,588) (4,551,703)
            

GROSS PROFIT

    5,817,278  6,228,334  6,023,405 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

  9  (2,230,142) (1,918,788) (1,479,863)

OTHER INCOME

  10  165,837  135,038  165,732 

INTEREST EXPENSE

  11  (26,349) (24,611) (35,942)
            

PROFIT BEFORE INCOME TAXES

    3,726,624  4,419,973  4,673,332 

INCOME TAXES

  12  (1,354,656) (1,538,036) (1,518,762)
            

PROFIT FOR THE YEAR

  13  2,371,968  2,881,937  3,154,570 
            

Attributable to:

      

Equity holders of the Company

    2,372,985  2,881,461  3,154,317 

Minority interests

    (1,017) 476  253 
            
    2,371,968  2,881,937  3,154,570 
            

APPROPRIATIONS TO RESERVES

    566,728  755,530  737,782 
            

DIVIDEND RECOGNIZED AS DISTRIBUTION

      

DURING THE YEAR

  15  1,082,048  799,240  470,680 
            

EARNINGS PER SHARE, BASIC

  16  RMB0.48  RMB0.59  RMB0.66 
            

EARNINGS PER ADS, BASIC

  16  RMB24.12  RMB29.29  RMB33.25 
            

YANZHOU COAL MINING COMPANY LIMITED

LOGO

CONSOLIDATED BALANCE SHEET

   At December 31,
      2006  2005
   NOTES  RMB’000  RMB’000

ASSETS

      

CURRENT ASSETS

      

Bank balances and cash

  17  4,715,945  5,885,581

Term deposits

  17  1,194,531  1,326,335

Restricted cash

  17  68,562  30,505

Bills and accounts receivable

  18  2,211,909  2,224,836

Inventories

  19  579,561  470,501

Other loans receivable

  20  640,000  640,000

Prepayments and other current assets

  21  231,505  202,417

Prepaid lease payments

  22  13,746  13,465

Prepayment for resources compensation fees

  23  3,240  —  

Prepayment for land subsidence, restoration, rehabilitation and environmental costs

  32  212,912  157,511
        

TOTAL CURRENT ASSETS

    9,871,911  10,951,151

MINING RIGHTS

  24  307,909  153,265

PREPAID LEASE PAYMENTS

  22  578,988  579,773

PREPAYMENT FOR RESOURCES COMPENSATION FEES

  23  21,827  —  

PROPERTY, PLANT AND EQUIPMENT

  25  12,139,939  9,318,486

GOODWILL

  26  295,584  153,037

INVESTMENTS IN SECURITIES

  27  96,142  62,181

RESTRICTED CASH

  17  49,023  36,551

DEPOSIT MADE ON INVESTMENT

  28  97,426  —  
        

TOTAL ASSETS

    23,458,749  21,254,444
        

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

CURRENT LIABILITIES

      

Bills and accounts payable

  30  745,685  497,660

Other payables and accrued expenses

  31  1,899,684  1,575,869

Amounts due to Parent Company and its subsidiary companies

  38  982,347  508,254

Unsecured bank borrowings - due within one year

  33  50,000  200,000

Taxes payable

    150,332  647,247
        

TOTAL CURRENT LIABILITIES

    3,828,048  3,429,030

AMOUNTS DUE TO PARENT COMPANY AND ITS

      

SUBSIDIARY COMPANIES - DUE AFTER ONE YEAR

  38  23,138  31,827

UNSECURED BANK BORROWINGS - DUE AFTER ONE YEAR

  33  330,000  —  

DEFERRED TAX LIABILITY

  29  283,823  146,279
        

TOTAL LIABILITIES

    4,465,009  3,607,136

COMMITMENTS

  39    

CAPITAL AND RESERVES

      

SHARE CAPITAL

  34  4,918,400  4,918,400

RESERVES

    14,013,379  12,700,177
        

EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

    18,931,779  17,618,577

MINORITY INTEREST

    61,961  28,731
        

TOTAL EQUITY

    18,993,740  17,647,308
        

TOTAL LIABILITIES AND EQUITY

    23,458,749  21,254,444
        

YANZHOU COAL MINING COMPANY LIMITED

LOGO

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

  Share
capital
 Share
premium
  Future
development
fund
 Statutory
common
reserve
fund
 Statutory
common
welfare
fund
  Translation
reserve
  Investment
revaluation
reserve
  Retained
earnings
  Attributable to
equity holders
of the Company
  Minority
interest
  Total 
  RMB’000 RMB’000  RMB’000 RMB’000 RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000 
       (note 34) (note 34) (note 34)                   

Balance at January 1, 2004

 2,870,000 3,272,527  1,114,911 498,781 249,453  —    —    3,077,567  11,083,239  3,740  11,086,979 

Profit and total recognized income and expenses for the year

 —   —    —   —   —    —    —    3,154,317  3,154,317  253  3,154,570 

Appropriations to reserves

 —   —    331,548 270,812 135,422  —    —    (737,782) —    —    —   

Dividends

 —   —    —   —   —    —    —    (470,680) (470,680) (319) (470,999)

Share issued at premium

 204,000 1,591,977  —   —   —    —    —    —    1,795,977  —    1,795,977 

Share issue expenses

 —   (39,102) —   —   —    —    —    —    (39,102) —    (39,102)
                              

Balance at December 31, 2004

 3,074,000 4,825,402  1,446,459 769,593 384,875  —    —    5,023,422  15,523,751  3,674  15,527,425 
                              

Balance at January 1, 2005

 3,074,000 4,825,402  1,446,459 769,593 384,875  —    —    5,023,422  15,523,751  3,674  15,527,425 

Effect of change in accounting policy

 —   —    —   —   —    —    —    27,621  27,621  —    27,621 
                              

As restated

 3,074,000 4,825,402  1,446,459 769,593 384,875  —    —    5,051,043  15,551,372  3,674  15,555,046 

Exchange difference arising on translation of foreign operations recognized directly in equity

 —   —    —   —   —    (15,016) —    —    (15,016) —    (15,016)

Profit for the year

 —   —    —   —   —    —    —    2,881,461  2,881,461  476  2,881,937 
                              

Total recognized income and expenses for the year

 —   —    —   —   —    (15,016) —    2,881,461  2,866,445  476  2,866,921 

Appropriations to reserves

 —   —    381,208 249,548 124,774  —    —    (755,530) —    —    —   

Bonus issue of shares

 1,844,400 (1,844,400) —   —   —    —    —    —    —    —    

Dividends

 —   —    —   —   —    —    —    (799,240) (799,240) (237) (799,477)

Acquisition of a subsidiary

 —   —    —   —   —    —    —    —    —    24,818  24,818 
                              

Balance at December 31, 2005

 4,918,400 2,981,002  1,827,667 1,019,141 509,649  (15,016) —    6,377,734  17,618,577  28,731  17,647,308 
                              

Balance at January 1, 2006

 4,918,400 2,981,002  1,827,667 1,019,141 509,649  (15,016) —    6,377,734  17,618,577  28,731  17,647,308 

Gain on fair value change of available-for-sale investments

 —   —    —   —   —    —    33,961  —    33,961  —    33,961 

Deferred taxes on fair value change of available-for-sale investments

 —   —    —   —   —    —    (11,207) —    (11,207) —    (11,207)

Exchange difference arising on translation of foreign operations

 —   —    —   —   —    (489) —    —    (489) —    (489)

Net income recognized directly in equity

 —   —    —   —   —    (489) 22,754  —    22,265  —    22,265 
                              

Profit for the year

 —   —    —   —   —    —    —    2,372,985  2,372,985  (1,017) 2,371,968 

Total recognized income and expenses for the year

 —   —    —   —   —    (489) 22,754  2,372,985  2,395,250  (1,017) 2,394,233 
                              

Appropriations to reserves

 —   —    390,907 175,821 —    —    —    (566,728) —    —    —   

Transfer

 —   —    —   509,649 (509,649) —    —    —    —    —    —   

Dividends

 —   —    —   —   —    —    —    (1,082,048) (1,082,048) (271) (1,082,319)

Acquisition of a subsidiary

 —   —    —   —   —    —    —    —    —    34,518  34,518 
                              

Balance at December 31, 2006

 4,918,400 2,981,002  2,218,574 1,704,611 —    (15,505) 22,754  7,101,943  18,931,779  61,961  18,993,740 
                              

YANZHOU COAL MINING COMPANY LIMITED

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CONSOLIDATED STATEMENT OF CASH FLOWS

      Year ended December 31, 
   NOTES  2006  2005  2004 
      RMB’000  RMB’000  RMB’000 

OPERATING ACTIVITIES

      

Profit before income taxes

    3,726,624  4,419,973  4,673,332 

Adjustments for:

      

Finance costs

    26,349  24,611  35,942 

Interest income

    (94,372) (91,715) (92,711)

Dividend income

    (6,311) (4,465) (4,465)

Depreciation of property, plant and equipment

    1,061,976  952,096  958,667 

Amortization of prepaid lease payments

    13,826  13,171  13,194 

Amortization of prepayment for resources compensation fees

    320  —    —   

Amortization of goodwill

    —    —    15,773 

Release of negative goodwill to income

    —    —    (27,620)

Amortization of mining rights

    12,069  6,624  6,624 

(Reversal of) impairment loss on accounts receivable and other receivables

    (19,717) —    49,104 

Loss on disposal of property, plant and equipment

    73,531  527  104,597 
            

Operating cash flows before movements in working capital

    4,794,295  5,320,822  5,732,437 

Decrease (increase) in bills and accounts receivable

    40,527  (1,001,048) (10,437)

Decrease (increase) in inventories

    (66,199) 59,989  27,129 

Increase in prepayment for land subsidence, restoration, rehabilitation and environmental cost

    (55,401) (53,377) —   

Decrease (increase) in prepayments and other current assets

    (10,805) (17,261) 324,273 

Decrease (increase) in amounts due from Parent Company and its subsidiary companies

    —    213,871  (213,871)

Increase in prepaid lease payments

    (1,944) (14,691) —   

Increase in bills and accounts payable

    235,899  19,379  50,673 

Increase (decrease) in other payables and accrued expenses

    64,281  157,421  (15,118)

Decrease in provision for land subsidence, restoration, rehabilitation and environmental costs

    —    —    (178,361)

Increase (decrease) in amounts due to Parent Company and its subsidiary companies

    471,464  479,067  (368,939)
            

Cash generated from operations

    5,472,117  5,164,172  5,347,786 

Income taxes paid

    (1,782,465) (1,296,879) (992,424)

Interest paid

    (23,179) (24,199) (34,157)

Interest income received

    94,372  91,715  92,711 

Dividend income received

    6,311  4,465  4,465 
            

NET CASH FROM OPERATING ACTIVITIES

    3,767,156  3,939,274  4,418,381 
             

YANZHOU COAL MINING COMPANY LIMITED

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CONSOLIDATED STATEMENT OF CASH FLOWS

      Year ended December 31, 
   NOTES  2006  2005  2004 
      RMB’000  RMB’000  RMB’000 

INVESTING ACTIVITIES

      

Decrease (increase) in term deposits

    131,804  (1,326,335) —   

Purchase of property, plant and equipment

    (3,137,145) (1,315,431) (743,022)

Decrease (increase) in other loans receivable

    —    210,000  (750,000)

Increase in restricted cash

    (50,529) (5,325) (44,210)

Proceeds on disposal of property, plant and equipment

    14,165  4,378  17,009 

Acquisition of Shanxi Group

  35  (444,204) —    —   

Acquisition of Heze

  36  —    170,247  (574,000)

Acquisition of Southland

  37  (18,544) —    (136,302)

Deposit made on investment

    (97,426) —    —   

Acquisition of mining rights in Southland

    (23,644) —    —   

Acquisition of Railway Assets

    —    —    (40,000)

Acquisition of investment in securities

    —    —    (30,283)
            

NET CASH FLOW USED IN INVESTING ACTIVITIES

    (3,625,523) (2,262,466) (2,300,808)
            

FINANCING ACTIVITIES

      

Dividend paid

    (1,082,048) (799,240) (470,680)

Repayments of bank borrowings

    (200,000) (200,000) (200,000)

Repayment to Parent Company and its subsidiary companies in respect of consideration for acquisition of Jining III

    (9,230) (9,802) (10,483)

Dividend paid to a minority shareholder of a subsidiary

    (271) (237) (319)

Issues of shares, net of share issue expenses

    —    —    1,756,875 
            

NET CASH FLOW (USED IN) FROM FINANCING ACTIVITIES

    (1,291,549) (1,009,279) 1,075,393 
            

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

    (1,149,916) 667,529  3,192,966 

CASH AND CASH EQUIVALENTS, AT JANUARY 1

    5,885,581  5,216,738  2,023,772 

EFFECT OF FOREIGN EXCHANGE RATE CHANGES

    (19,720) 1,314  —   
            

CASH AND CASH EQUIVALENTS, DECEMBER 31, REPRESENTED BY BANK BALANCES AND CASH

    4,715,945  5,885,581  5,216,738 
            

YANZHOU COAL MINING COMPANY LIMITED

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.GENERAL

OrganisationOrganization and principal activities

Yanzhou Coal Mining Company Limited (the “Company”) is established as a joint stock company with limited liability in the People’s Republic of China (the “PRC”). The addresses of the registered office and principal place of business of the Company are 298 Fushan South Road, Zoucheng, Shandong Province.disclosed in the introduction to the annual report.

The Company operates six coal mines, namely the Xinglongzhuang coal mine, Baodian coal mine, Nantun coal mine, Dongtan coal mine, Jining II coal mine (“Jining II”) and Jining III coal mine (“Jining III”) as well as a regional railway network that links these mines with the national railway grid.gird. These six coal mines and the railway were originally divisions of the Company’s ultimate holding company, Yankuang Group Corporation Limited (the “Parent Company”), a state-owned enterprise in the PRC. The Parent Company contributed the assets and liabilities of the Xinglongzhuang coal mine, Baodian coal mine, Nantun coal mine and Dongtan coal mine into the Company upon its formation.

The Company acquired from the Parent Company Jining II, Jining III and the assets of the special purpose coal railway transportation business (“Railway Assets”) in 1998, 2001 and 2002, respectively.

In April 2001, the status of the Company was changed to that of a sino-foreign joint stock limited company.

The Company’s A shares are listed on the Shanghai Securities Exchange (“SSE”), its H shares are listed on The Stock Exchange of Hong Kong (the “SEHK”), and its American Depositary Shares (“ADS”, one ADS represents 50 H shares) are listed on the New York Stock Exchange, Inc.

Acquisitions and establishment of subsidiaries

The Group represents the Company and its consolidated subsidiaries.

At December 31, 2003, the Company acquired a 92% interest in the registered capital of Shandong Yanmei Shipping Co., Ltd. (formerly known as Zoucheng Nanmei Shipping Co., Ltd.) (“Yanmei Shipping”) for a cash consideration of RMB11,692,000. Yanmei Shipping is a limited liability company established and operated in the PRC and is principally engaged in the transportation business via rivers and lakes and sale of coal and construction materials.

In 2004, the Company established Yanzhou Coal Yulin Power Chemical Co., Ltd. (“Yulin”), a 97% owned subsidiary, for the future development of the methanol projects of the Group in the Shaanxi Province in the PRC.

YANZHOU COAL MINING COMPANY LIMITED

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1.GENERAL - continued

In 2004, the Company acquired the entire interest in the Southland coal mine located in New South Wales of Australia (“Southland”) from independent third parties at an aggregate cash consideration of AUD28,000,000 (equivalent to RMB187,312,000). See note 37 for further details. The Company has also established two wholly-owned subsidiaries in Australia, namely Yancoal Australia Pty Limited (“Yancoal”) and Austar Coal Mine Pty Limited (“Austar”), in 2004 for the Group’s future operations in Southland.

In 2005, the Company acquired a 95.67% equity interest in Yankuang Heze Power Chemical Company Limited (“Heze”) from the Parent Company at cash consideration of RMB584,008,000. See note 36 for further details. The principal activities of Heze are to conduct the initial preparation of the coal mines at the Juye coalfield which includes obtaining the approvals for the coal mine projects, applying rights to explore for coal and preparing the construction work of the coal mines. At December 31, 2005, Heze has commenced construction works for the Zhaolou coal mine and it has no significant impact on the Group’s results for the year 2005.

In 2006, the Company acquired a 98% equity interest in Yankuang Shanxi Neng Hua Company Limited (“Shanxi Neng Hua”) and its subsidiaries (collectively referred as the “Shanxi Group”) from

YANZHOU COAL MINING COMPANY LIMITED

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1.GENERAL - continued

the Parent Company at cash consideration of RMB733,346,000. The principal activities of Shanxi Group are to invest in heat and electricity, manufacture and sale of mining machinery and engine products, coal mining and the development of integrated coal technology.

Shanxi Neng Hua is an investment holding company, which holds 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 principal activities of Shanxi Tianchi are to exploit and sale of coal from Tianchi Coal Mine, the principal asset of Shanxi Tianchi. Shanxi Tianchi has completed the construction of Tianchi Coal Mine and commenced production by the end of 2006. Shanxi Tianhao is established to engage in the production of methanol and other chemical products, coke production, exploration and sales. The construction of the methanol facilities by Shanxi Tianhao commenced in March 2006 and it has not yet commenced production as at December 31, 2006. Shanxi Group has no significant impact to the Group’s results for the year. In 2007, the Company further acquired the remaining 2% equity interest in Shanxi Neng Hua at cash consideration of RMB14,966,000.

 

2.BASIS OF PRESENTATION

The accompanying financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The Company also prepares a set of financial statements in accordance with the relevant accounting principles and regulations applicable to PRC enterprises (“PRC GAAP”).

The financial statements reflect additional disclosures to conform with the disclosure requirements of the Hong Kong Companies Ordinance.Ordinance and the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

The presentation currency of the Group isconsolidated financial statements are presented in Renminbi, which is same asalso the functional currency of the Group.Company.

 

3.ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

In the current year, the Group has adopted allapplied, for the first time, a number of the new and revised standards, amendments and interpretations (“New IFRS”) issued by the International Accounting Standards Board (the “IASB”) and the International Financial Reporting Interpretations Committee (IFRIC)(the IFRIC) of the IASB which are either effective for accounting periods beginning on or after December 1, 2005 or January 1, 2006. The adoption of the New IFRS had no material effect on how the results for the current or prior accounting periods have been prepared and presented. Accordingly, no prior period adjustment has been required.

In 2005, the Group had adopted all of the new and revised standards and interpretations issued by the IASB and IFRIC of the IASB that are relevant to its operations and effective for accounting periods beginning on January 1, 2005. The adoption of these new and revised standards and interpretations hashad resulted in changes to the Group’s accounting policies in the following areas that havehad affected the amounts reported for the current or prior periods:

YANZHOU COAL MINING COMPANY LIMITED

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3.ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS - continued

 

goodwill (IFRS 3); and

 

excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost of acquisition (previously known as negative goodwill) (IFRS 3);.

The impact of these changes in accounting policies is discussed in detail later in this note. The impact on basic earnings per share is disclosed in note 16.

At the date of authorization of these financial statements, the following standards and interpretations were in issue but not yet effective:

IAS 1 (Amendment)Presentation of Financial Statements
Added disclosures about an entity’s capital1
IAS 19 (Amendment)Employee Benefits2
IAS 39 (Amendment)Financial Instruments: Recognition and Measurement Amendment for hedges of forecast intragroup transactions2
IAS 39 (Amendment)Financial Instruments: Recognition and Measurement Amendment for fair value option2
IAS 39 (Amendment) & IFRS 4Financial Instruments: Recognition and Measurement Amendment for financial guarantee contracts2
IFRS 6Exploration for and Evaluation of Mineral Assets2
IFRS 7Financial Instruments: Disclosures1
IFRIC 4Determining whether an Arrangement Contains a Lease2
IFRIC 5Rights to Interests Arising from Decommissing, Restoration and Environmental Rehabilitation Funds2
IFRIC 6Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment3
IFRIC 7Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies4
IFRIC 8Scope of IFRS 25
IFRIC 9Reassessment of Embedded Derivatives6

1Effective for annual periods beginning on or after January 1, 2007.

2Effective for annual periods beginning on or after January 1, 2006.

3Effective for annual periods beginning on or after December 1, 2005.

4Effective for annual periods beginning on or after March 1, 2006.

5Effective for annual periods beginning on or after May 1, 2006.

6Effective for annual periods beginning on or after June 1, 2006.

The directors are evaluating the impact of the adoption of these standards and interpretations but have not yet determined the effect on the adoption on its financial position and results of operations.

YANZHOU COAL MINING COMPANY LIMITED

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3.ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS - continued

The impacts of these changes in accounting policies are as follow:

IFRS 3, “Business Combinations”

Goodwill

IFRS 3 “Business Combinations” has been adopted for business combinations for which the agreement date is on or after March 31, 2004. The option of limited retrospective application of the Standard has not been taken up, thus avoiding the need to restate past business combinations. The principal impact of the new standard on the accounting for that transaction has been the recognition of contingent liabilities that would not have been recognized separately from goodwill under the predecessor Standard, IAS 22. The recognition of these liabilities has had no material impact on the results for the year.

After initial recognition, IFRS 3 requires goodwill acquired in a business combination to be carried at cost less any accumulated impairment losses. Under IAS 36 “Impairment of Assets” (as revised in 2004), impairment reviews are required annually, or more frequently if there are indications that goodwill might be impaired. IFRS 3 prohibits the amortization of goodwill. Previously, under IAS 22, the Group carried goodwill in its balance sheet at cost less accumulated amortization and accumulated impairment losses. Amortization was charged over the estimated useful life of the goodwill, subject to the rebuttable presumption that the maximum useful life of goodwill was 20 years.

In accordance with the transitional rules of IFRS 3 “Business Combinations”, the Group has applied the revised accounting policy for goodwill prospectively from the beginning of its first annual period beginning on or after March 31, 2004, i.e. January 1, 2005, to goodwill acquired in business combinations for which the agreement date was before March 31, 2004. Therefore, from January 1, 2005, the Group has discontinued amortizing such goodwill and has tested the goodwill for impairment in accordance with IAS 36. At January 1, 2005, the carrying amount of amortization accumulated before that date of RMB29.3 million has been eliminated, with a corresponding decrease in the cost of goodwill.

Because the revised accounting policy has been applied prospectively, the change has had no impact on amounts reported for the year ended December 31, 2004 or prior periods. No amortization has been charged in the current year.year 2005. Under the previous accounting policy, RMB15.8 million would have been charged to income statement during the year ended December 31, 2005, leaving a balance of goodwill of RMB137.2 million at December 31, 2005.

No impairment loss has been recognized in the current period in accordance with IAS 36.

Excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost (previously known as negative goodwill)

IFRS 3 requires that, after reassessment, any excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of the business combination should be recognized immediately in profit or loss. IFRS 3 prohibits the recognition of negative goodwill in the balance sheet.

YANZHOU COAL MINING COMPANY LIMITED

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3.ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS - continued

Previously, under IAS 22 (superceded(superseded by IFRS 3), the Group released negative goodwill to income over a number of accounting periods, based on an analysis of the circumstances from which the balance resulted. Negative goodwill was reported as a deduction from assets in the balance sheet.

In accordance with the transitional rules of IFRS 3, the Group has applied the revised accounting policy prospectively from January 1, 2005. Therefore, the change has had no impact on amounts reported for the year ended December 31, 2004 or prior periods.

The carrying amount of negative goodwill at January 1, 2005 has been derecognized at the transition date. Therefore, an adjustment of RMB27.6 million is made to opening retained earnings and negative goodwill at January 1, 2005.

Under the previous accounting policy, RMB27.6 million of negative goodwill would have been released to income during the year ended December 31, 2005, leaving zero balance of negative goodwill at December 31, 2005. Therefore, the impact of the change in accounting policy in 2005 is a reduction in other operating income of RMB27.6 million and no financial impact on net assets at December 31, 2005.

At the date of authorization of these financial statements, the following standards and interpretations were in issue but not yet effective:

YANZHOU COAL MINING COMPANY LIMITED

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3.ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS - continued

IAS 1 (Amendment)                    Presentation of Financial Statements: Capital Disclosures1
IFRS 7Financial Instruments: Disclosures1
IFRS 8Operating Segments2
IFRIC 7Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies3
IFRIC 8Scope of IFRS 24
IFRIC 9Reassessment of Embedded Derivatives5
IFRIC 10Interim Financial Reporting and Impairment6
IFRIC 11IFRS 2 - Group and Treasury Share Transactions7
IFRIC 12Service Concession Arrangements8

1

Effective for annual periods beginning on or after January 1, 2007.

2

Effective for annual periods beginning on or after January 1, 2009.

3

Effective for annual periods beginning on or after March 1, 2006.

4

Effective for annual periods beginning on or after May 1, 2006.

5

Effective for annual periods beginning on or after June 1, 2006.

6

Effective for annual periods beginning on or after November 1, 2006.

7

Effective for annual periods beginning on or after March 1, 2007.

8

Effective for annual periods beginning on or after January 1, 2008.

The directors anticipate that adoption of these Standards and Interpretations will have no material impact on the results and the financial position of the Group.

 

4.SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared on the historical cost basis except for the revaluation of financial instruments, which are stated at fair value. The principal accounting policies adopted are set out below.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities (including special purpose entities) controlled by the Company.Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring thetheir accounting policies used into line with those used by other members of the Group.

All significant intra-group transactions, balances, income and expenses are eliminated on consolidation.

YANZHOU COAL MINING COMPANY LIMITED

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4.SIGNIFICANT ACCOUNTING POLICIES - continued

Basis of consolidation - continued

Minority interests in the net assets of consolidated subsidiaries are presented separately from the Group’s equity therein. Minority interests in the net assets consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

Business combination

The acquisitions of subsidiaries and businesses is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognized at their fair values at the acquisition date.

YANZHOU COAL MINING COMPANY LIMITED

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4.SIGNIFICANT ACCOUNTING POLICIES – continued

Business combination - continued

Goodwill arising on acquisition is recognized as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognized immediately in profit or loss.

The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognized.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal courses of business, net of discounts and sales related taxes.

Sales of goods are recognized when goods are delivered and title has passed.

Service income is recognized when services are provided.

Interest income from a financial asset accrued on a time basis by reference to the principal outstanding and at the interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial assets to that asset’s net carrying amount.

Dividend income from investments is recognized when the shareholders’ rights to receive payments have been established.

Mining rights

Mining rights of Jining III and Southland are stated at cost less accumulated amortization and are amortized on a straight line basis over the shorter of their useful life estimated based on the total proven and probable reserves of the coal mine or contractual period from the date of commencement of commercial production.production which approximates the date from which they are available for use.

Prepaid lease payments

Prepaid lease payments representsrepresent land use rights which are stated at cost less accumulated amortization and identified impairment losses.

Property, plant and equipment

Property, plant and equipment, other than construction in progress, are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.

Depreciation is charged so as to write off the cost of items of property, plant and equipment, other than construction in progress, over their estimated useful lives and after taking into account their estimated residual value, using the straight line method or units of production method.

Construction in progress represents property, plant and equipment in the course of construction for production or for its own use purposes. Construction in progress is carried at cost less any recognized impairment loss. Construction in progress is classified to the appropriate category of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

YANZHOU COAL MINING COMPANY LIMITED

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4.SIGNIFICANT ACCOUNTING POLICIES - continued

Property, plant and equipment - continued

Construction in progress is stated at cost less any identified impairment loss. Cost comprises construction expenditure and other direct costs attributable to such projects, including borrowing costs, if the amount of capital expenditures and the time involved to complete the construction are significant. When the assets concerned are brought into use, the costs are transferred to property, plant and equipment and depreciated in accordance with the policies.

Assets under construction are not depreciated until they are completed and put into commercial operation.are ready for their intended use.

Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the consolidated income statement.

Impairment other than goodwill

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses areloss is recognized as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized as an income immediately.

Goodwill

Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of athe relevant subsidiary at the date of acquisition. Goodwill arising on an acquisition of a subsidiary for which the agreement date is on or after January 1, 2005, is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Any impairment is recognized immediately in income statement and is not subsequently reversed.

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4.SIGNIFICANT ACCOUNTING POLICIES - continued

Goodwill - continued

For previouslyPreviously capitalized goodwill arising on acquisitions after January 1, 2001 the Group has discontinued amortization from January 1, 2005 onwards, and such goodwill is tested for impairment annually, and whenever there is an indication that the cash generating unit to which the goodwill relates may be impaired.

For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination.acquisition. Cash-generating units to which goodwill has been allocated are tested for impairment annually, and wheneveror more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit first and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. Any impairment is recognized immediately in the consolidated income statement and is not subsequently reversed.

Goodwill arising on the acquisition of a subsidiary is presented separately in the consolidated balance sheet.

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the gain or loss on disposal.

YANZHOU COAL MINING COMPANY LIMITED

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4.SIGNIFICANT ACCOUNTING POLICIES – continued

Inventories

Inventories of coal are physically measured and are stated at the lower of cost and net realizable value. Cost, which comprises direct materials and, where applicable, direct labor and overheads that have been incurred in bringing the inventories to their present location and condition, is calculated using the weighted average method. Net realizable value represents the estimated selling price less all further costs to completion and costs to be incurred in selling, marketing and distribution.

Inventories of auxiliary materials, spare parts and small tools expected to be used in production are stated at weighted average cost less allowance, if necessary, for obsolescence.

Income taxesTaxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

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4.SIGNIFICANT ACCOUNTING POLICIES - continued

Income taxes - continued

Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Research and development

Expenditure on research activities is recognized as an expense in the period in which it is incurred.

An internally-generated intangible asset arising from development expenditure is recognized only if it is anticipated that the development costs incurred on a clearly-defined project will be recovered through future commercial activity. The resultant asset is amortized on a straight line basis over its useful life.

YANZHOU COAL MINING COMPANY LIMITED

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4.SIGNIFICANT ACCOUNTING POLICIES - continued

Research and development - continued

Where no internally-generated intangible asset can be recognized, development expenditure is recognized as an expense in the period in which it is incurred.

No development expenditure has been deferred.

YANZHOU COAL MINING COMPANY LIMITED

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4.SIGNIFICANT ACCOUNTING POLICIES - continued

Land subsidence, restoration, rehabilitation and environmental costs

One consequence of coal mining is land subsidence caused by the resettlement of the land above the underground mining sites. Depending on the circumstances, the Group may relocate inhabitants from the land above the underground mining sites prior to mining those sites or the Group may compensate the inhabitants for losses or damages from land subsidence after the underground sites have been mined. The Group may also be required to make payments for restoration, rehabilitation or environmental protection of the land after the underground sites have been mined.

An estimate of such costs is recognized in the period in which the obligation is identified and is charged as an expense in proportion to the coal extracted.

Capitalization of borrowingBorrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalized as part of the cost of those assets. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.

All other borrowings costs are recognized as in profit or loss in the period in which they are incurred.

Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Company (i.e. Renminbi) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognisedrecognized as a separate component of equity (the translation reserve). Such exchange differences are recognisedrecognized in profit or loss in the period in which the foreign operation is disposed of.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

4.SIGNIFICANT ACCOUNTING POLICIES - continued

Government grants

Government grants are recognized as income over the periods necessary to match them with the related costs. If the grants do not relate to any specific expenditures incurred by the Group, they are reported separately as other operating income. If the grants subsidise an expense incurred by the Group, they are deducted in reporting the related expense. Grants relating to depreciable assets are presented as a deduction from the cost of the relevant asset.

Retirement benefit costs

Payments to defined contribution retirement benefit plans are charged as expenses as they fall due.when the employees render the services entitling them to the contributions.

Financial instruments

Financial assets and financial liabilities are recognized on the balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Loan and receivables

Loan and receivables (including bills and accounts receivables,receivable, other loan receivable) are initially measured at fair value and subsequently measured at amortized cost using the effective interest rate method. An impairment loss for estimated irrecoverable amounts are recognized in profit or loss when there is objective evidence that the asset is impaired. The impairment loss recognized is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognized, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

Investments

Investments are recognized and derecognized on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs.

Investments other than held-to-maturity debt securities are classified as either investments held for trading or as available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognized directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognized in equity is included in the profit or loss for the period. Available-for saleAvailable-for-sale equity investments that do not have quoted market prices in an active market and those fair value can not be reliably measured are measured at cost less impairment after initial recognition. Impairment losses recognized in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

4.SIGNIFICANT ACCOUNTING POLICIES - continued

Financial instruments - continued

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Financial liabilities and equity

Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities.

Bank borrowings

Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortized cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognized over the term of the borrowings.

Bills and accounts payable, other payables and accrued expenses and amounts due to Parent Company and its subsidiary companies

Bills and accounts payable, other payables and accrued expenses and amounts due to Parent Company and its subsidiary companies are initially measured at fair value, and are subsequently measured at amortized cost, using the effective interest rate method.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

YANZHOU COAL MINING COMPANY LIMITED

LOGO

 

5.CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINAITYUNCERTAINTY

In the process of applying the Group’s accounting policies, which are described in note 4, management has made the following judgments that have the most significant effect on the amounts recognized in the financial statements.

Depreciation

The cost of mining structures is depreciated using the units of production method based on the estimated production volume for which the structure was designed. The management exercises their judgment in estimating the useful lives of the depreciable assets and the production volume of the mine.

Mining rights

Mining rights are amortized on a straight line basis over the shorter of the contractual period and their useful lives. The useful lives are estimated based on the total proven and probable reserves of coal mine. The management exercises their judgment in estimating the total proven and probable reserves of coal mine.

YANZHOU COAL MINING COMPANY LIMITED

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5.KEY SOURCES OF ESTIMATION UNCERTAINTY - continued

Estimated impairment on trade receivables

The management regularly reviews the recoverability and age of the trade receivables. Impairment on trade receivables is made based on the estimation of the future cash flow discounted at an effective interest rate to calculate the present value.

Provision for land subsidence, restoration, rehabilitation and environmental costs

The cost of relocation of inhabitants from the land in preparation for mining activities is charged to statement of income when incurred. The provision is reviewed regularly to verify that it properly reflects the remaining obligation arising from the current and past mining activities. Provision for land subsidence, restoration, rehabilitation and environmental costs are determined by the management based on their best estimates of the current and future cost and past experiences.

Estimated impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. As at December 31, 2005,2006, the carrying amount of goodwill is RMB153,037,000.

RMB295,584,000.

YANZHOU COAL MINING COMPANY LIMITED

LOGOCash flow projections during the budget period for each of the above units are based on the budgeted revenue and expected gross margins during the budget period and the same raw materials price inflation during the budget period. Expected cash inflows/outflows, which include budgeted sales, gross margin and raw material price inflation have been determined based on past performance and management’s expectations for the market development. Management believes that any reasonably possible change in any of these assumptions would not cause the carrying amount of each of the above units to exceed the recoverable amount of each of the above units

 

6.SEGMENT INFORMATION

The Group is engaged primarily in the coal mining business and thebusiness. The Group is also engaged in the coal railway transportation business. The Company does not currently have direct export rights in the PRC and all of its export sales must beis made through China National Coal Industry Import and Export Corporation (“National Coal Corporation”), Minmetals Trading Co., Ltd. (“Minmetals Trading”) or Shanxi Coal Imp. & Exp. Group Corp. (“Shanxi Coal Corporation”). The final customer destination of the Company’s export sales is determined by the Company, National Coal Corporation, Minmetals Trading or Shanxi Coal Corporation. Certain of the Company’s subsidiaries are engaged in trading and processing of mining machinery and the transportation business via rivers and lakes in the PRC. No separate segment information about these businesses is presented in these financial statements as the underlying gross sales, results and assets of these businesses, which are currently included in the coal mining business segment, are insignificant to the Group.

Business segments

For management purposes, the Group is currently organized into two operating divisions—divisions - coal mining and coal railway transportation. These divisions are the basis on which the Group reports its primary segment information.

YANZHOU COAL MINING COMPANY LIMITED

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6.SEGMENT INFORMATION - continued

Principal activities are as follows:

Coal mining                                - Underground mining, preparation and sales of coal

Coal railway transportation        - Provision of railway transportation services

Segment information about these businesses is presented below:

INCOME STATEMENT

 

  For the year ended
December 31, 2005 Coal railway
  For the year ended December 31, 2006
  Coal mining  transportation  Eliminations Consolidated  Coal mining  Coal railway
transportation
  Eliminations Consolidated
  RMB’000  RMB’000  RMB’000 RMB’000  RMB’000  RMB’000  RMB’000 RMB’000

GROSS REVENUE

              

External

  12,283,588  163,437  —    12,447,025  12,783,567  160,399  —    12,943,966

Inter-segment

  —    226,852  (226,852) —    —    206,770  (206,770) —  
                        

Total

  12,283,588  390,289  (226,852) 12,447,025  12,783,567  367,169  (206,770) 12,943,966
                        

Inter-segment revenue is charged at prices pre-determined by the relevant governmental authority.

   For the year ended December 31, 2006 
   Coal mining  Coal railway
transportation
  Eliminations  Consolidated 
   RMB’000  RMB’000  RMB’000  RMB’000 

RESULT

        

Segment results

  4,093,855  8,664  —    4,102,519 
           

Unallocated corporate expenses

        (461,760)

Unallocated corporate income

        112,214 

Interest expenses

        (26,349)
          

Profit before income taxes

        3,726,624 

Income taxes

        (1,354,656)
          

Profit for the year

        2,371,968 
          

BALANCE SHEET

   At December 31, 2006
   Coal mining  Coal railway
transportation
  Consolidated
   RMB’000  RMB’000  RMB’000

ASSETS

      

Segment assets

  15,272,657  933,987  16,206,644
        

Unallocated corporate assets

      7,252,105
       
      23,458,749
       

LIABILITIES

      

Segment liabilities

  3,048,669  20,368  3,069,037
        

Unallocated corporate liabilities

      1,395,972
       
      4,465,009
       

YANZHOU COAL MINING COMPANY LIMITED

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6.SEGMENT INFORMATION - continued

OTHER INFORMATION

   For the year ended December 31, 2006 
   Coal mining  Coal railway
transportation
  Corporate
and others
  Consolidated 
   RMB’000  RMB’000  RMB’000  RMB’000 

Capital additions

  4,175,125  19,827  104,454  4,299,406 

Amortization of mining rights

  12,069  —    —    12,069 

Amortization of prepaid lease payments

  8,638  5,188  —    13,826 

Depreciation of property, plant and equipment

  976,306  77,704  7,966  1,061,976 

Loss on disposal of property, plant and equipment

  72,929  115  487  73,531 

Impairment losses reversed on accounts receivable and other receivable

  (19,717) —    —    (19,717)
             

INCOME STATEMENT

   For the year ended December 31, 2005
   Coal mining  Coal railway
transportation
  Eliminations  Consolidated
   RMB’000  RMB’000  RMB’000  RMB’000

GROSS REVENUE

       

External

  12,283,588  163,437  —    12,447,025

Inter-segment

  —    226,852  (226,852) —  
            

Total

  12,283,588  390,289  (226,852) 12,447,025
            

Inter-segment revenue is charged at prices pre-determined by the relevant governmental authority.

   For the year ended December 31, 2005 
   Coal mining  Coal railway
transportation
  Eliminations  Consolidated 
   RMB’000  RMB’000  RMB’000  RMB’000 

RESULT

        

Segment results

  4,601,715  67,381  —    4,669,096 
           

Unallocated corporate expenses

        (320,692)

Unallocated corporate income

        96,180 

Interest expenses

        (24,611)
          

Profit before income taxes

        4,419,973 

Income taxes

        (1,538,036)
          

Profit for the year

        2,881,937 
          

YANZHOU COAL MINING COMPANY LIMITED

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6.SEGMENT INFORMATION - continued

BALANCE SHEET

   At December 31, 2005
   Coal mining  Coal railway
transportation
  Consolidated
   RMB’000  RMB’000  RMB’000

ASSETS

      

Segment assets

  12,139,834  1,031,347  13,171,181
        

Unallocated corporate assets

      8,083,263
       
      21,254,444
       

LIABILITIES

      

Segment liabilities

  2,584,110  29,500  2,613,610
        

Unallocated corporate liabilities

      993,526
       
      3,607,136
       

OTHER INFORMATION

   For the year ended December 31, 2005
   Coal mining  Coal railway
transportation
  Corporate
and others
  Consolidated
   RMB’000  RMB’000  RMB’000  RMB’000

Capital additions

  1,828,130  23,710  5,531  1,857,371

Amortization of prepaid lease payments

  7,983  5,188  —    13,171

Depreciation of property, plant and equipment

  867,210  77,412  7,474  952,096

Amortization of mining rights

  6,624  —    —    6,624

(Gain) loss on disposal of property, plant and equipment

  —    (13) 540  527
            

INCOME STATEMENT

   For the year ended December 31, 2004
   Coal mining  Coal railway
transportation
  Eliminations  Consolidated
   RMB’000  RMB’000  RMB’000  RMB’000

GROSS REVENUE

       

External

  11,757,052  220,771  —    11,977,823

Inter-segment

  —    380,535  (380,535) —  
            

Total

  11,757,052  601,306  (380,535) 11,977,823
            

Inter-segment revenue is charged at prices pre-determined by the relevant governmental authority.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

6.SEGMENT INFORMATION - continued

RESULT

   For the year ended December 31, 2005 
   Coal mining  Coal railway
transportation
  Eliminations  Consolidated 
   RMB’000  RMB’000  RMB’000  RMB’000 

RESULT

        

Segment results

  4,601,715  67,381  —    4,669,096 
           

Unallocated corporate expenses

        (320,692)

Unallocated corporate income

        96,180 

Interest expenses

        (24,611)
          

Income before income taxes

        4,419,973 

Income taxes

        (1,538,036)
          

Income for the year

        2,881,937 
          

   For the year ended December 31, 2004 
   Coal
mining
  Coal railway
transportation
  Eliminations  Consolidated 
   RMB’000  RMB’000  RMB’000  RMB’000 

Segment results

  4,642,234  284,147  —    4,926,381 
           

Unallocated corporate expenses

        (314,283)

Unallocated corporate income

        97,176 

Interest expenses

        (35,942)
          

Profit before income taxes

        4,673,332 

Income taxes

        (1,518,762)
          

Profit for the year

        3,154,570 
          

BALANCE SHEET

 

  At December 31, 2005  At December 31, 2004
  Coal mining  Coal railway
transportation
  Consolidated  Coal mining  Coal railway
transportation
  Consolidated
  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

ASSETS

            

Segment assets

  12,139,834  1,031,347  13,171,181  10,923,609  1,083,502  12,007,111
                

Unallocated corporate assets

      8,083,263      6,329,586
              
      21,254,444      18,336,697
              

LIABILITIES

            

Segment liabilities

  2,584,110  29,500  2,613,610  1,669,373  23,747  1,693,120
                

Unallocated corporate liabilities

      993,526      1,116,152
              
      3,607,136      2,809,272
              

OTHER INFORMATION

 

  For the year ended December 31, 2005  For the year ended December 31, 2004 
  Coal mining  transportation Coal railway
and others
  Corporate
Consolidated
  Coal mining Coal railway
transportation
  Corporate
and others
 Consolidated 
  RMB’000  RMB’000 RMB’000  RMB’000  RMB’000 RMB’000  RMB’000 RMB’000 

Capital additions

  1,828,130  23,710  5,531  1,857,371  1,009,788  66,036  18,458  1,094,282 

Amortization of goodwill

  777  13,880  1,116  15,773 

Release of negative goodwill to income

  (27,620) —    —    (27,620)

Depreciation of property, plant and equipment

  879,260  74,635  4,772  958,667 

Amortization of prepaid lease payments

  7,983  5,188  —    13,171  8,006  5,188  —    13,194 

Depreciation of property, plant and equipment

  867,210  77,412  7,474  952,096

Amortization of mining rights

  6,624  —    —    6,624  6,624  —    —    6,624 

(Gain) loss on disposal of property, plant and equipment

  —    (13) 540  527

Loss (gain) on disposal of property, plant and equipment

  104,759  272  (434) 104,597 

Impairment losses on accounts receivable

  49,104  —    —    49,104 
                         

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

6.SEGMENT INFORMATION - continued

INCOME STATEMENT

   For the year ended December 31, 2004 
   Coal mining  Coal railway
transportation
  Eliminations  Consolidated 
   RMB’000  RMB’000  RMB’000  RMB’000 

GROSS REVENUE

       

External

  11,757,052  220,771  —    11,977,823 

Inter-segment

  —    380,535  (380,535) —   
             

Total

  11,757,052  601,306  (380,535) 11,977,823 
             

Inter-segment revenue is charged at prices pre-determined by the relevant governmental authority.

 

RESULT

       

Segment results

  4,642,234  284,147  —    4,926,381 
           

Unallocated corporate expenses

       (314,283)

Unallocated corporate income

       97,176 

Interest expenses

       (35,942)
         

Income before income taxes

       4,673,332 

Income taxes

       (1,518,762)
         

Income for the year

       3,154,570 
         

BALANCE SHEET

   At December 31, 2004
   Coal mining  Coal railway
transportation
  Consolidated
   RMB’000  RMB’000  RMB’000

ASSETS

      

Segment assets

  10,923,609  1,083,502  12,007,111
        

Unallocated corporate assets

      6,329,586
       
      18,336,697
       

LIABILITIES

      

Segment liabilities

  1,669,373  23,747  1,693,120
         

Unallocated corporate liabilities

      1,116,152
       
      2,809,272
       

YANZHOU COAL MINING COMPANY LIMITED

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6.SEGMENT INFORMATION - continued

OTHER INFORMATION

   For the year ended December 31, 2004 
   Coal mining  Coal railway
transportation
  Corporate
and others
  Consolidated 
   RMB’000  RMB’000  RMB’000  RMB’000 

Capital additions

  1,009,788  66,036  18,458  1,094,282 

Amortization of goodwill

  777  13,880  1,116  15,773 

Release of negative goodwill to income

  (27,620) —    —    (27,620)

Depreciation of property, plant and equipment

  879,260  74,635  4,772  958,667 

Amortization of prepaid lease payments

  8,006  5,188  —    13,194 

Amortization of mining rights

  6,624  —    —    6,624 

Loss (gain) on disposal of property, plant and equipment

  104,759  272  (434) 104,597 

Impairment losses on accounts receivable

  49,104  —    —    49,104 
             

INCOME STATEMENT

   For the year ended December 31, 2003 
   Coal mining  Coal railway
transportation
  Eliminations  Consolidated 
   RMB’000  RMB’000  RMB’000  RMB’000 

GROSS REVENUE

       

External

  8,386,629  154,585  —    8,541,214 

Inter-segment

  —    400,048  (400,048) —   
             

Total

  8,386,629  554,633  (400,048) 8,541,214 
             

Inter-segment revenue is charged at prices pre-determined by the relevant governmental authority.

 

RESULT

       

Segment results

  2,013,688  245,041  —    2,258,729 
           

Unallocated corporate expenses

       (246,469)

Unallocated corporate income

       22,624 

Interest expenses

       (59,966)
         

Income before income taxes

       1,974,918 

Income taxes

       (587,710)
         

Income for the year

       1,387,208 
         

YANZHOU COAL MINING COMPANY LIMITED

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6.SEGMENT INFORMATION - continued

BALANCE SHEET

   At December 31, 2003
   Coal mining  Coal railway
transportation
  Consolidated
   RMB’000  RMB’000  RMB’000

ASSETS

      

Segment assets

  10,440,480  1,115,491  11,555,971
        

Unallocated corporate assets

      2,353,833
       
      13,909,804
       

LIABILITIES

      

Segment liabilities

  1,818,585  11,929  1,830,514
        

Unallocated corporate liabilities

      992,311
       
      2,822,825
       

OTHER INFORMATION

   For the year ended December 31, 2003 
   Coal mining  Coal railway
transportation
  Corporate
and others
  Consolidated 
   RMB’000  RMB’000  RMB’000  RMB’000 

Capital additions

  1,255,070  82,616  14,144  1,351,830 

Amortization of goodwill

  777  8,880  —    9,657 

Release of negative goodwill to income

  (27,620) —    —    (27,620)

Depreciation of property, plant and equipment

  842,975  74,170  3,774  920,919 

Amortization of prepaid lease payments

  8,019  5,275  —    13,294 

Amortization of mining rights

  6,624  —    —    6,624 

(Gain) loss on disposal of property, plant and equipment

  (7,113) 185  56  (6,872)

Impairment losses on accounts receivables

  80,272  —    —    80,272 
             

The number of employees in each of the Group’s principal divisions are as follows:

 

   At December 31,
   2005  2004  2003

Coal mining

  26,662  25,892  24,810

Coal railway transportation

  3,401  3,374  3,151
         
  30,063  29,266  27,961
         

YANZHOU COAL MINING COMPANY LIMITED

LOGO

6.SEGMENT INFORMATION - continued
   At December 31,
   2006  2005  2004

Coal mining

  39,132  26,662  25,892

Coal railway transportation

  3,760  3,401  3,374
         
  42,892  30,063  29,266
         

Geographical segment

The Group’s operations are primarily located in the PRC. In December 2004, the Group acquired Southland which is located in Australia. Analysis of the Group’s gross sales and carrying amount of assets by geographical area is not presented in the financial statements as over 90% of the amounts involved are in the PRC.

The following is an analysis of the additions to property, plant and equipment and intangible assets analysedanalyzed by the geographical area in which the assets are located:

 

  

Additions to property, plant and

equipment and intangible assets

  Additions to property,
plant and equipment and intangible assets
Year ended December 31,
  Year ended December 31,
  2005  2004  2003  2006  2005  2004
  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

The PRC

  1,599,372  869,957  1,351,830  3,582,427  1,599,372  869,957

Australia

  257,999  224,325  —    716,979  257,999  224,325
                  
  1,857,371  1,094,282  1,351,830  4,299,406  1,857,371  1,094,282
                  

 

7.NET SALES OF COAL

 

  Year ended December 31,  Year ended December 31,
  2005  2004  2003  2006  2005  2004
  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Domestic sales of coal, gross

  8,689,496  7,841,328  4,840,317  9,746,146  8,689,496  7,841,328

Less: Transportation costs

  268,034  434,340  503,228  358,414  268,034  434,340
                  

Domestic sales of coal, net

  8,421,462  7,406,988  4,337,089  9,387,732  8,421,462  7,406,988
                  

Export sales of coal, gross

  3,594,092  3,915,724  3,546,312  3,037,421  3,594,092  3,915,724

Less: Transportation costs

  662,069  968,375  1,089,066  578,205  662,069  968,375
                  

Export sales of coal, net

  2,932,023  2,947,349  2,457,246  2,459,216  2,932,023  2,947,349
                  

Net sales of coal

  11,353,485  10,354,337  6,794,335  11,846,948  11,353,485  10,354,337
                  

Net sales of coal representsrepresent the invoiced value of coal sold and isare net of returns, discounts, sales taxes and transportation costs if the invoiced value includes transportation costs to the customers.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

8.COST OF SALES AND SERVICE PROVIDED

 

  Year ended December 31,  Year ended December 31,
  2005  2004  2003  2006  2005  2004
  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Materials

  1,147,572  1,088,683  899,602  1,320,596  1,147,572  1,088,683

Wages and employee benefits

  1,258,333  1,022,614  863,707  1,646,018  1,258,333  1,022,614

Electricity

  282,492  298,274  278,507  336,284  282,492  298,274

Depreciation

  891,640  918,360  836,120  962,963  891,640  918,360

Land subsidence, restoration, rehabilitation and environmental costs

  636,590  323,240  264,158  742,985  636,590  323,240

Repairs and maintenance

  350,953  455,782  374,855  327,151  350,953  455,782

Annual fee and amortization of mining rights (note 22)

  19,604  19,604  19,604

Annual fee and amortization of mining rights (note 24)

  25,049  19,604  19,604

Transportation costs

  98,787  119,737  48,231  106,572  98,787  119,737

Others

  602,617  305,409  170,239  722,451  602,617  305,409
                  
  5,288,588  4,551,703  3,755,023  6,190,069  5,288,588  4,551,703
                  

 

9.SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

   Year ended December 31,
   2005  2004  2003
   RMB’000  RMB’000  RMB’000

Retirement benefit scheme contributions (note 41)

  523,324  408,462  349,377

Wages and employee benefits

  271,213  155,500  115,456

Additional medical insurance

  46,458  35,912  27,814

Staff training costs

  32,553  28,762  26,780

Depreciation

  73,627  53,501  44,339

Amortization of goodwill

  —    15,773  9,657

Distribution charges

  35,626  43,639  37,779

Impairment loss on accounts receivables

  —    49,104  80,272

Resource compensation fees (note)

  117,228  110,959  84,941

Repairs and maintenance

  17,012  18,753  13,918

Research and development

  45,009  24,934  46,144

Freight charges

  19,256  9,801  14,862

Loss on disposal of property, plant and equipment

  527  104,597  —  

Others

  736,955  420,166  413,519
         
  1,918,788  1,479,863  1,264,858
         

   Year ended December 31,
   2006  2005  2004
   RMB’000  RMB’000  RMB’000

Wages and employee benefits

  1,001,783  794,537  563,962

Additional medical insurance

  57,364  46,458  35,912

Staff training costs

  44,037  32,553  28,762

Depreciation

  112,839  73,627  53,501

Amortization of goodwill

  —    —    15,773

Distribution charges

  57,100  35,626  43,639

Impairment loss on accounts receivables

  —    —    49,104

Resource compensation fees (note)

  107,502  117,228  110,959

Repairs and maintenance

  18,440  17,012  18,753

Research and development

  45,979  45,009  24,934

Freight charges

  20,741  19,256  9,801

Loss on disposal of property, plant and equipment

  73,531  527  104,597

Others

  690,826  736,955  420,166
         
  2,230,142  1,918,788  1,479,863
         

 Note:In accordance with the relevant regulations, the GroupCompany pays resource compensation fees (effectively a government levy) to the Ministry of Geology and Mineral Resources at the rate of 1% on the imputed sales value of raw coal.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

10.OTHER INCOME

 

   Year ended December 31,
   2005  2004  2003
   RMB’000  RMB’000  RMB’000

Dividend income

  4,465  4,465  4,810

Gain on sales of auxiliary materials

  36,749  33,878  35,197

Gain on disposal of property, plant and equipment

  —    —    6,872

Government grants (note)

  —    —    8,194

Interest income from bank deposits

  85,971  70,885  13,631

Interest income on other loans receivable

  5,744  21,826  4,183

Release of negative goodwill to income

  —    27,620  27,620

Others

  2,109  7,058  5,338
         
  135,038  165,732  105,845
         

Note:Government grants represented the amount received by the Group in respect of its export sales activities.
   Year ended December 31,
   2006  2005  2004
   RMB’000  RMB’000  RMB’000

Dividend income

  6,311  4,465  4,465

Gain on sales of auxiliary materials

  49,623  36,749  33,878

Government grants

  4,000  —    —  

Interest income from bank deposits

  94,372  85,971  70,885

Interest income on loan receivable

  —    5,744  21,826

Release of negative goodwill to income

  —    —    27,620

Others

  11,531  2,109  7,058
         
  165,837  135,038  165,732
         

 

11.INTEREST EXPENSE

 

  Year ended December 31,  Year ended December 31,
  2005  2004  2003  2006  2005  2004
  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Interest expenses on:

            

- bank borrowings wholly repayable within 5 years

  20,753  31,392  53,682  10,058  20,753  31,392

- bank borrowings not wholly repayable within 5 years

  2,281  —    —  

- bills receivable discounted without recourse

  —    —    1,023  10,840  —    —  

Deemed interest expenses in respect of acquisition of Jining III

  3,858  4,550  5,261  3,170  3,858  4,550
                  
  24,611  35,942  59,966  26,349  24,611  35,942
                  

No interest was capitalized during each of the years presented.

YANZHOU COAL MINING COMPANY LIMITED

LOGO

 

12.INCOME TAXES

 

   Year ended December 31, 
   2005  2004  2003 
   RMB’000  RMB’000  RMB’000 

Income taxes:

      

Current taxes

  1,372,398  1,390,767  587,775 

Underprovision in prior years

  42,463  16,019  —   
          
  1,414,861  1,406,786  587,775 

Deferred tax charge (credit) (note 30)

  123,175  111,976  (65)
          
  1,538,036  1,518,762  587,710 
          

YANZHOU COAL MINING COMPANY LIMITED

LOGO

12.INCOME TAXES - continued
   Year ended December 31,
   2006  2005  2004
   RMB’000  RMB’000  RMB’000

Income taxes:

     

Current taxes

  1,309,783  1,372,398  1,390,767

(Over) underprovision in prior years

  (24,233) 42,463  16,019
         
  1,285,550  1,414,861  1,406,786

Deferred tax charge (note 29)

  69,106  123,175  111,976
         
  1,354,656  1,538,036  1,518,762
         

The Company and its subsidiaries in the PRC are subject to a standard income tax rate of 33% on its taxable income.

Taxation arising in other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.

The total charge for the year can be reconciled to the accounting profit as follows:

 

   Year ended December 31, 
   2005  2004  2003 
   RMB’000  RMB’000  RMB’000 

Standard income tax rate in the PRC

  33% 33% 33%

Standard income tax rate applied to income before income taxes

  1,458,591  1,542,200  651,723 

Reconciling items:

    

Transfer to future development fund deductible for tax purposes but not charged to income under IFRS

  (68,618) (109,411) (85,692)

Release of negative goodwill not subject to tax

  —    (9,115) (9,115)

Deemed interest not deductible for tax purposes

  1,273  1,502  1,736 

Impairment loss on doubtful debts not deductible for tax purposes

  —    16,187  25,731 

Loss on disposal of property, plant and equipment not deductible for tax purposes

  836  8,273  —   

Government grants received not subject to tax

  —    —    (2,704)

Tax effect of tax losses not recognized

  42,151  —    —   

Underprovision in prior years

  42,463  16,019  —   

Write off deferred tax asset

  44,436  44,436  —   

Others

  16,904  8,671  6,031 
          

Income taxes

  1,538,036  1,518,762  587,710 
          

Effective income tax rate

  35% 32% 30%
          

The subsidiaries acquired during the years ended December 31, 2005, 2004 and 2003 did not have any significant impact on the income taxes provided for the years ended December 31, 2005, 2004 and 2003.

   Year ended December 31, 
   2006  2005  2004 
   RMB’000  RMB’000  RMB’000 

Standard income tax rate in the PRC

  33% 33% 33%

Standard income tax rate applied to income before income taxes

  1,229,786  1,458,591  1,542,200 

Reconciling items:

    

Transfer to future development fund deductible for tax purposes but not charged to income under IFRS

  (70,496) (68,618) (109,411)

Release of negative goodwill not subject to tax

  —    —    (9,115)

Deemed interest not deductible for tax purposes

  1,046  1,273  1,502 

Expenses not deductible for tax purposes

  117,447  —    —   

(Reversal) provision of impairment loss on doubtful debts not subject to tax

  (6,507) —    16,187 

Loss on disposal of property, plant and equipment not deductible for tax purposes

  —    836  8,273 

Deemed interest income from subsidiaries subject to tax

  9,456  —    —   

Tax effect of tax losses not recognized

  94,807  42,151  —   

(Over) underprovision in prior years

  (24,233) 42,463  16,019 

Write off deferred tax asset

  —    44,436  44,436 

Others

  3,350  16,904  8,671 
          

Income taxes

  1,354,656  1,538,036  1,518,762 
          

Effective income tax rate

  36% 35% 32%
          

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

13.INCOMEPROFIT FOR THE YEAR

 

  Year ended December 31,  Year ended December 31,
  2005  2004  2003  2006 2005  2004
  RMB’000  RMB’000  RMB’000  RMB’000 RMB’000  RMB’000

Income for the year has been arrived at after charging:

      

Profit for the year has been arrived at after charging:

     

Amortization of mining rights

  6,624  6,624  6,624  12,069  6,624  6,624

Amortization of goodwill

  —    15,773  9,657  —    —    15,773

Amortization of prepaid lease payment

  13,171  13,194  13,294

Amortization of prepaid lease payments

  13,826  13,171  13,194

Depreciation of property, plant and equipment

  952,096  958,667  920,533  1,061,976  952,096  958,667
                  

Total depreciation and amortization

  971,891  994,258  950,108  1,087,871  971,891  994,258
                  

Auditors’ remuneration

  9,229  5,000  5,000  10,406  9,229  5,000

Staff costs, including directors’ and supervisors’ emoluments

  2,164,616  1,682,240  1,437,682  2,783,298  2,164,616  1,682,240

Retirement benefit scheme contributions (included in staff costs above)

  641,633  523,324  408,462

Cost of inventories

  5,144,888  4,460,844  3,687,433  6,089,185  5,144,888  4,460,844

Exchange loss

  98,681  —    —    12,346  98,681  —  

and crediting:

           

Gain on disposal of investments in securities

  —    —    1,424

Reversal of impairment loss on accounts receivable and other receivables

  (19,717) —    —  

Exchange gain

  —    5,507  116  —    —    5,507
                  

 

14.DIRECTORS’ AND SUPERVISORS’ REMUNERATION AND FIVE HIGHEST PAID INDIVIDUALS

 

 (a)Directors’ and supervisors’ emoluments

Details of the directors’ and supervisors’ emoluments are as follows:

Details of the directors’ and supervisors’ emoluments are as follows:

For the year ended December 31, 2006

 

  For the year ended December 31, 2005
  Fees  Salaries,
allowance and
other benefits
in kind
  Retirement
benefit
scheme
contribution
  Discretionary
bonus
  Total  Fees  Salaries,
allowance and
other benefits
in kind
  Retirement
benefit
scheme
contribution
  Discretionary
bonus
  Total
  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Independent non-executive directors

                    

Pu Hongjiu

  43  —    —    —    43  89  —    —    —    89

Cui Jianmin

  81  —    —    —    81  89  —    —    —    89

Wang Xiaojun

  98  —    —    —    98  106  —    —    —    106

Wang Quanxi

  81  —    —    —    81  89  —    —    —    89

Fan Weitang

  39  —    —    —    39
                              
  342  —    —    —    342  373  —    —    —    373
                              

YANZHOU COAL MINING COMPANY LIMITED

LOGO

14.DIRECTORS’ AND SUPERVISORS’ REMUNERATION AND FIVE HIGHEST PAID INDIVIDUALS - continued

(a)Directors’ and supervisors’ emoluments - continued

Details of the directors’ and supervisors’ emoluments are as follows:

   For the year ended December 31, 2005
   Fees  Salaries,
allowance and
other benefits
in kind
  Retirement
benefit
scheme
contribution
  Discretionary
bonus
  Total
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Executive directors

          

Wang Xin

  —    —    —    —    —  

Geng Jiahuai

  —    —    —    —    —  

Yang Deyu

  —    —    —    —    —  

Shi Xuerang

  —    —    —    —    —  

Chen Changchun

  —    —    —    —    —  

Wu Yuxiang

  —    144  65  —    209

Wang Xinkun

  —    144  65  —    209

Chen Guangshui

  —    144  65  —    209

Dong Yunqing

  —    144  65  —    209
               
  —    576  260  —    836
               

Supervisors

          

Meng Xianchang

  —    —    —    —    —  

Song Guo

  —    —    —    —    —  

Zhang Sheng Dong

  —    —    —    —    —  

Liu Wei Xin

  —    —    —    —    —  

Xu Bentai

  —    160  72  —    232
               
  —    160  72  —    232
               

Other management team

          

Jin Tai

  —    —    —    —    —  

Zhang Yingmin

  —    —    —    —    —  

He Ye

  —    144  65  —    209

Tian fengze

  —    144  65  —    209

Shi Chenzhong

  —    145  65  —    210

Lai Cunliang

  —    190  86  —    276

Ni Xinghua

  —    144  65  —    209
               
  —    767  364  —    1,113
               

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

14.DIRECTORS’ AND SUPERVISORS’ REMUNERATION AND FIVE HIGHEST PAID INDIVIDUALS - continued

 

 (a)Directors’ and supervisors’ emoluments - continued

Details of the directors’ and supervisors’ emoluments are as follows:

For the year ended December 31, 2006 - continued

   For the year ended December 31, 2004
   Fees  Salaries,
allowance and
other benefits
in kind
  Retirement
benefit
scheme
contribution
  Discretionary
bonus
  Total
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Independent non-executive directors

          

Fan Weitang

  77  —    —    —    77

Cui Jianmin

  77  —    —    —    77

Wang Xiaojun

  93  —    —    —    93

Mang Quanxi

  77  —    —    —    77
               
  324  —    —    —    324
               

Executive directors

          

Mo Liqi

  —    —    —    —    —  

Yang Deyu

  —    —    —    —    —  

Geng Jiahuai

  —    —    —    —    —  

Wang Bangjun

  —    —    —    —    —  

Yang Jiachun

  —    —    —    —    —  

Wu Yuxiang

  —    98  44  —    142

Dong Yunqing

  —    124  56  —    180

Wang Xin

  —    —    —    —    —  

Wang Xinkun

  —    118  53  —    171
               
  —    340  153  —    493
               

Supervisors

          

Meng Xianchang

  —    —    —    —    —  

Xiao Shuzhang

  —    —    —    —    —  

Zhang Sheng Dong

  —    —    —    —    —  

Liu Wei Xin

  —    —    —    —    —  

Xu Bentai

  —    126  57  —    183
               
  —    126  57  —    183
               

Other management team

          

Jin Tai

  —    —    —    —    —  

Zhang Yingmin

  —    —    —    —    —  

He Ye

  —    121  54  —    175

Tian Fengze

  —    119  54  —    173

Shi Chenzhong

  —    97  44  —    141

Ni Xinghua

  —    103  46  —    149

Chen Guangshui

  —    123  55  —    178
               
  —    563  253  —    816
               

   Fees  Salaries,
allowance and
other benefits
in kind
  Retirement
benefit
scheme
contribution
  Discretionary
bonus
  Total
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Executive Directors

          

Wang Xin

  —    —    —    —    —  

Geng Jiahuai

  —    —    —    —    —  

Yang Deyu

  —    —    —    —    —  

Shi Xuerang

  —    —    —    —    —  

Chen Changchun

  —    —    —    —    —  

Wu Yuxiang

  —    182  82  —    264

Wang Xinkun

  —    238  107  —    345

Chen Guangshui

  —    187  84  —    271

Zhang Baocai

  —    170  77  —    247

Dong Yunqing

  —    205  92  —    297
               
  —    982  442  —    1,424
               

Supervisors

          

Meng Xianchang

  —    —    —    —    —  

Song Guo

  —    —    —    —    —  

Zhang Shengdong

  —    —    —    —    —  

Liu Weixin

  —    —    —    —    —  

Xu Bentai

  —    218  98  —    316
               
  —    218  98  —    316
               

Other management team

          

Jin Tai

  —    —    —    —    —  

Zhang Yingmin

  —    —    —    —    —  

He Ye

  —    208  94  —    302

Tian Fengze

  —    202  91  —    293

Shi Chenzhong

  —    229  103  —    332

Qu Tianzhi

  —    232  104  —    336

Ni Xinghua

  —    218  98  —    316

Lai Cunliang

  —    421  —    —    421
               
  —    1,510  490  —    2,000
               

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

14.DIRECTORS’ AND SUPERVISORS’ REMUNERATION AND FIVE HIGHEST PAID INDIVIDUALS - continued

 

 (a)Directors’ and supervisors’ emoluments - continued

Details of the directors’ and supervisors’ emoluments are as follows:

For the year ended December 31, 2005

   For the year ended December 31, 2003
   Fees  Salaries,
allowance
and other
benefits
in kind
  Retirement
benefit
scheme
contribution
  Discretionary
bonus
  Total
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Independent non-executive directors

          

Fan Weitang

  77  —    —    —    77

Cui Jianmin

  77  —    —    —    77

Wang Xiaojun

  93  —    —    —    93
               
  247  —    —    —    247
               

Executive directors

          

Mo Liqi

  —    —    —    —    —  

Yang Dayu

  —    —    —    —    —  

Geng Jiahuai

  —    —    —    —    —  

Yu Xuezhi

  —    —    —    —    —  

Wang Bangjun

  —    —    —    —    —  

Yang Jiachun

  —    —    —    —    —  

Wu Yuxiang

  —    29  13  —    42

Dong Yunqing

  —    29  13  —    42
               
  —    58  26  —    84
               

Supervisors

          

Meng Xianchang

  —    —    —    —    —  

Xiao Shuzhang

  —    —    —    —    —  

Zhang Sheng Dong

  —    —    —    —    —  

Liu Wei Xin

  —    —    —    —    —  

Xu Bentai

  —    80  36  —    116
               
  —    80  36  —    116
               

Other management team

          

Zhang Yingmin

  —    38  17  —    55

Wang Xinkun

  —    29  13  —    42

Tian fengze

  —    29  13  —    42

Shi Chenzhong

  —    29  13  —    42

Ni Xinghua

  —    29  13  —    42

Chen Guangshui

  —    29  13  —    42
               
  —    183  82  —    265
               

   Fees  Salaries,
allowance and
other benefits
in kind
  Retirement
benefit
scheme
contribution
  Discretionary
bonus
  Total
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Independent non-executive directors

          

Pu Hongjiu

  43  —    —    —    43

Cui Jianmin

  81  —    —    —    81

Wang Xiaojun

  98  —    —    —    98

Wang Quanxi

  81  —    —    —    81

Fan Weitang

  39  —    —    —    39
               
  342  —    —    —    342
               

Executive directors

          

Wang Xin

  —    —    —    —    —  

Geng Jiahuai

  —    —    —    —    —  

Yang Deyu

  —    —    —    —    —  

Shi Xuerang

  —    —    —    —    —  

Chen Changchun

  —    —    —    —    —  

Wu Yuxiang

  —    144  65  —    209

Wang Xinkun

  —    144  65  —    209

Chen Guangshui

  —    144  65  —    209

Dong Yunqing

  —    144  65  —    209
               
  —    576  260  —    836
               

Supervisors

          

Meng Xianchang

  —    —    —    —    —  

Song Guo

  —    —    —    —    —  

Zhang Sheng Dong

  —    —    —    —    —  

Liu Wei Xin

  —    —    —    —    —  

Xu Bentai

  —    160  72  —    —  
               
  —    160  72  —    232
               

Other management team

          

Jin Tai

  —    —    —    —    —  

Zhang Yingmin

  —    —    —    —    —  

He Ye

  —    144  65  —    209

Tian Fengze

  —    144  65  —    209

Shi Chenzhong

  —    145  65  —    210

Lai Cunliang

  —    190  86  —    276

Ni Xinghua

  —    144  65  —    209
               
  —    767  346  —    1,113
               

YANZHOU COAL MINING COMPANY LIMITED

LOGO

LOGO

 

14.DIRECTORS’ AND SUPERVISORS’ REMUNERATION AND FIVE HIGHEST PAID INDIVIDUALS - continued

 

 (a)Directors’ and supervisors’ emoluments - continued

Details of the directors’ and supervisors’ emoluments are as follows:

For the year ended December 31, 2004

   Fees  Salaries,
allowance and
other benefits
in kind
  Retirement
benefit
scheme
contribution
  Discretionary
bonus
  Total
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Independent non-executive directors

          

Fan Weitang

  77  —    —    —    77

Cui Jianmin

  77  —    —    —    77

Wang Xiaojun

  93  —    —    —    93

Wang Quanxi

  77  —    —    —    77
               
  324  —    —    —    324
               

Executive directors

          

Mo Liqi

  —    —    —    —    —  

Yang Deyu

  —    —    —    —    —  

Geng Jiahuai

  —    —    —    —    —  

Wang Bangjun

  —    —    —    —    —  

Yang Jiachun

  —    —    —    —    —  

Wu Yuxiang

  —    98  44  —    142

Dong Yunqing

  —    124  56  —    180

Wang Xin

  —    —    —    —    —  

Wang Xinkun

  —    118  53  —    171
               
  —    340  153  —    493
               

Supervisors

          

Meng Xianchang

  —    —    —    —    —  

Xiao Shuzhang

  —    —    —    —    —  

Zhang Sheng Dong

  —    —    —    —    —  

Liu Wei Xin

  —    —    —    —    —  

Xu Bentai

  —    126  57  —    183
               
  —    126  57  —    183
               

Other management team

          

Jin Tai

  —    —    —    —    —  

Zhang Yingmin

  —    —    —    —    —  

He Ye

  —    121  54  —    175

Tian Fengze

  —    119  54  —    173

Shi Chenzhong

  —    97  44  —    141

Ni Xinghua

  —    103  46  —    149

Chen Guangshui

  —    123  55  —    178
               
  —    563  253  —    816
               

YANZHOU COAL MINING COMPANY LIMITED

LOGO

14.DIRECTORS’ AND SUPERVISORS’ REMUNERATION AND FIVE HIGHEST PAID INDIVIDUALS - continued

(a)Directors’ and supervisors’ emoluments - continued

Details of the directors’ and supervisors’ emoluments are as follows:

No directors waived any emoluments in each of the year ended 31 December 2006, 2005 2004 and 2003.2004.

 

 (b)Employees’ emoluments

The five highest paid individuals in the Group in 2005 included oneno director for the year ended December 31, 2005 (2004: four; 2003: five)2006 (2005: one; 2004: four), details of whose emoluments are included in the disclosures in note 14(a) above. The emoluments of the remaining four individualfive individuals for the year ended December 31, 2005 (2004: one; 2003: Nil)2006 (2005: four; 2004: one) were as follows:

 

  Year ended December 31,  Year ended December 31,
  2005  2004  2003  2006  2005  2004
  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Salaries, allowance and other benefits in kind

  3,690  224  —    7,053  3,690  224

Retirement benefit scheme contributions (note 41)

  365  101  —  

Retirement benefit scheme contributions

  —    365  101

Discretionary bonuses

  —    —    —    656  —    —  
                  
  4,055  325  —    7,709  4,055  325
                  

EmolumentsFor the year ended December 31, 2006, the emoluments of four of these employees were within the band of HK$1,000,000 to HK$2,000,000 and one of these employees were within the band of HK$2,000,000 to HK$3,000,000. For the years ended December 31, 2005 and 2004, emoluments of each of these employees were all within the band of Nilnil to HK$1,000,000 for the year ended December 31, 2005.1,000,000.

 

15.DIVIDEND RECOGNIZED AS DISTRIBUTION DURING THE YEAR

 

    Year ended December 31,
   2005  2004  2003
   RMB’000  RMB’000  RMB’000

2004 Final dividend, RMB0.260 per share (2004: 2003 final dividend RMB0.114; 2003: 2002 final dividend RMB0.104)

  799,240  327,180  298,480

2004 Special dividend RMB0.050 per share

  —    143,500  —  
         
  799,240  470,680  298,480
         
   Year ended December 31,
   2006  2005  2004
   RMB’000  RMB’000  RMB’000

2005 Final dividend, RMB0.220 per share
(2005: 2004 final dividend RMB0.260; 2004: 2003 final dividend RMB0.114)

  1,082,048  799,240  327,180

2004 Special dividend
RMB0.050 per share

  —    —    143,500
         
  1,082,048  799,240  470,680
         

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

15.DIVIDENDDIVIDENDS RECOGNIZED AS DISTRIBUTION DURING THE YEAR - continued

In the annual general meeting held on June 27, 2003, a final dividend in respect of the year ended December 31, 2002 was approved by the shareholders and paid to the shareholders of the Company.

In the annual general meeting held on June 25, 2004, a final dividend and a special dividend in respect of the year ended December 31, 2003 was approved by the shareholders and paid to the shareholders of the Company.

In the annual general meeting held on June 28, 2005, a final dividend and a bonus issue to the shareholder through the capitalization of share premium of the Company on the basis of six shares for every ten existing shares in respect of the year ended December 31, 2004 were approved by the shareholders and paid and issued to the shareholders of the Company.

In the annual general meeting held on June 29, 2006, a final dividend in respect of the year ended December 31, 2005 was approved by the shareholders and paid to the shareholders of the Company.

The board of directors proposes to declare a final dividend and a special divideddividend of approximately RMB737,760,000RMB590,208,000 and RMB344,288,000RMB393,472,000 calculated based on a total number of 4,918,400,000 shares issued at RMB1 each, at RMB0.15RMB0.12 per share and RMB0.07RMB0.08 per share respectively, in respect of the year ended December 31, 2005.2006. The declaration and payment of the final dividend needs to be approved by the shareholders of the Company by way of an ordinary resolution in accordance with the requirements of the Company’s Articles of Association. A shareholders’ general meeting will be held for the purpose of considering and, if thought fit, approving this ordinary resolution.

 

16.EARNINGS PER SHARE AND PER ADS

The calculation of the earnings per share attributable to the equity holders of the Company for the years ended December 31, 2006, 2005 2004 and 20032004 is based on the incomeprofit attributable to the equity holders of the Company for the year of RMB2,372,985,000, RMB2,881,461,000 RMB3,154,317,000 and RMB1,386,686,000RMB3,154,317,000 and on the weighted average number of 4,918,400,000 shares, 4,743,606,5574,918,400,000 shares and 4,592,000,0004,743,606,557 shares in issue, respectively, during the years.

The weighted average number of ordinary shares for the purpose of calculating basic earnings per share for all the period presented has been adjusted for the bonus issue of the Company on July 27, 2005.

The earnings per ADS have been calculated based on the net incomeprofit for the relevant periods and on one ADS, being equivalent to 50 shares, which has been adjusted for the bonus issue of the Company on July 27, 2005.

No diluted earning per share has been presented as there are no dilutive potential shares in issue during the years ended December 31, 2006, 2005 2004 and 2003.2004.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

16.EARNINGS PER SHARE AND PER ADS - continued

Impact of changes in accounting policies

Changes in the Group’s accounting policies during the year are described in details in note 3. To the extent that those changes have had an impact on results reported for the years ended December 31, 2005, 2004 and 2003, they have had an impact on the amounts reported for earnings per share. The following table summarizes that impact on basic earnings per share:

   Impact on basic earnings per share  Impact on earnings per ADS
   2005  2004  2003  2005  2004  2003
   RMB  RMB  RMB  RMB  RMB  RMB

Non-amortisation of goodwill (replaced by impairment loss)

  0.003  —    —    0.16  —    —  

Negative goodwill no longer released to income

  (0.006) —    —    (0.28) —    —  
                  

Total impact of changes in accounting policies

  (0.003) —    —    (0.12) —    —  
                  

 

17.BANK BALANCES AND CASH/TERM DEPOSITS AND RESTRICTED CASH

Bank balances carry interest at market rates which ranged from 0.72% to 1.44%.

At the balance sheet dates, the short-term restricted cash represents the bank deposits pledged to certain banks to secure banking facilities granted to the Group. The long-term amount represents the bank deposits placed as guarantee for the future payments of rehabilitation costs of Southland as required by the Australian government. The long-term deposits carry interest at rate of 5.31% (2005: 5.16%) per annum.

The term deposits carry fixed interest rate of 0.72% to 2.25% (2005: 0.72% to 2.70%) per annum. The fair value of term depositdeposits and restricted cash at December 31, 20052006 approximates to its carrying amount.

 

18.BILLS AND ACCOUNTS RECEIVABLE

 

  At December 31,   At December 31, 
  2005 2004   2006 2005 
  RMB’000 RMB’000   RMB’000 RMB’000 

Total bills receivable

  2,092,949  890,046   2,004,425  2,092,949 

Total accounts receivable

  258,587  460,442   238,931  258,587 
       
  2,243,356  2,351,536 

Less: Impairment loss

  (126,700) (126,700)  (31,447) (126,700)
              

Total bills and accounts receivable, net

  2,224,836  1,223,788   2,211,909  2,224,836 
              

Bills receivable represents unconditional orders in writing issued by or negotiated from customers of the Group for completed sale orders which entitle the Group to collect a sum of money from banks or other parties.

The fair value of bills and accounts receivable at December 31, 20052006 approximates to their carrying amount.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

18.BILLS AND ACCOUNTS RECEIVABLE - continued

An analysis of the impairment loss on bills and accounts receivable is as follows:

 

  2005  2004  2006 2005
  RMB’000  RMB’000  RMB’000 RMB’000

Balance at January 1

  126,700  100,627  126,700  126,700

Additional impairment loss

  —    26,073

Written off

  (78,603) —  

Reversal

  (16,650) —  
            

Balance at December 31

  126,700  126,700  31,447  126,700
            

According to the credit rating of different customers, the Group allows a range of credit periods to its trade customers not exceeding 180 days.

The following is an aged analysis of bills and accounts receivable at the reporting date:

 

  At December 31,  At December 31,
  2005  2004  2006  2005
  RMB’000  RMB’000  RMB’000  RMB’000

1 - 180 days

  2,245,170  1,233,248  2,216,935  2,245,170

181 - 365 days

  6,014  654  1,018  6,014

1 - 2 years

  19  3,913

2 - 3 years

  —    32,407

1 - 3 years

  869  19

Over 3 years

  100,333  80,266  24,534  100,333
            
  2,351,536  1,350,488  2,243,356  2,351,536
            

 

19.INVENTORIES

 

  At December 31,  At December 31,
  2005  2004  2006  2005
  RMB’000  RMB’000  RMB’000  RMB’000

COST

        

Auxiliary materials, spare parts and small tools

  256,755  226,271  265,122  256,755

Coal products

  213,746  259,158  314,439  213,746
            
  470,501  485,429  579,561  470,501
            

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

20.OTHER LOANS RECEIVABLE

At the balance sheet dates, the amounts consist of loansamount represents loan granted to the an independent third parties. The amounts areparty, which carries interest at 7.00% per annum and is guaranteed by other independent third parties and bear interest at 5.04% - 7.00% per annum. Included in the total amount is aparties. The loan of RMB640,000,000 (the “Default Loan”) which is secured by certain state legal person shares of a company listed on the SSE (“the Secured Shares”) and certain equity interest in another unlisted company held by the guarantor. The Default Loan was defaulted in January 2005 and the Company had applied to the People’s Supreme Court of the Shangdong ProvinceShandong province (the “Court”) to freeze the Secured Shares. The Company has also applied to the Court to dispose the Secured Shares by way of a public auction and the proceedproceeds would be applied to repay the Default Loan and the associated interests to the Company. The public auction was held successfully in September 2005. Up to the date of the report, the legal procedure for the transfer of ownership of the Secured Shares has not yet been completed.

In December 2006, Shandong Runhua Group Company Limited has also claimed for a portion of the Secured Shares. To protect the Company’s priority rights in the Secured Shares to recover the Default Loan, the Company sought support from the Shandong provincial government and the State-owned Assets Supervision and Administrative Committee (the “SASAC”). In January 2007, these government authorities in Shandong province and the SASAC have rendered formal written request the Supreme Court to protect the Company’s priority right on the Secured Shares.

After considering the advice from their legal counsel, the directors are in the opinion of the directors,that, based on the result of the auction, the proceeds netsupport from the government authorities in Shandong province and the SASAC and the fair value of relevant expensethe underlying Secured Shares, the amount to be recovered by the Company from the Secured Shares would be sufficient to cover the principal and interest of the Default Loan.

 

21.PREPAYMENTS AND OTHER CURRENT ASSETS

 

  At December 31,  At December 31,
  2005  2004  2006  2005
  RMB’000  RMB’000  RMB’000  RMB’000

Advances to suppliers

  69,605  56,707  109,714  69,605

Prepaid freight charges and related handling charges

  62,445  58,623  27,287  62,445

Others

  70,367  72,966  94,504  70,367
            
  202,417  188,296  231,505  202,417
            

The directors consider that the carrying amount of other current assets approximates their fair value.

Included in the above balances as of December 31, 20052006 is an impairment loss of RMB35,717,000 (2004:RMB32,650,000 (2005: RMB35,717,000). During the year ended December 31, 2006, the Group reversed impairment loss of RMB3,067,000. During the year ended December 31, 2005 the Group did not mademake any additional impairment onfor doubtful debts (2004: RMB23,031,000; 2003: RMB:9,147,000)RMB23,031,000).

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

22.PREPAID LEASE PAYMENTS

   At December 31,
   2006  2005
   RMB’000  RMB’000

Current portion

  13,746  13,465

Non-current portion

  578,988  579,773
      
  592,734  593,238
      

The amounts represent prepaid lease payments for land use rights which are situated in the PRC and have a term of fifty years from the date of grant of land use rights certificates.

The land use rights of Railway Assets were acquired from the Parent Company during the year ended December 31, 2002. The registration process in respect of the land use rights of the Railway Assets, with the carrying amount of RMB233,441,000, has not yet been completed at December 31, 2006.

23.PREPAYMENT FOR RESOURCES COMPENSATION FEES

In accordance with the relevant regulations, the Shanxi Group is required to pay resources compensation fees to the Heshun Municipal Coal Industry Bureau at a rate of RMB2.70 per tonne of raw coal mined. During the year, Shanxi Group was requested by the relevant government to prepay the fees based on production volume of 10 million tonnes. At the balance sheet date, the amount represented the prepayment for resources compensation fees. The current portion represents the amount to be utilized in the coming year which is estimated based on expected production volume.

YANZHOU COAL MINING COMPANY LIMITED

LOGO

24.MINING RIGHTS

 

   RMB’000 

COST

  

At January 1, 2004

132,479

Acquisition of Southland

32,634

At December 31, 20042005

  165,113 

Exchange re-alignment

  (2,372)

Addition

  23,644 
    

At December 31, 2005January 1, 2006

  186,385

Exchange re-alignment

2,261

Acquisition of Shanxi Neng Hua

164,452

At December 31, 2006

353,098 
    

AMORTIZATION

  

At January 1, 2004

19,872

Provided for the year

6,624

At January 1, 2005

  26,496 

Provided for the year

  6,624 
    

At December 31, 2005January 1, 2006

  33,120

Provided for the year

12,069

At December 31, 2006

45,189 
    

NET BOOK VALUES

  

At December 31, 20052006

  153,265307,909 
    

At December 31, 20042005

  138,617153,265 
    

In addition, the Parent Company and the Company have entered into a mining rights agreement pursuant to which the Company has agreed to pay to the Parent Company, effective from September 25, 1997, an annual fee of RMB12,980,000 as compensation for the Parent Company’s agreement to give up the mining rights associated with the Xinglongzhuang coal mine, Baodian coal mine, Nantun coal mine, Dongtan coal mine and Jining II. The annual fee is subject to change after a ten-year period.period, and the renegotiation has not yet started up to the date of this report.

MiningThe mining rights isare amortized, on a straight-line basis, over the useful life of twenty years from the date of commencement of commercial production.

The mining rights of the Shanxi Group are amortized, on a straight-line basis, over the remaining useful life of twenty-seven years from the date of acquisition. The mining right permit expires in January 2009 and can be renewed at a cost which is not significant to the Group as the Parent Company has undertaken to compensate the Group for 79.68% of the cost.

23.PREPAID LEASE PAYMENTS

RMB’000

COST

At January 1, 2004 and December 31, 2004

658,549

Addition

14,691

At December 31, 2005

673,240

AMORTIZATION

At January 1, 2004

53,637

Provided for the year

13,194

At December 31, 2004

66,831

Provided for the year

13,171

At December 31, 2005

80,002

NET BOOK VALUES

At December 31, 2005

593,238

At December 31, 2004

591,718

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

23.PREPAID LEASE PAYMENTS - continued

Analysis for reporting purposes as:

   At December 31,
   2005  2004
   RMB’000  RMB’000

Current portion

  13,465  13,171

Non-current portion

  579,773  578,547
      
  593,238  591,718
      

The amounts represent prepaid lease payment for land use rights which are situated in the PRC and have a term of fifty years from the date of grant of land use rights certificates.

The land use rights of Railway Assets were acquired from the Parent Company during the year ended December 31, 2002. The registration process in respect of the land use rights of the Railway Assets has not yet been completed at December 31, 2005.

24.25.PROPERTY, PLANT AND EQUIPMENT NET

 

   Freehold
land in
Australia
  Buildings  Harbor
works
and
crafts
  Railway
structures
  Mining
structures
  Plant,
machinery
and
equipment
  Transportation
equipment
  Construction
in progress
  Total 
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000 

COST

             

At January 1, 2004

  —    2,052,927  250,231  720,484  3,904,460  7,314,574  281,744  85,748  14,610,168 

Acquisition of Southland

  57,195  5,377  —    —    —    128,833  —    —    191,405 

Additions

  —    —    —    —    —    18,791  5,922  805,530  830,243 

Transfers

  —    76,541  —    7,190  —    690,072  30,970  (804,773) —   

Disposals

  —    —    —    —    —    (862,057) (33,003) —    (895,060)
                            

At December 31, 2004 and January 1, 2005

  57,195  2,134,845  250,231  727,674  3,904,460  7,290,213  285,633  86,505  14,736,756 

Exchange re-alignment

  (4,164) (392)       (9,381) (21) —    (13,958)

Acquisition of Heze

  —    —    —    —    —    35,103  201  472,292  507,596 

Additions

  —    1,689  —    —    —    71,578  25,258  1,191,961  1,290,486 

Transfers

  —    34,447  —    2,115  —    823,315  —    (859,877) —   

Disposals

  —    (597) —    —    —    (20,175) (8,115) —    (28,887)
                            

At December 31, 2005

  53,031  2,169,992  250,231  729,789  3,904,460  8,190,653  302,956  890,881  16,491,993 
                            

ACCUMULATED DEPRECIATION

             

At January 1, 2004

  —    797,845  —    106,903  1,408,418  3,545,719  134,910  —    5,993,795 

Provided for the year

  —    97,878  6,068  54,498  97,866  693,886  29,069  —    979,265 

Eliminated on disposals

  —    —    —    —    —    (748,503) (24,951) —    (773,454)
                            

At December 31, 2004 and January 1, 2005

  —    895,723  6,068  161,401  1,506,284  3,491,102  139,028  —    6,199,606 

Provided for the year

  —    124,340  6,068  54,568  86,638  684,913  41,356  —    997,883 

Eliminated on disposals

  —    (511) —    —    —    (17,046) (6,425) —    (23,982)
                            

At December 31, 2005

  —    1,019,552  12,136  215,969  1,592,922  4,158,969  173,959  —    7,173,507 
                            

NET BOOK VALUES

             

At December 31, 2005

  53,031  1,150,440  238,095  513,820  2,311,538  4,031,684  128,997  890,881  9,318,486 
                            

At December 31, 2004

  57,195  1,239,122  244,163  566,273  2,398,176  3,799,111  146,605  86,505  8,537,150 
                            

YANZHOU COAL MINING COMPANY LIMITED

LOGO

24.PROPERTY, PLANT AND EQUIPMENT, NET - continued
   Freehold
land in
Australia
  Buildings  Harbor
works
and
crafts
  Railway
structures
  Mining
structures
  Plant,
machinery
and
equipment
  Transportation
equipment
  

Construction

in progress

  Total 
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000 

COST

            

At January 1, 2005

  57,195  2,134,845  250,231  727,674  3,904,460  7,290,213  285,633  86,505  14,736,756 

Exchange re-alignment

  (4,164) (392)      (9,381) (21) —    (13,958)

Acquisition of Heze

  —    —    —    —    —    35,103  201  472,292  507,596 

Additions

  —    1,689  —    —    —    71,578  25,258  1,191,961  1,290,486 

Transfers

  —    34,447  —    2,115  —    823,315  —    (859,877) —   

Disposals

  —    (597) —    —    —    (20,175) (8,115) —    (28,887)
                            

At December 31, 2005 and January 1, 2006

  53,031  2,169,992  250,231  729,789  3,904,460  8,190,653  302,956  890,881  16,491,993 

Exchange re-alignment

  2,224  280  —    —    —    7,803  22  6,958  17,287 

Acquisition of Shanxi Group

  —    95,347  —    —    129,366  186,107  25,723  192,433  628,976 

Additions

  —    15,725  —    —    15,378  257,147  2,139  3,073,042  3,363,431 

Transfers

  —    196,575  118  5,012  —    1,238,710  10,102  (1,450,517) —   

Disposals

  —    (47,600) —    —    (31,762) (878,537) (17,247) —    (975,146)
                            

At December 31, 2006

  55,255  2,430,319  250,349  734,801  4,017,442  9,001,883  323,695  2,712,797  19,526,541 
                            

ACCUMULATED DEPRECIATION

            

At January 1, 2005

  —    895,723  6,068  161,401  1,506,284  3,491,102  139,028  —    6,199,606 

Provided for the year

  —    124,340  6,068  54,568  86,638  684,913  41,356  —    997,883 

Eliminated on disposals

  —    (511) —    —    —    (17,046) (6,425) —    (23,982)
                            

At December 31, 2005 and January 1, 2006

  —    1,019,552  12,136  215,969  1,592,922  4,158,969  173,959  —    7,173,507 

Exchange re-alignment

  —    18  —    —    —    293  6  —    317 

Provided for the year

  —    132,648  6,070  53,710  90,921  781,231  35,648  —    1,100,228 

Eliminated on disposals

  —    (41,411) —    —    (476) (828,954) (16,609) —    (887,450)
                            

At December 31, 2006

  —    1,110,807  18,206  269,679  1,683,367  4,111,539  193,004  —    7,386,602 
                            

NET BOOK VALUES

            

At December 31, 2006

  55,255  1,319,512  232,143  465,122  2,334,075  4,890,344  130,691  2,712,797  12,139,939 
                            

At December 31, 2005

  53,031  1,150,440  238,095  513,820  2,311,538  4,031,684  128,997  890,881  9,318,486 
                            

The following estimated useful lives are used for the depreciation of property, plant and equipment, other than construction in progress:

 

Buildings

  15 to 35 years
Harbour

Harbor works and crafts

  40 years

Railway structures

  15 to 25 years

Plant, machinery and equipment

  5 to 15 years

Transportation equipment

  6 to 18 years

Transportation equipment includes vessels which are depreciated over the estimated useful lives of 18 years.

The mining structures include the main and auxiliary mine shafts and underground tunnels. Depreciation is provided to write off the cost of the mining structures using the units of production method based on the estimated production volume for which the structure was designed and the contractual period of the relevant mining rights.

25.GOODWILL

   2005  2004
   RMB’000  RMB’000

COST

   

At January 1

  146,707  106,707

Subsequent adjustment to contingent consideration payment in respect of the acquisition of Railway Assets

  —    40,000

Elimination of amortization accumulated prior to the adoption of IFRS 3 (note 3)

  (29,315) 

Acquisition of Heze (note 36)

  35,645  —  
      

At December 31

  153,037  146,707
      

AMORTIZATION

   

At January 1

  29,315  13,542

Elimination of amortization accumulated prior to the adoption of IFRS 3 (note 3)

  (29,315) —  

Charge for the year

  —    15,773
      

At December 31

  —    29,315
      

NET BOOK VALUE

   

At December 31

  153,037  117,392
      

On January 1, 2002, the Company acquired the Railway Assets from its Parent Company for an original consideration of RMB1,242,586,000. Pursuant to the terms of the acquisition agreement, the consideration was adjusted to RMB1,282,586,000, RMB1,322,586,000 and RMB1,362,586,000 as the annual transportation volume of the Railway Assets reached the volume milestone targets of 25,000,000 tonnes, 28,000,000 tonnes and 30,000,000 tonnes for the years ended December 31, 2002, 2003 and 2004, respectively. The contingent consideration resulted in additional goodwill.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

25.26.GOODWILL - continued

Prior to January 1, 2005, goodwill was amortized over its estimated useful life, ranging from 10 to 20 years. No amortization was made on goodwill from January 1, 2005 in accordance with the Group’s accounting policy.

   2006  2005
   RMB’000  RMB’000

COST

    

At January 1

  153,037  117,392

Acquisition of Heze (note 36)

  —    35,645

Acquisition of Shanxi Group (note 35)

  142,547  —  
      

At December 31

  295,584  153,037
      

Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units that allare expected to benefit from that business combination. Before recognition of impairment losses, theThe carrying amount of goodwill had been allocated as follows:

 

  2005  2004  2006  2005
  RMB’000  RMB’000  RMB’000  RMB’000

Coal mining

    

Coal Mining

    

- Jining II

  10,106  10,106  10,106  10,106

- Yanmei Shipping

  10,046  10,046  10,046  10,046

- Heze

  35,645  —    35,645  35,645

Coal Railway transportation

    

- Shanxi Group

  142,547  —  

Coal Railway Transportation

    

- Railway Assets

  97,240  97,240  97,240  97,240
            
  153,037  117,392  295,584  153,037
            

The recoverable amounts of goodwill havefrom each of the above cash generating units has been determined on the basis of value in use calculations. TheirThe recoverable amounts are based on certain similar key assumptions on discount rates, growth rates and expected changes in selling prices and direct cost. All value in use calculations use cash flow projections based on financial budgets approved by management covering a 5 year5-year period, and with a discount rate of 5%8%.

The cashflows beyond the 5-year period are extrapolated using a zero percent growth rate.

Cash flow projections during the budget period for each of the above units are based on the budgeted revenue and expected gross margins during the budget period and the same raw materials price inflation during the budget period. Expected cash inflows/outflows, which include budgeted sales, gross margin and raw material price inflation have been determined based on past performance and management’s expectations for the market development. Management believes that any reasonably possible change in any of these assumptions would not cause the carrying amount of each of the above units to exceed the recoverable amount of each of the above units. During the year ended December 31, 2005,2006, management of the Group determinesdetermined that there are no impairments of any of its CGU containing goodwill.

26.NEGATIVE GOODWILL

   2005  2004
   RMB’000  RMB’000

COST

   

At January 1

  138,101  138,101

Derecognized upon the application of IFRS 3 (note 3)

  (138,101) —  
      

At December 31

  —    138,101
      

RELEASED TO INCOME

   

At January 1

  110,480  82,860

Released for the year

  —    27,620

Derecognized upon the application of IFRS 3 (note 3)

  (110,480) —  
      

At December 31

  —    110,480
      

NET BOOK VALUE

   

At December 31

  —    27,621
      

As explained in note 3, all negative goodwill arising on acquisition prior to January 1, 2005 was derecognized as a result of the application of IFRS 3.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

27.SUBSIDIARIES

Details of the Company’s subsidiaries at December 31, 2005 are as follows:

Name of subsidiary

  

Country of
incorporation/
registration
and operation

  Issued and
fully paid capital/
registered capital
  Proportion of
registered capital/
issued share capital
held by the Company
  Proportion
of voting
power held
  

Principal activities

         Directly  Indirectly      

Austar

  Australia  AUD30,000,000  —    100% 100% Coal mining business

Heze (note)

  PRC  RMB600,000,000  95.67% —    95.67% Development of ancillary projects

Yancoal

  Australia  AUD30,000,000  100% —    100% Investment holding

Yanmei Shipping (note)

  PRC  RMB5,500,000  92% —    97% Transportation via rivers and lakes and the sales of coal and construction materials

Yulin (note)

  PRC  RMB800,000,000  97% —    97% Not yet commenced operations

Zhongyan Trade Co., Ltd. (“Zhongyan”) (note)

  PRC  RMB2,100,000  52.38% —    52.38% Trading and processing of mining machinery

Note: Yanmei Shipping, Yulin, Zhongyan and Heze are established in the PRC as limited liability companies.

28.INVESTMENTS IN SECURITIES

The amountsinvestments in securities represent cost of available-for-sale equity investment of the Group. investments:

   At December 31,
   2006  2005
   RMB’000  RMB’000

Equity securities listed on the SSE

    

- Restricted portion stated at cost less impairment

  40,281  —  

- Unrestricted portion stated at fair value

  54,101  —  

Unlisted equity security in form of state legal person shares

  —    60,421

Unlisted equity security

  1,760  1,760
      
  96,142  62,181
      

The amount at December 31, 2005 principally includes an unlisted investment of RMB60,421,000 in the form of state legal person shares of Shenergy Company Limited, a company listed on the SSE. These shares arewere not tradable on the SSE.SSE as at December 31, 2005 and therefore, they were stated at cost less impairment because the range of reasonable fair value estimates is so significant that the directors of the Company were of the opinion that their fair value cannot be measured reliably.

TheyPursuant to the share reform plan of Shenergy Company Limited, the non-tradable legal person shares held by the Company were converted into tradable shares on August 17, 2006. Under this share reform plan, the Company has committed that the Company will not sell more than one-third of the shares held as of August 17, 2005 within one year after August 17, 2006; and two-third of the shares held as of August 17, 2005 within two years after August 17, 2006. This investment is presented as listed securities as at December 31, 2006. The unrestricted portion is carried at fair value determined by reference to bid prices quoted in active markets.

The unlisted equity securities and the restricted portion of the shares of Shenergy Company Limited are stated at cost less impairment at each balance sheet date because the range of reasonable fair value estimates is so significant that the directors of the Company are of the opinion that their fair value cannot be measured reliably.

 

29.28.DEPOSIT MADE ON INVESTMENT

The amount in 2004 represented the payment made byDuring 2006, the Company entered into a co-operative agreement with two independent third parties, to establish a company for the Parentoperation of a coal mine to be acquired in Shaanxi province. The Company will have to invest approximately RMB196.8 million in order to obtain 41% equity interest. As at December 31, 2006, the Company made a deposit of RMB97 million in relation to the transfer of 95.67% equity interest in Heze owned by the Parent Company. The principal activity of Heze is the development of ancillary projects of Wangfu Coal Mine and Zhaolou Coal Mine in Shangdon Province in the PRC. During the year endedthis acquisition. As at December 31, 2005,2006, the relevant procedures to establish the new company are still in progress, and the acquisition was completed and Heze became a subsidiary of the Company.has not yet been completed.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

30.29.DEFERRED TAX LIABILITY

 

   Provision for
land subsidence,
restoration,
rehabilitation and
environmental costs
  Accelerated
tax
depreciation
  Total 
   RMB’000  RMB’000  RMB’000 

Balance at January 1, 2004

  88,872  —    88,872 

(Charge) for the year (note 12)

  (44,436) (67,540) (111,976)
          

Balance at January 1, 2005

  44,436  (67,540) (23,104)

(Charge) credit for the year (note 12)

  (44,436) (78,739) (123,175)
          

Balance at December 31, 2005

  —    (146,279) (146,279)
          
   Available-for-sale
investment
  Provision for
land subsidence,
restoration,
rehabilitation and
environmental costs
  Accelerated
tax
depreciation
  Mining rights  Total 
   RMB’000  RMB’000  RMB’000  RMB’000  RMB’000 

Balance at January 1, 2005

  —    44,436  (67,540) —    (23,104)

Charge the year (note 12)

  —    (44,436) (78,739) —    (123,175)
                

Balance at January 1, 2006

  —    —    (146,279) —    (146,279)

Acquisition of Shanxi Group

  —    —    (2,962) (54,269) (57,231)

Charge to reserve

  (11,207) —    —    —    (11,207)

(Charge) credit to income for the year (note 12)

  —    —    (69,272) 166  (69,106)
                

Balance at December 31, 2006

  (11,207) —    (218,513) (54,103) (283,823)
                

At the balance sheet date, the Group has unused tax losses of AUD24RMB450 million equivalent to RMB140million (2004: Nil)(2005: RMB140 million) contributed by the Australian subsidiaries available for offset against future profits. No deferred tax asset has been recognized in respect of such losses due to the unpredictability of future profit streams. SuchIncluded in unrecognized tax losses are losses of RMB55 million that will expire in 2011. Other losses may be carried forward indefinitely.

There was no other material unprovided deferred tax for the year or at the balance sheet date.

 

31.30.BILLS AND ACCOUNTS PAYABLE

 

   At December 31,
   2005  2004
   RMB’000  RMB’000

Bills payable

  136,779  —  

Accounts payable

  360,881  478,281
      
  497,660  478,281
      

YANZHOU COAL MINING COMPANY LIMITED

LOGO

31.BILLS AND ACCOUNTS PAYABLE - continued
   At December 31,
   2006  2005
   RMB’000  RMB’000

Bills payable

  159,632  136,779

Accounts payable

  586,053  360,881
      
  745,685  497,660
      

The following is an aged analysis of bills and accounts payable at the reporting date:

 

  At December 31,  At December 31,
  2005  2004  2006  2005
  RMB’000  RMB’000  RMB’000  RMB’000

1 - 180 days

  361,680  360,684  564,995  361,680

181 - 365 days

  96,397  85,714  139,974  96,397

1 - 2 years

  39,583  31,883  40,716  39,583
            
  497,660  478,281  745,685  497,660
            

The fair value of the Group’s bills and accounts payable at December 31, 2005 approximates to their carrying amount.

32.OTHER PAYABLES AND ACCRUED EXPENSES

   At December 31,
   2005  2004
   RMB’000  RMB’000

Customers’ deposits

  475,333  426,877

Accrued wages

  135,375  80,242

Other taxes payable

  249,955  255,711

Payables in respect of purchases of property, plant and equipment and construction materials

  216,250  173,093

Accrued freight charges

  39,342  51,685

Accrued repairs and maintenance

  22,829  47,895

Accrued utility expenses

  4,120  7,672

Staff welfare payable

  69,372  41,376

Accrued land subsidence, restoration, rehabilitation and environmental costs

  196  8,592

Resource compensation fees payable

  100,886  83,658

Consideration payable on acquisition of Southland

  47,299  51,010

Payable in respect of purchase of mining rights in Southland (note 37)

  23,644  —  

Others

  191,268  109,754
      
  1,575,869  1,337,565
      

The fair value of the Group’s other payables and accrued expenses at December 31, 20052006 approximates to their carrying amount.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

33.31.(PREPAYMENT) PROVISIONOTHER PAYABLES AND ACCRUED EXPENSES

   At December 31,
   2006  2005
   RMB’000  RMB’000

Customers’ deposits

  674,789  475,333

Accrued wages

  210,751  135,375

Other taxes payable

  205,720  249,955

Payables in respect of purchases of property, plant and equipment and construction materials

  442,536  216,250

Accrued freight charges

  15,963  39,342

Accrued repairs and maintenance

  20,162  22,829

Accrued utility expenses

  5,430  4,120

Staff welfare payable

  72,748  69,372

Resource compensation fees payable

  —    100,886

Withholding tax payable

  8,645  6,916

Deposits received from employees

  33,775  20,908

Consideration payable on acquisition of Southland

  28,755  47,299

Payable in respect of purchase of mining rights in Southland (note 37)

  —    23,644

Others

  180,410  163,640
      
  1,899,684  1,575,869
      

The fair value of the Group’s other payables and accrued expenses at balance sheet date approximates to their carrying amount.

32.PREPAYMENT FOR LAND SUBSIDENCE, RESTORATION, REHABILITATION AND ENVIRONMENTAL COSTS

 

  2005 2004   2006 2005 
  RMB’000 RMB’000   RMB’000 RMB’000 

Balance at January 1

  (103,407) 85,022   (157,511) (103,407)

Additional provision in the year

  635,863  313,172   731,796  635,863 

Ultization of provision

  (689,967) (501,601)

Utilization of provision

  (787,197) (689,967)
              

Balance at December 31

  (157,511) (103,407)  (212,912) (157,511)
              

The provision for land subsidence, restoration, rehabilitation and environmental costs has been determined by the directors based on their best estimates. The payment during both years included mainly rehabilitation costs paid on mining areas in relation to mining activities in the future periods and therefore the balances are presented as prepayment at the balances sheet dates. However, in so far as the effect on the land and the environment from current mining activities becomes apparent in future periods, the estimate of the associated costs may be subject to change in the near term.

34.UNSECURED BANK BORROWING

In 2002, the Group obtained a new bank loan in the amount of RMB1,200,000,000, of which the repayment is guaranteed by the Parent Company. The loan bears interest at 6.21% per annum and is repayable by instalments over a period of 7 years, the first repayment instalment of which was due in August 2004. The proceeds were used to finance the acquisition of the Railway Assets.

In 2003, the interest rate of the bank loan was adjusted to 5.76% per annum, pursuant to the terms of the loan agreement. The loan is arranged at fixed interest rates and expose the Group to fair value interest rate risk. The Group has made a partial repayment of RMB600,000,000 during that year and according to the terms of the loan agreement, an early settlement would be deemed to settle the latest instalments due. The balance of the loan was therefore repayable in instalments over the following 3 years, the first repayment instalment of which was due and repaid in August 2004. Interests are payable quarterly over the terms of the loan.

The above loan is repayable as follows:

   At December 31, 
   2005  2004 
   RMB’000  RMB’000 

Within one year

  200,000  200,000 

More than one year, but not exceeding two years

  —    200,000 
       
  200,000  400,000 

Less: Amount due within one year and included in current liabilities

  (200,000) (200,000)
       

Amount due after one year

  —    200,000 
       

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

35.33.UNSECURED BANK BORROWINGS

The amounts are repayable as follows:

   At December 31, 
   2006  2005 
   RMB’000  RMB’000 

Within one year

  50,000  200,000 

More than one year, but not exceeding two years

  72,000  —   

More than two years, but not more than five years

  126,000  —   

More than five years

  132,000  —   
       
  380,000  200,000 

Less: Amounts due within one year and included in current liabilities

  (50,000) (200,000)
       

Amounts due after one year

  330,000  —   
       

The bank loan of RMB200,000,000 as at December 31, 2005 carried interest at 5.76% per annum. During the year ended December 31, 2006, this bank loan has been fully repaid.

The balances at of December 31, 2006 represent two borrowings obtained by Shanxi Tianchi before the Company acquired it. Included in the loans of RMB380,000,000 is an amount of RMB160,000,000 that initially carries interest at 5.85% per annum and is subject to adjustment based on the interest rate stipulated by the People Bank of China (the “PBOC”). The loan is repayable by 3 instalments over a period of 4 years, with the first instalment due in December 2007. The repayment is guaranteed by the Parent Company.

The remaining balance of RMB220,000,000 carries interest at 6.21% per annum and is subject to adjustment based on the interest rate stipulated by the PBOC. The loan is repayable by 20 instalments over a period of 12 years, with the first instalment due in May 2008. The amount is also guaranteed by the Parent Company.

YANZHOU COAL MINING COMPANY LIMITED

LOGO

34.SHAREHOLDERS’ EQUITY

Share capital

The Company’s share capital structure at the balance sheet date is as follows:

 

  Domestic inveted shares  Foreign invested shares  Domestic invested shares  Foreign invested shares   
  State legal person
shares (held by the
Parent Company)
  A shares
(Note 1)
  H shares
(including H
share represented
by ADS (Note 1)
  Total  State legal person
shares (held by the
Parent Company)
 A shares
(Note 1)
  

H shares

(including H

shares represented

by ADS (Note 1))

  Total

Number of shares

               

At January 1, 2004

  1,670,000,000  180,000,000  1,020,000,000  2,870,000,000

Issue of shares

  —    —    204,000,000  204,000,000
            

At January 1, 2005

  1,670,000,000  180,000,000  1,224,000,000  3,074,000,000  1,670,000,000  180,000,000  1,224,000,000  3,074,000,000

Bonus issue of shares

  1,002,000,000  108,000,000  734,400,000  1,844,400,000  1,002,000,000  108,000,000  734,400,000  1,844,400,000
                        

At January 31, 2005

  2,672,000,000  288,000,000  1,958,400,000  4,918,400,000

At January 1, 2006

  2,672,000,000  288,000,000  1,958,400,000  4,918,400,000

Share Reform Plan

  (72,000,000) 72,000,000  —    —  
            

December 31,2006

  2,600,000,000  360,000,000  1,958,400,000  4,918,400,000
                        
  Domestic inveted shares  Foreign invested shares  Domestic invested shares  Foreign invested shares   
  State legal person
shares (held by the
Parent Company)
  A shares
(Note 1)
  H shares
(including H
share represented
by ADS (Note 1)
  Total  State legal person
shares (held by the
Parent Company)
 A shares
(Note 1)
  

H shares

(including H shares
represented

by ADS (Note 1))

  Total
  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000 RMB’000  RMB’000  RMB’000

Registered, issued and fully paid

               

At January 1, 2004

  1,670,000  180,000  1,020,000  2,870,000

Issue of shares

  —    —    204,000  204,000
            

At January 1, 2005

  1,670,000  180,000  1,224,000  3,074,000  1,670,000  180,000  1,224,000  3,074,000

Bonus issue of shares

  1,002,000  108,000  734,400  1,844,400  1,002,000  108,000  734,400  1,844,400
                        

At January 31, 2005

  2,672,000  288,000  1,958,400  4,918,400

At January 1, 2006

  2,672,000  288,000  1,958,400  4,918,400

Share Reform Plan

  (72,000) 72,000  —    —  
                        

December 31, 2006

  2,600,000  360,000  1,958,400  4,918,400
            

Each share has a par value of RMB1.

At July 27, 2005, a bonus issue of six bonus shares for every ten shares in issue resulted in an increase in issued share capital of RMB1,844,400,000, and an equivalent reduction in the share premium account.

On July 15, 2004, the Company issued an aggregate of 204,000,000 H sharesPursuant to independent investors upon private placement. The net proceeds of approximately RMB1,756,875,000 will be useda meeting for the investments in the proposed developmentholders of coal mines in Shandong Province and the coal-methanol project in Shaanxi Province. These new HA shares were issued under the general mandate granted to the directors at the 2004 annual general meeting of the Company held on June 28, 2005March 6, 2006, a share reform plan (“Share Reform Plan”) was approved by the relevant shareholders. Under the Share Reform Plan, 2.5 A shares for every existing 10 A shares would be offered by the Parent Company and thesethe non-tradable legal person shares rank pari passu with other Hheld by the Parent Company would then be converted to tradable shares in issue in all respects.4 years’ time according to a formula. The Share Reform Plan has been further approved by the Ministry of Commerce of the PRC on March 21, 2006. An aggregate of 72,000,000 state legal person shares of RMB 1 each held by the Parent Company is transferred as A shares pursuant to the Share Reform Plan.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

35.34.SHAREHOLDERS’ EQUITY - continued

Reserves

Pursuant to regulation in the PRC, the Company is required to transfer an annual amount to a future development fund at RMB6 per tonne of raw coal mined. The fund can only be used for the future development of the coal mining business and is not available for distribution to shareholders.

Pursuant to the regulations of the Shandong Province Finance Bureau, State-owned Assets Supervision and Administration Commission of Shandong Province and the Shandong Province Coal Mining Industrial Bureau, the Company is required to transfer an additional amount at RMB5 per tonne of raw coal mined from July 1, 2004 to the future development fund for the future improvement of the mining facilities and is not distributable to shareholders.

Pursuant to the relevant regulations from the Ministry of Finance, the Company is no longer required to set aside profit to the statutory common welfare fund effective from January 1, 2006 and the balance of statutory common welfare fund as at January 1, 2006 is transferred to statutory common reserve fund.

The Company has to set aside 10% of its net incomeprofit for the statutory common reserve fund (except where the fund has reached 50% of the Company’s registered capital) and 5% to 10% of its net income for the statutory common welfare fund.. The statutory common reserve fund can be used for the following purposes:

 

to make good losses in previous years; or

 

to convert into capital, provided such conversion is approved by a resolution at a shareholders’ general meeting and the balance of the statutory common reserve fund does not fall below 25% of the registered capital.

The statutory common welfare fund, which is to be used for the welfare of the staff and workers of the Company, is of a capital nature.

In accordance with the Company’s Articles of Association, the net incomeprofit for the purpose of appropriation will be deemed to be the lesser of the amounts determined in accordance with (i) PRC accounting standards and regulations and (ii) IFRS or the accounting standards of the places in which its shares are listed.

The Company can also create a discretionary reserve in accordance with its Articles of Association or pursuant to resolutions which may be adopted at a meeting of shareholders.

The Company’s distributable reserve as at December 31, 20052006 is the retained earnings computed under PRC GAAP which amounted to approximately RMB5,844,289,000 (2004: RMB4,522,369,000)RMB6,344,632,000 (At December 31, 2005: RMB5,844,289,000).

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

35.ACQUISITION OF SHANXI NENG HUA COMPANY LIMITED AND ITS SUBSIDIARIES

On August 18, 2006, the Company entered into an equity transfer agreement with the Parent Company and conditionally agreed to purchase the 98% equity interest in Shanxi Neng Hua from the Parent Company.

In November 2006, the acquisition was completed and the consideration of RMB733,346,000 was fully paid to the Parent Company. The net assets acquired were included in the coal mining segment.

This acquisition has been accounted for using the purchase method.

The net assets of Shanxi Group acquired, and the goodwill arising, are as follows:

   Acquiree’s
carrying
amount before
combination
  

Fair

value
adjustments

  

Fair

value

 
   RMB’000  RMB’000  RMB’000 

Bank balances and cash

  289,142   289,142 

Bills and accounts receivable

  10,950   10,950 

Inventories

  4,609   4,609 

Prepayment for resources compensation fees

  25,387   25,387 

Prepayments and other currents assets

  15,216   15,216 

Property, plant and equipment

  628,976   628,976 

Mining rights

  —    164,452  164,452 

Deferred tax liability

  (2,962) (54,269) (57,231)

Prepaid lease payments

  11,378   11,378 

Accounts payable

  (12,126)  (12,126)

Other payables and accrued expenses

  (75,436)  (75,436)

Bank borrowings

  (380,000)  (380,000)
        

Total net assets acquired

  515,134   625,317 

Minority interests

    (34,518)

Goodwill arising on acquisition

    142,547 
      
    733,346 
      

Total consideration satisfied by:

    

Cash consideration paid on acquisition

    733,346 
      

Net cash outflow arising on acquisition:

    

Cash paid on acquisition

    (733,346)

Bank balances and cash acquired

    289,142 
      
    (444,204)
      

Shanxi Group contributed RMB21,875,000 and RMB8,755,000 to the Group’s turnover and loss respectively, for the period between the date of acquisition and the balance sheet date.

If the acquisition had been completed on January 1, 2006, the Group’s revenue for the period would have been RMB12,961,204,000, and the Group’s profit for the period would have been RMB2,274,162,000. The pro forma information is for illustrative purposes only and is not necessarily an indication of revenue and results of operations of the Group that actually would have been achieved had the acquisition been completed on January 1, 2006, nor is it intended to be a projection of future results.

The goodwill arising from the acquisition is attributable to the anticipated profitability and the anticipated future operating synergies from the combination.

YANZHOU COAL MINING COMPANY LIMITED

LOGO

 

36.ACQUISITION OF HEZE

The net assets of Heze acquired in 2005, and the goodwill arising, are as follows:

 

   Fair Carrying
value and
fair value
 
   RMB’000 

Bank balances and cash

  180,255 

Prepayments and other current assets

  1,150 

Property, plant and equipment

  507,596 

Other payables and accrued expenses

  (86,061)

Amounts due to Parent Company and its subsidiary companies

  (29,759)

Minority interest

  (24,818)
    

Total net assets acquired

  548,363 

Goodwill arising on acquisition

  35,645 
    
  584,008 
    

Total consideration satisfied by:

  

Deposit made on investment in 2004

  574,000 

Cash consideration paid on acquisition

  10,008 
    
  584,008 
    

Net cash outflow arising on acquisition:

  

Cash paid on acquisition

  (10,008)

Bank balances and cash acquired

  180,255 
    
  170,247 
    

Heze did not contribute significantly to the Group’s turnover and profit before profit for the year ended December 31, 2005.

If the acquisition had been completed on January 1, 2005, the Group’s revenue and the Group’s profit for the year ended December 31, 2005 would have been RMB12,447,025,000 and RMB2,864,866,000, respectively.

On November 16, 2004, the Company entered into an equity transfer agreement (“Acquisition Agreements”Agreement”) with the Parent Company and conditionally agreed to purchase the 95.67% equity interest in Heze held by the Parent Company. As at December 31, 2004, a deposit of RMB574,000,000 was paid to the Parent Company.

YANZHOU COAL MINING COMPANY LIMITED

LOGO

36.ACQUISITION OF HEZE - continued

On June 28, 2005, a supplemental agreement (the “Supplemental Agreement”) was entered into between the Company and the Parent Company, pursuant to which the consideration of the acquisition of 95.67% equity interest in Heze has been determined to be RMB584,008,000.Company. Under the Supplemental Agreement, the Parent Company has irrevocably undertakenprovided an irrevocable undertaking that the Group shall have the right to purchase 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, based on valuations conducted by independent qualified PRC valuers which should also be endorsed by the applicable PRC government authorities.

Company. In December 2005, the acquisition was completed and the Company paid the remaining consideration of RMB10,008,000 to the Parent Company. The Company then holds 95.67% equity interest in Heze. The net assets acquired were included in the coal mining segment. Heze did not have any significant impact on the Group’s results or cash flows for the year ended December 31, 2005.

Pursuant to the Acquisition Agreement and the Supplemental Agreement, should certain situations arise, including but not limited to failure of Heze to obtain the land use rights or failure ofJune 2006, the Parent Company to obtainhas obtained the mining rights of the Zhaolou coal mine by June 30,mine. At December 31, 2006, the Company shall havehas not yet purchased the right to transfer the 95.67% equity interest in Heze back to the Parent Company, and the Parent Company will be obligated to refund the purchase consideration to the Company, within 30 daysmining rights from the date of the issue of notice by the Company for such transfer.

The carrying amount of Heze’s net assets approximates to its fair value at date of acquisition.

The goodwill arising on the acquisition is attributable to the anticipated profitability of the sales of coal products.parent Company.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

37.ACQUISITION OF SOUTHLAND

In December 2004, the Group acquired a 100% interest in Southland for a cash consideration of RMB187,312,000, of which RMB136,302,000 was paid upon acquisition and RMB51,010,000 (equivalent to AUD8,000,000) was payable upon the production of the initial 4 million tonnes of saleable coal by the Group in Southland. Pursuant to the agreements in relation to the acquisition, the Company has an obligation to acquire further coal mines and land adjacent to Southland at AUD4,000,000 when the sellers obtain the exploration license under the Mining Act of Australia for such coal mines. During the year,2005, the Group successfully obtained the exploration licences for the adjacent mines. Accordingly, consideration amounted to RMB 23,644,000RMB23,644,000 (equivalent to AUD 4,000,000)AUD4,000,000) was payablepaid upon the completion of registration process. In the opinion of directors, the registration process will be completed by Junein 2006.

 

   Carrying
value and
and fair value
 
   RMB’000 

The net assets of Southland acquired in the transaction were as follows:

  

Mining rights

  32,62432,634 

Property, plant and equipment

  191,405 

Other payables and accrued expenses

  (36,727)
    

Total net assets acquired

  187,312 
    

Satisfied by:

  

Cash consideration paid on acquisition

  187,312 
    

Southland did not contribute significantly to the Group’s turnover and profit before income taxes for the year ended December 31, 2004.

If the acquisition had been completed on January 1, 2004, the Group’s revenue and the Group’s profit for the year ended December 31, 2004 would have been RMB 11,977,823,000 and RMB3,154,570,000, respectively.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

38.ACQUISITION OF YANMEI SHIPPING

Fair value
RMB’000

The net assets of Yanmei Shipping acquired in the transaction, and the goodwill arising, were as follows:

Bank balances and cash

506

Bills and accounts receivable

735

Inventories

1,254

Prepayments and other current assets

16,423

Property, plant and equipment, net

12,551

Other payables and accrued expenses

(4,259)

Amounts due to Parent Company and its subsidiaries

(26,151)

Taxes payable

(483)

Minority interest

(46)

Total net assets acquired

530

Goodwill arising on acquisition

11,162
11,692

Consideration satisfied by cash

11,692

Net cash outflow arising on acquisition:

Cash consideration paid

(11,692)

Bank balances and cash acquired

506
(11,186)

On December 31, 2003, the Group acquired 92% of the issued share capital of Yanmei Shipping for a cash consideration of RMB11,692,000. The net assets acquired were included in the coal mining segment. Yanmei Shipping did not have any significant impact on the Group’s results or cash flows for the year ended December 31, 2003.

The carrying amount of Yanmei Shipping’s net assets approximates to its fair value at date of acquisition.

The goodwill arising on the acquisition is attributable to the anticipated future operating synergies from the combination.

Yanmei Shipping did not contribute significantly to the Group’s turnover and profit before income taxes for the year ended December 31, 2003.

If the acquisition had been completed on January 1, 2003, the Group’s revenue and the Group’s profit for the year ended December 31, 2003 would have been RMB8,542,214,000 and RMB1,385,573,000, respectively.

YANZHOU COAL MINING COMPANY LIMITED

LOGO

39.RELATED PARTY BALANCES AND TRANSACTIONS

Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed. Details of balance and transactions between the Group and other related parties are disclosed below.

Related Party Balances

The amounts due from Parent Company and its subsidiary companies were non-interest bearing, unsecured and repayable on demand.

The amounts due to the Parent Company and its subsidiary companies are non-interest bearing and unsecured.

The amounts due to the Parent Company and its subsidiary companies as at December 31, 2005 and 20042006 included the present value of the outstanding balance that arose from the funding of the acquisition of the mining rights of Jining III as of January 1, 2001 discounted using the market rate of bank borrowings.

The consideration for the cost of the mining rights of approximately RMB132,479,000 is to be settled over the 10 years by equal installmentsinstalments before December of each year, commencing from 2001.

 

   At December 31,
   2005  2004
   RMB’000  RMB’000

Amounts due to Parent Company and its subsidiary companies

   

Within one year

  508,254  —  

More than one year, but not exceeding two years

  8,689  9,230

More than two years, but not exceeding three years

  8,181  8,689

More than three years, but no exceeding four years

  7,704  8,181

More than four years, but not exceeding five years

  7,253  7,704

Exceeding five years

  —    7,253
      

Total

  540,081  41,057

Less: amount due within one year

  (508,254) —  
      

Amount due after one year

  31,827  41,057
      

YANZHOU COAL MINING COMPANY LIMITED

LOGO

39.RELATED PARTY BALANCES AND TRANSACTIONS - continued
   At December 31, 
   2006  2005 
Amounts due to Parent Company and its subsidiary companies  RMB’000  RMB’000 

Within one year

  982,347  508,254 

More than one year, but not exceeding two years

  8,181  8,689 

More than two years, but not exceeding three years

  7,704  8,181 

More than three years, but no exceeding four years

  7,253  7,704 

More than four years, but not exceeding five years

  —    7,253 
       

Total

  1,005,485  540,081 

Less: amount due within one year

  (982,347) (508,254)
       

Amount due after one year

  23,138  31,827 
       

Except the amounts disclosed above, the amounts due to the Parent Company and/or its subsidiary companies have no specific terms of repayments.

YANZHOU COAL MINING COMPANY LIMITED

LOGO

38.RELATED PARTY BALANCES AND TRANSACTIONS - continued

Related Party Transactions

During the periods,years, the Group had the following significant transactions with the Parent Company and/or its subsidiary companies:

 

   Year ended December 31,
   2005  2004  2003
   RMB’000  RMB’000  RMB’000

Income

      

Sales of coal

  856,580  523,015  229,730

Sales of auxiliary materials

  369,855  350,873  472,899

Utilities and facilities

  29,000  29,000  29,000

Railway transportation services

  —    —    66

Expenditure

      

Utilities and facilities

  355,953  354,424  285,166

Annual fee for mining rights

  12,980  12,980  12,980

Purchases of supply materials and equipment

  341,935  303,549  373,710

Repair and maintenance services

  197,624  222,949  225,408

Social welfare and support services

  242,952  207,062  188,825

Technical support and training

  15,130  15,130  15,130

Road transportation services

  53,346  63,478  17,216

Construction services

  —    160,342  507,824
         

During the periods, the Group had the following significant transactions with a related party, certain management members of which were also management members of the Group:

   Year ended December 31,
   2005  2004  2003
   RMB’000  RMB’000  RMB’000

Sales of coal by the Group

  —    —    77,155

Transaction services provided to the Group

  —    —    74,783
         
   Year ended December 31,
   2006  2005  2004
   RMB’000  RMB’000  RMB’000

Income

      

Sales of coal

  1,069,879  856,580  523,015

Sales of auxiliary materials

  496,221  369,855  350,873

Utilities and facilities

  —    29,000  29,000

Expenditure

      

Utilities and facilities

  358,370  355,953  354,424

Annual fee for mining rights

  12,980  12,980  12,980

Purchases of supply materials and equipment

  458,329  341,935  303,549

Repair and maintenance services

  246,841  197,624  222,949

Social welfare and support services

  406,004  242,952  207,062

Technical support and training

  20,000  15,130  15,130

Road transportation services

  63,448  53,346  63,478

Construction services

  306,658  —    160,342
         

Certain expenditure for social welfare and support services (excluding medical and child care expenses) of RMB165,900,000, RMB63,361,000 and RMB63,275,000 and RMB63,530,000 for each of the three years ended December 31, 2006, 2005 2004 and 2003,2004, respectively, and for technical support and training of RMB20,000,000, RMB15,130,000 for each of the three years ended December 31, 2005, 2004 and 2003,RMB15,130,000, have been charged by the Parent Company at a negotiated amount per annum, subject to changes every year.

The above transactions were charged either at market prices or based on terms agreed by both parties.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

39.38.RELATED PARTY BALANCES AND TRANSACTIONS - continued

During the year, the Company acquired Shanxi Neng Hua from the Parent Company. Details of this acquisition are set out in note 35.

During the year ended December 31, 2005, the Company acquired Heze from the Parent Company. Details of this acquisition are set out in note 36.

In addition to the above, the Company participates in a multi-employerretirement benefit scheme of the Parent Company in respect of retirement benefits (see notes 8 and 41)(note 40).

Transactions/balances with other state-controlled entities in the PRC

The Group operates in an economic environment currently predominated by entities directly or indirectly owned or controlled by the PRC government (“state-controlled entities”). In addition, the Group itself is part of a larger group of companies under the Parent Company which is controlled by the PRC government. Apart from the transactions with the Parent Company and fellow subsidiaries and other related parties disclosed above, the Group also conducts business with other state-controlled entities. The directors consider those state-controlled entities are independent third parties so far as the Group’s business transactions with them are concerned.

In establishing its pricing strategies and approval process for transactions with other state-controlled entities, the Group does not differentiate whether the counter-party is a state-controlled entity or not.

Material transactions with other state-controlled entities are as follows:

 

  Year ended December 31,  Year ended December 31,
  2005  2004  2003  2006  2005  2004
  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Trade sales

  3,855,545  4,466,519  3,941,149  4,600,606  3,855,545  4,466,519
                  

Trade purchases

  1,607,729  1,541,147  1,760,528  1,568,658  1,607,729  1,541,147
                  

Material balances with other state-controlled entities are as follows:

 

  At December 31  At December 31
  2005  2004  2006  2005
  RMB’000  RMB’000  RMB’000  RMB’000

Amounts due from other state-controlled entities

  350,688  400,603  345,914  350,688
            

Amounts due to other state-controlled entities

  270,559  303,103  301,117  270,559
            

In addition, the Group has entered into various transactions, including deposits placements, borrowings and other general banking facilities, with certain banks and financial institutions which are state-controlled entities in its ordinary course of business. In view of the nature of those banking transactions, the directors are of the opinion that separate disclosure would not be meaningful.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

39.38.RELATED PARTY BALANCES AND TRANSACTIONS - continued

Except as disclosed above, the directors are of the opinion that transactions with other state-controlled entities are not significant to the Group’s operations.

Compensation of key management personnel

The remuneration of directors and other members of key management was as follows:

 

  Year ended December 31,  Year ended December 31,
  2005  2004  2003  2006  2005  2004
  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000  RMB’000

Directors’ fee

  342  324  247  373  342  324

Salaries, allowance and other benefit in kind

  1,503  1,029  321  2,710  1,503  1,029

Retirement benefit scheme contribution

  678  463  144  1,030  678  463
                  
  2,523  1,816  712  4,113  2,523  1,816
                  

The remuneration of directors and key executives is determined by the remuneration committee having regard to the performance of individuals and market trends.

 

40.39.COMMITMENTS

 

  At December 31,  At December 31,
  2005  2004  2006  2005
  RMB’000  RMB’000  RMB’000  RMB’000

Capital expenditure contracted for but not provided in the financial statements in respect of acquisition of property, plant and equipment

  920,907  12,872  1,221,884  920,907

Capital expenditure authorized but not contracted for in respect of development of new coal mines

  1,900,000  2,100,000  600,000  1,900,000
            
  2,820,907  2,112,872  1,821,884  2,820,907
            

In accordance with the regulations of the State Administration of Work Safety, the Group has a commitment to incurreset aside RMB8 per tonefor each tonne of raw coal mined from May 1, 2004 aggregating to RMB91,462,000 (2004: RMB5,848,000) onwhich will be used for enhancement of safety production environment and improvement of facilities (“Work Safety Cost”). The unutilized Work Safety Cost at December 31, 2006 was RMB 30,208,000 (2005: RMB91,462,000).

During 2006, the Company entered into a co-operative agreement with two independent third parties, to establish a company for the operation of a coal mine to be acquired in Shaanxi province. In addition to the deposit referred to in note 28, the Company is committed to invest a further RMB99.8 million.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

41.40.RETIREMENT BENEFITS

Qualifying employees of the Company are entitled to a pension, medical and other welfare benefits. The Company participates in a multi-employer scheme of the Parent Company and pays a monthly contribution to the Parent Company in respect of retirement benefits at an agreed contribution rate based on the monthly basic salaries and wages of the qualified employees. The Parent Company is responsible for the payment of all retirement benefits to the retired employees of the Company.

The monthly contribution rate was set initially at 45% of the aggregate monthly basic salaries and wages of the Company’s employees, and was fixed until December 31, 2001. Upon expiration of the initial period, the Company and the Parent Company determined that the contribution rate should remain at 45% for the period from January 1, 2002 to December 31, 2006.

The amount of contributioncontributions paid to the Parent Company were RMB640,620,000, RMB522,650,000 RMB408,462,000 and RMB349,377,000RMB408,462,000 for the years ended December 31, 2006, 2005, and 2004, and 2003.respectively.

The Company’s subsidiaries are participants in a state-managed retirement scheme pursuant to which the subsidiaries pay a fixed percentage of its qualifying staff’s wages as a contribution to the scheme. The subsidiaries’ financial obligations under this scheme are limited to the payment of the employer’s contribution. During the year, contributions payable by the subsidiaries pursuant to this arrangement were insignificant to the Group.

During the year and at the balance sheet date, there were no forfeited contributions which arose upon employees leaving the above schemes available to reduce the contributions payable in future years.

 

42.41.HOUSING SCHEME

The Parent Company is responsible for providing accommodation to its employees and the employees of the Company. The Company and the Parent Company share the incidental expenses relating to the accommodation at a negotiated amount for each of the three years ended December 31, 2006, 2005 2004 and 2003.2004. Such expenses, amounting to RMB86,200,000, RMB37,200,000 and RMB37,200,000 for each of the three years ended December 31, 2006, 2005 and 2004 and 2003,respectively, have been included as part of the social welfare and support services expenses summarized in note 39.38.

The Company currently makes a fixed monthly contribution for each of its qualifying employees to a housing fund which is equally matched by a contribution from the employees. The contributions are paid to the Parent Company which utilizes the funds, along with the proceeds from the sales of accommodation and, if the need arises, from loans arranged by the Parent Company, to construct new accommodation. Starting from 2002, the Parent Company intends to sell the new accommodation by reference to market prices instead of cost. Accordingly, the Company paid an additional housing allowance to the employees at a percentage of their wages.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

43.42.FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of bank balances and cash, bills and accountsterm deposits, restricted cash, other loans receivable, bills and accounts payables, other payables, amounts due to Parent Company and accrued expensesits subsidiary companies and variable debtsbank borrowings approximate their fair value because of the short maturity of these amounts or because they are stated at present value discounted using market rates. In addition, the carrying amount of bank borrowing approximates its fair value as the interest rate approximates the market rate.

 

44.43.CONCENTRATION OF CREDIT RISK

The Group maintains its cash and cash equivalents with reputable banks in the PRC. Therefore, the directors consider that the credit risk for such is minimal.

The Group generally grants the long-term customers credit terms with a range from one to four months, depending on the situations of the individual customers. For small to medium sized new customers, the Group generally requires them to pay for the products before delivery.

Most of the Group’s domestic sales are sales to electric power plants, metallurgical companies, construction material producers and railway companies. The Group generally has established long-term and stable relationships with these companies. The Group also sells its coal to provincial and city fuel trading companies.

As the Group does not currently have direct export rights, all of its export sales must be made through National Coal Corporation, Shanxi Coal Corporation or Minmetals Trading. The quality, prices and final customer destination of the Group’s export sales are determined by the Group, National Coal Corporation, Shanxi Coal Corporation or Minmetals Trading. The Group intends to apply for direct export rights although there can be no assurance that such rights will be obtained on a timely basis.

For the years ended December 31, 2006, 2005 2004 and 2003,2004, net sales to the Group’s five largest domestic customers accounted for approximately 20.0%22.1%, 15.3%20.0% and 18.5%15.3%, respectively, of the Group’s total net sales. Net sales to the Group’s largest domestic customer accounted for 13.4%10.2%, 9.2%13.4% and 11.3%9.2% of the Group’s net sales for the years ended December 31, 2006, 2005 2004 and 2003,2004, respectively. The Group’s largest domestic customer was the Huadian Power International Corporation Limited (“Huadian”) for the year ended December 31, 2005 (2004: Huadian; 2003: the Shandong Power and Fuel Company). The Shandong Power and Fuel Company purchases coal on behalf of several power plants in Shangdong Province, the largest of which, the Zouxian Electric Power Plant, alone accounted for 9.6% of the Group’s net sales for the years ended December 31, 2003.2006, 2005 and 2004.

Details of the amounts receivable from the five customers with the largest receivable balances at December 31, 20052006 and 20042005 are as follows:

 

   Percentage of
accounts receivable
 
   At December 31, 
   2005  2004 

Five largest receivable balances

  66% 75%
       
   Percentage of
accounts receivable
At December 31,
 
   2006  2005 

Five largest receivable balances

  72% 66%
       

As at 31 December 2006, the Group has exposure to credit risk in the event of the counterparties failure to perform their obligation in relation to the Default Loan (note 20). In order to minimize the credit risk, the management of the Group has monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of other loan receivables at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced.

44.SUBSEQUENT EVENTS

On January 11, 2007, the Company acquired the remaining 2% of the equity interest in Shanxi Neng Hua at a cash consideration of RMB14,966,000. The acquisition was completed on January 23, 2007.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

On March 16, 2007, the People’s Republic of China promulgated Law of the People’s Republic of China on Enterprise Income Tax (“New Law”) by Order No. 63 of the President of the People’s Republic of China, which will be effective from January 1, 2008. The Company and its subsidiaries will then measure and pay Enterprise Income Tax pursuant to the New Law. This may result in a decrease of the December 31, 2006 deferred tax liability of approximately RMB69 million.

 

45.SUBSEQUENT EVENT

Pursuant to a meeting for the holders of A shares of the Company held on March 6, 2006, the share reform plan (“Share Reform Plan”) was approved by the relevant shareholders. Under the Share Reform Plan, 2.5 A shares for every existing 10 A shares would be offered by the Parent Company and the non-tradable legal person shares held by the Parent Company would then be converted to tradable shares in 4 years time according to formula. The Share Reform Plan has been further approved by the Ministry of Commerce of the PRC on March 21, 2006.

46.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER PRC GAAP

The consolidated financial statements prepared under IFRS and those prepared under PRC GAAP have the following major differences:

 

 (i)adjustment of future development fund, which is charged to income before income taxes under PRC GAAP, to shareholders’ equity;

 

 (ii)reversal of the Work Safety Cost provided but not yet ultizingutilizing for the enhancement of safety production environment and facilities (see note 40)39), which is charged as expenses when provided under PRC GAAP;

 

 (iii)depreciation provided for plant and equipment acquired by utilizing Work Safety Cost, which is charged as expenses in all once provided as Work Safety Cost under PRC GAAP;

(iv)negative goodwill arising under IFRS for the acquisition of Jining III was recognized as income in the statement of income on a systematic basis over the remaining weighted average useful life of the identifiable acquired depreciable/amortizable assets prior to January 1, 2005. No negative goodwill is recognized under PRC GAAP;

 

 (iv)(v)the installments payable to the Parent Company for the acquisition of Jining III have been stated at present value discounted using market rates under IFRS while under PRC GAAP, the installments payable are stated at gross amounts. Accordingly, deemed interest expense arises on the installments payable to the Parent Company under IFRS and no such interest expenses are recognized under PRC GAAP;

 

 (v)(vi)write off pre-operating expenses capitalized in a subsidiary of the Company as a long termlong-term asset under PRC GAAP.GAAP;

 

 (vi)(vii)reversal of amortization of goodwill under PRC GAAP, which is not amortized but instead tested for impairment at least annually under IFRS from January 1, 2005 onwards; and

 

 (vii)(viii)recognition of a deferred tax asset/liability under IFRS for the tax consequence of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.liabilities; and

(ix)reversal of fair value change in available-for-sales investment, which is not taken up under PRC GAAP.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

46.45.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER PRC GAAP - continued

The following table summarizes the differences between consolidated financial statement prepared under IFRS and those under PRC GAAP:

 

  Net income attributable to the equity
holders of the Company for the year
ended December 31,
 Net assets attributable to
equity holders of the
Company as at December 31,
   

Net income attributable to the

equity holders of the Company

for the year ended December 31,

 

Net assets attributable

to equity holders of the
Company as at December 31,

 
  2005 2004 2003 2005 2004   2006 2005 2004 2006 2005 
  RMB’000 RMB’000 RMB’000 RMB’000 RMB’000   RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 

As per consolidated financial statements prepared under IFRS

  2,881,461  3,154,317  1,386,686  17,618,577  15,523,751   2,372,985  2,881,461  3,154,317  18,931,779  17,618,577 

Impact of IFRS adjustments in respect of:

      

- transfer to future development fund which is charged to income before income taxes under PRC GAAP

  (381,208) (331,548) (259,674) (269,945) (96,669)

Impact of IFRS adjustments in respect of: - transfer to future development fund which is charged to income before income taxes under PRC GAAP

  (390,907) (381,208) (331,548) (447,372) (269,945)

- reversal of Work Safety Cost

  (238,600) (204,668) —    (443,268) (204,668)  (209,555) (238,600) (204,668) (652,823) (443,268)

- release of negative goodwill to income

  —    (27,620) (27,620) (138,101) (110,480)  —    —    (27,620) (138,101) (138,101)

- deemed interest expenses

  3,858  4,550  5,261  113,220  109,362   3,171  3,858  4,550  116,391  113,220 

- write-off of pre-operating expenses of a subsidiary

  121,801  —    —    121,801  —   

- reversal of goodwill amortisation

  (15,006) —    —    (15,006) —   

- (Reversal) write-off of pre-operating expenses of subsidiaries

  (80,051) 121,801  —    46,860  121,801 

- reversal of goodwill amortization

  (16,007) (15,006) —    (31,013) (15,006)

- deferred tax effect on temporary differences not recognized under PRC GAAP

  123,175  111,976  (65) 146,279  23,104   69,021  123,175  111,976  226,507  146,279 

- fair value change of available-for-sales investment

  —    —    —    (33,961) —   

- others

  —    778  777  8,070  8,071   684  —    778  8,754  8,070 
                                

As per consolidated financial statements prepared under PRC GAAP

  2,495,481  2,707,785  1,105,365  17,141,627  15,252,471   1,749,341  2,495,481  2,707,785  18,027,021  17,141,627 
                                

 Note:There are also differences in other items in the consolidated financial statements due to differences in classification between IFRS and PRC GAAP.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

47.46.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER US GAAP

The consolidated financial statements are prepared in accordance with IFRS, which differ in certain significant respects from consolidated financial statement prepared under US GAAP. The significant differences relate principally to the accounting for the acquisitions of Jining II, Jining III and Railway Assets, the cost bases of property, plant and equipment and land use rights and related adjustments to deferred taxation.

Under IFRS, the acquisitions of Jining II, Jining III, and the Railway Assets, Heze and Shanxi Group have been accounted for using the purchase method which accounts for the assets and liabilities of Jining II, Jining III and, the Railway Assets, Heze and Shanxi Group at their fair value at the date of acquisition. Any excess of the purchase consideration over the fair value of the net assets acquired is capitalized as goodwill. Prior to January 1, 2005, such goodwill was amortized over a period of ten to twenty years. Subsequent to January 1, 2005, such goodwill is tested for impairment at least annually. Prior to January 1, 2005, any excess of the fair value of the net assets acquired over the purchase consideration is recorded as negative goodwill, which was presented as a deduction from the assets of the Group in the consolidated balance sheet. Such negative goodwill was released to the statement of income on a systematic basis over the remaining weighted average useful life of the identifiable acquired depreciable/amortizable assets. The carrying amount of negative goodwill has been de-recognized and adjusted to the opening retained earnings at January 1, 2005.

Under US GAAP, as the Group, Jining II, Jining III, the Railway Assets, Heze and HezeShanxi Group are entities under the common control of the Parent Company, the assets and liabilities of Jining II, Jining III, the Railway Assets, Heze and HezeShanxi Group are required to be included in the consolidated balance sheet of the Group at historical cost. The difference between the historical cost of the assets and liabilities of Jining II, Jining III, the Railway Assets, Heze and HezeShanxi Group acquired and the purchase price paid is recorded as an adjustment to shareholders’ equity.

In applying the pooling of interest method, the financial statement items of the combining enterprises for the period in which the combination occurs and for any comparative periods disclosed should be included in the financial statements of the combined enterprises as if they had been combined from the beginning of the earliest period presented. The effect of accounting for the acquisition of HezeShanxi Group using the pooling of interest method on the net income under US GAAP for the year ended December 31, 20042005 and 20032004 is as follows:

 

   Year ended December 31,
   2004  2003
   RMB’000  RMB’000

Net income

   

As previously reported

  3,272,478  1,499,249

Pooling of interest adjustment

   

Net loss from Heze

  (8,586) —  
      

As restated

  3,263,892  1,499,249
      

YANZHOU COAL MINING COMPANY LIMITED

LOGO

47.SUMMARY OF DIFFERENCES BETWEEN IFRS AND US GAAP- continued
   Year ended December 31,
   2005  2004
   RMB’000  RMB’000

Net income

   

As previously reported

  2,994,711  3,263,892

Pooling of interest adjustment

   

Net loss from Shanxi

  (3,592) —  
      

As restated

  2,991,119  3,263,892
      

Under IFRS, the mining rights of Jining III and Shanxi Group are stated at purchase consideration less amortization. Mining rights are amortized on a straight line basis over twenty years and twenty-seven years, respectively, being the useful lifelives estimated based on the total proven and probable reserves of the coal mine. Under US GAAP, as both the Group and Jining III are entities under the common control of the Parent Company, the mining rights have to be restated at nil cost and no amortization on mining rights will be recognized. However, a deferred tax asset relating to the capitalization of mining rights is required to be recognized under US GAAP as a higher tax base resulting from the capitalization is utilized for PRC tax purposes.

YANZHOU COAL MINING COMPANY LIMITED

LOGO

46.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER US GAAP - continued

Under IFRS, property, plant and equipment and prepaid lease payments have been stated based on their respective fair values at the date of acquisition even for cases involving transaction between entities under common control. The fair value amount becomes the new cost basisbases of the assets of the Company formed from the reorganization and depreciation is based on such new basis.bases. Under US GAAP, when accounting for a transfer of assets or exchange of shares between entities under common control, the entity that receives the net assets or equity interests shall initially recognize the assets and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer. Accordingly, property, plant and equipment and prepaid lease payments are restated at the historical cost and no additional depreciation on the fair value amounts will be recognized under US GAAP. However, a deferred tax asset relating to the difference in cost bases between the fair value at the date of acquisition and historical cost is required to be recognized under US GAAP and the tax bases of the assets are the fair value amount at the date of acquisition.

Under IFRS, the acquisition of Yanmei Shipping has been accounted for using purchase method which accounted for the assets and liabilities of Yanmei Shipping at their fair value at the date of acquisition. The excess of the purchase consideration over the value of the net assets acquired is capitalized as goodwill and was, prior to January 1, 2007, amortized over a period of ten years prior to January 1, 2005. No further difference in this treatment of goodwill are identified from January 1, 2005 onwards. Under US GAAP, goodwill is not amortized but instead tested for impairment at least annually.annually starting from the initial recognition of goodwill in 2003, when Yanmei Shipping was acquired by the Company.

Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. The Group completes a two-step goodwill impairment test. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.

The cost of mining structure is depreciated using the unit of production method based on the estimated production volume for proven and probable reserves, of which the structure was designed.

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

47.46.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER US GAAP - continued

The adjustments necessary to restate net income and shareholders’ equity in accordance with US GAAP are shown in the tables set out below.

 

  Year ended December 31,   Year ended December 31, 
  2005 2004 2003   2006 2005 2004 
  RMB’000 RMB’000 RMB’000   RMB’000 RMB’000 RMB’000 

Income attributable to the equity holders of the Company as reported under IFRS

   2,881,461   3,154,317   1,386,686    2,372,985   2,881,461   3,154,317 

US GAAP adjustments:

        

Additional depreciation charged on fair valued property, plant and equipment and prepaid lease payments

   187,885   187,418   188,191 

Additional deferred tax charge due to a higher tax base resulting from the difference in cost bases of property, plant and equipment and prepaid lease payments and capitalization of mining rights

   (64,188)  (64,034)  (64,289)

Additional depreciation charged on fair value of property, plant and equipment and prepaid lease payments

   187,859   187,885   187,418 

Additional deferred tax charge due to a higher tax base resulting from the difference in cost bases of property, plant and equipment and prepaid lease payments and capitalization of mining rights, net of minority interest

   (64,311)  (64,188)  (64,034)

Amortization of negative goodwill on acquisition of Jining III

   —     (27,620)  (27,620)   —     —     (27,620)

Amortization of mining rights of Jining III

   6,624   6,624   6,624    6,624   6,624   6,624 

Amortization of mining rights of Shanxi Group, net of minority interest

   402   —     —   

Amortization of goodwill arising on acquisition of Jining II

   —     777   777    —     —     777 

Amortization of goodwill arising on acquisition of the Railway Assets

   —     13,880   8,880    —     —     13,880 

Amortization of goodwill arising on acquisition of Yanmei Shipping

   —     1,116   —      —     —     1,116 

Loss of Heze included in the Group using the pooling of interest method

   (17,071)  (8,586)  —      —     (17,071)  (8,586)

Loss of Shanxi Group included in the Group using the pooling of interest method

   (97,806)  (3,592)  —   
                    

Income under US GAAP

   2,994,711   3,263,892   1,499,249    2,405,753   2,991,119   3,263,892 
                    

Earnings per share under US GAAP, Basic and diluted

  RMB0.61  RMB0.69  RMB0.33   RMB0.49  RMB0.61  RMB0.69 
                    

Earnings per ADS under US GAAP Basic and diluted

  RMB30.44  RMB34.40  RMB16.32   RMB24.46  RMB30.41  RMB34.40 
                    

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

47.46.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER US GAAP - continued

 

  At December 31,   At December 31, 
  2005 2004   2006 2005 
  RMB’000 RMB’000   RMB’000 RMB’000 

Equity attributable to the equity holders of the Company as reported under IFRS

  17,618,577  15,523,751   18,931,779  17,618,577 

US GAAP adjustments:

      

Difference in cost bases of property, plant and equipment and prepaid lease payments

  (2,561,032) (2,561,032)  (2,561,032) (2,561,032)

Additional depreciation/amortization charged on fair valued property, plant and equipment and prepaid lease payments

  1,500,823  1,312,938   1,688,682  1,500,823 

Additional deferred tax asset due to a higher tax base resulting from the difference in cost bases of property, plant and equipment and prepaid lease payments

  349,869  411,871   287,876  349,869 

Goodwill arising on acquisition of Jining II

  (10,106) (10,106)  (10,106) (10,106)

Negative goodwill arising on acquisition of Jining III, net

  —    27,621 

Mining rights of Jining III

  (99,359) (105,983)  (92,735) (99,359)

Additional deferred tax asset due to a higher tax base resulting from capitalization of mining rights

  32,788  34,974   30,602  32,788 

Difference in cost bases of mining rights of Shanxi Group, net of minority interest

  (130,640) —   

Additional deferred tax due to a higher tax base resulting from capitalization of mining rights of Shanxi Group, net of minority interest

  43,112  —   

Goodwill arising on acquisition of Railway Assets

  (97,240) (97,240)  (97,240) (97,240)

Goodwill arising on acquisition of Heze

  (35,645) (35,645)

Amortization of goodwill on acquisition of Yanmei Shipping

  1,116  1,116   1,116  1,116 

Net assets of Heze incorporated under pooling of interest

   

Net assets of Shanxi Neng Hua incorporated under pooling of interest

   

- current assets

  —    442,355   —    252,476 

- property, plant and equipment, net

  —    192,963   —    426,798 

- prepaid lease payments

  —    1,366 

- current liabilities

  —    (44,292)  —    (60,895)

- non-current liabilities

  —    (3,456)

- minority interests

  —    (25,592)  —    (17,423)
              
  —    565,434   —    598,866 
              

Consideration payable on acquisition of Heze

  —    (584,008)

Goodwill arising on acquisition of Heze

  (35,645) —   

Consideration payable on acquisition of Shanxi

  —    (733,346)

Goodwill arising on acquisition of Shanxi Group

  (142,547) —   
              

Shareholders’ equity under US GAAP

  16,699,791  14,519,336   17,913,222  16,565,311 
              

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

47.46.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER US GAAP - continued

A reconciliation of certain significant financial statement line items to the approximate amounts determined under US GAAP is as follows:

 

  At December 31,   At December 31, 
  2005 2004   2006 2005 
  RMB’000 RMB’000   RMB’000 RMB’000 

Total current assets

      

As reported under IFRS

  10,951,151  8,319,577   9,871,911  10,951,151 

US GAAP adjustments:

      

Net assets of Heze incorporated under pooling of interest

   

Net assets of Shanxi Group incorporated under pooling of interest

   

- current assets

  —    442,355   —    252,476 

Consideration payable on acquisition of Heze

  —    (584,008)

Consideration payable on acquisition of Shanxi Group

  —    (733,346)
              

As adjusted under US GAAP

  10,951,151  8,177,924   9,871,911  10,470,281 
              

Mining rights

      

As reported under IFRS

  153,265  138,617   307,909  153,265 

US GAAP adjustment:

      

Mining rights of Jining III

  (99,359) (105,983)  (92,735) (99,359)

Mining rights of Shanxi Group

  (163,948) —   
              

As adjusted under US GAAP

  53,906  32,634   51,226  53,906 
              

Prepaid lease payments

   

As reported under IFRS

   

- Current portion

  13,746  13,465 

- Non-current portion

  578,988  579,773 
       
  592,734  593,238 

US GAAP adjustments:

   

Difference in cost bases of land use rights

  (550,634) (550,634)

Additional depreciation charged on land use rights

  75,274  64,261 

Net assets of Shanxi Group incorporated under pooling of interest

   

- prepaid lease payments

  —    1,366 
       

As adjusted under US GAAP

  117,374  108,231 
       

Analysis as:

   

Current

  13,746  13,465 

Non-current

  103,628  94,766 
       
  117,374  108,231 
       

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

47.46.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER US GAAP - continued

 

   At December 31, 
   2005  2004 
   RMB’000  RMB’000 

Prepaid lease payments

   

As reported under IFRS

   

- Current portion

  13,465  13,171 

- Non-current portion

  579,773  578,547 
       
  593,238  591,718 

US GAAP adjustments:

   

Difference in cost bases of land use rights

  (550,634) (550,634)

Additional depreciation charged on land use rights

  64,261  53,248 
       

As adjusted under US GAAP

  106,865  94,332 
       

Analysis as:

   

Current

  13,465  13,171 

Non-current

  93,400  81,161 
       
  106,865  94,332 
       

Property, plant and equipment

   

As reported under IFRS

  9,318,486  8,537,150 

US GAAP adjustments:

   

Difference in cost bases of property, plant and equipment

  (2,010,398) (2,010,398)

Additional depreciation charged on property, plant and equipment

  1,436,562  1,259,690 

Net assets of Heze incorporated under pooling of interests

   

- Property, plant and equipment

  —    192,963 
       

As adjusted under US GAAP

  8,744,650  7,979,405 
       
   At December 31, 
   2006  2005 
   RMB’000  RMB’000 

Property, plant and equipment

   

As reported under IFRS

  12,139,939  9,318,486 

US GAAP adjustments:

   

Difference in cost bases of property, plant and equipment

  (2,010,398) (2,010,398)

Additional depreciation charged on property, plant and equipment

  1,613,408  1,436,562 

Net assets of Shanxi Group incorporated under pooling of interests

   

- property, plant and equipment

  —    426,798 
       

As adjusted under US GAAP

  11,742,949  9,171,448 
       

Goodwill

   

As reported under IFRS

  295,584  153,037 

US GAAP adjustments:

   

Goodwill arising on contingent payment for acquisition of Railway Assets, net

  (97,240) (97,240)

Goodwill arising on acquisition of Jining II, net

  (10,106) (10,106)

Goodwill arising on acquisition of Heze

  (35,645) (35,645)

Goodwill arising on acquisition of Shanxi Group

  (142,547) —   

Amortization arising on acquisition of Yanmei Shipping

  1,116  1,116 
       

As adjusted under US GAAP

  11,162  11,162 
       

Deferred tax assets/(liabilities)

   

As reported under IFRS

  (283,823) (146,279)

US GAAP adjustments:

   

Additional deferred tax asset attributable to differences in cost bases of property, plant and equipment

  131,007  189,366 

Additional deferred tax asset attributable to differences in cost bases of land use rights

  156,869  160,503 

Additional deferred tax asset attributable to capitalization of mining rights

  30,602  32,788 

Additional deferred tax asset attributable to capitalization of mining rights of Shanxi Group

  54,103  —   
       

As adjusted under US GAAP

  88,758  236,378 
       

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

47.46.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER US GAAP - continued

 

   At December 31, 
   2005  2004 
   RMB’000  RMB’000 

Goodwill

   

As reported under IFRS

  153,037  117,392 

US GAAP adjustments:

   

Goodwill arising on contingent payment for acquisition of Railway Assets, net

  (97,240) (97,240)

Goodwill arising on acquisition of Jining II, net

  (10,106) (10,106)

Goodwill arising on acquisition of Heze

  (35,645) —   

Amortization arising on acquisition of Yanmei Shipping

  1,116  1,116 
       

As adjusted under US GAAP

  11,162  11,162 
       

Negative goodwill

   

As reported under IFRS

  —    (27,621)

US GAAP adjustment:

   

Negative goodwill arising on acquisition of Jining III, net

  —    27,621 
       

As adjusted under US GAAP

  —    —   
       

Deferred tax assets/(liability)

   

As reported under IFRS

  (146,279) (23,104)

US GAAP adjustments:

   

Additional deferred tax asset attributable to differences in cost bases of property, plant and equipment

  189,366  247,734 

Additional deferred tax asset attributable to differences in cost bases of land use rights

  160,503  164,137 

Additional deferred tax asset attributable to capitalization of mining rights

  32,788  34,974 
       

As adjusted under US GAAP

  236,378  423,741 
       
   At December 31,
   2006  2005
   RMB’000  RMB’000

Current liabilities

   

As reported under IFRS

  3,828,048  3,429,030

US GAAP adjustment:

   

Current liabilities of Shanxi Group incorporated under pooling of interest

  —    60,895
      

As adjusted under US GAAP

  3,828,048  3,489,925
      

Non-current liabilities

   

As reported under IFRS

  353,138  31,827

US GAAP adjustment:

   

Non-current liabilities of Shanxi Group incorporated under pooling of interest

  —    3,456
      

As adjusted under US GAAP

  353,138  35,283
      

Minority interest

   

As reported under IFRS

  61,961  28,731

US GAAP adjustment:

   

Minority interest of capitalization of mining rights of Shanxi Group

  (22,317) —  

Net assets of Shanxi Group incorporated under pooling of interest

  —    17,423
      

As adjusted under US GAAP

  39,644  46,154
      

   Year ended December 31, 
   2006  2005  2004 
   RMB’000  RMB’000  RMB’000 

Cost of sales and service provided

    

As reported under IFRS

  6,190,069  5,288,588  4,551,703 

US GAAP adjustments:

    

Additional depreciation charged on property, plant and equipment

  (165,103) (165,677) (164,169)

Amortization of mining rights of Jining III

  (6,624) (6,624) (6,624)

Amortization of mining rights of Shanxi Group

  (504) —    —   
          

As adjusted under US GAAP

  6,017,838  5,116,287  4,380,910 
          

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

47.46.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER US GAAP - continued

 

   At December 31,
   2005  2004
   RMB’000  RMB’000

Current liabilities

    

As reported under IFRS

  3,429,030  2,545,111

US GAAP adjustment:

    

Net assets of Heze incorporated under pooling of interest

  —    44,292
      

As adjusted under US GAAP

  3,429,030  2,589,403
      

Minority interest

    

As reported under IFRS

  28,731  3,674

US GAAP adjustment:

    

Net assets of Heze incorporated under pooling of interest

  —    25,592
      

As adjusted under US GAAP

  28,731  29,266
      

  Year ended December 31,   Year ended December 31, 
  2005 2004 2003   2006 2005 2004 
  RMB’000 RMB’000 RMB’000   RMB’000 RMB’000 RMB’000 

Cost of sales and service provided

    

Selling, general and administrative expenses

    

As reported under IFRS

  5,288,588  4,551,703  3,755,023   2,230,142  1,918,788  1,479,863 

US GAAP adjustments:

        

Additional depreciation charged on property, plant and equipment

  (165,677) (164,169) (163,459)

Amortization of mining rights of Jining III

  (6,624) (6,624) (6,624)

Additional depreciation charged on:

    

- property, plant and equipment

  (11,653) (11,105) (12,236)

- land use rights

  (11,103) (11,103) (11,013)

Amortization of goodwill arising on acquisition of Railway Assets

  —    —    (13,880)

Amortization of goodwill arising on acquisition of Jining II

  —    —    (777)

Amortization of goodwill arising on acquisition of Yanmei Shipping

  —    —    (1,116)

Loss of Heze included in the Group using the pooling of interest method

  —    17,071  8,586 

Loss of Shanxi Group included in the Group using the pooling of interest method

  92,745  3,592  —   
                    

As adjusted under US GAAP

  5,116,287  4,380,910  3,584,940   2,300,131  1,917,243  1,449,427 
                    

Other operating income

    

As reported under IFRS

  165,837  135,038  165,732 

US GAAP adjustments:

    

Amortization of negative goodwill on acquisition of Jining III

  —    —    (27,620)

Reclassification of interest income from bank deposits and investments in securities to other income

  (94,372) (91,715) (92,711)

Reclassification of dividend income to other income

  (6,311) (4,465) (4,465)
          

As adjusted under US GAAP

  65,154  38,858  40,936 
          

Interest expenses

    

As reported under IFRS

  26,349  24,611  35,942 

US GAAP adjustments:

    

Loss of Shanxi Group included in the Group using the pooling of interest method

  5,061  —    —   
          

As adjusted under US GAAP

  31,410  24,611  35,942 
          

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

47.46.SUMMARY OF DIFFERENCES BETWEEN IFRS AND US GAAP - continuedCONSOLIDATED FINANCIAL STATEMENT

PREPARED UNDER IFRS AND THOSE UNDER US GAAP - continued

   Year ended December 31, 
   2005  2004  2003 
   RMB’000  RMB’000  RMB’000 

Selling, general and administrative expenses

    

As reported under IFRS

  1,918,788  1,479,863  1,264,858 

US GAAP adjustments:

    

Additional depreciation charged on:

    

- property, plant and equipment

  (11,105) (12,236) (13,719)

- land use rights

  (11,103) (11,013) (11,013)

Amortization of goodwill arising on acquisition of Railway Assets

  —    (13,880) (8,880)

Amortization of goodwill arising on acquisition of Jining II

  —    (777) (777)

Amortization of goodwill arising on acquisition of Yanmei Shipping

  —    (1,116) —   

Loss of Heze included in the Group using the pooling of interest method

  17,071  8,586  —   
          

As adjusted under US GAAP

  1,913,651  1,449,427  1,230,469 
          

Other Operating income

    

As reported under IFRS

  135,038  165,732  105,845 

US GAAP adjustments:

    

Amortization of negative goodwill on acquisition of Jining III

  —    (27,620) (27,620)

Reclassification of interest income from bank deposits and investments in securities to other income

  (91,715) (92,711) (17,814)

Reclassification of dividend income to other income

  (4,465) (4,465) (4,810)
          

As adjusted under US GAAP

  38,858  40,936  55,601 
          

   Year ended December 31, 
   2006  2005  2004 
   RMB’000  RMB’000  RMB’000 

Other income

    

As reported under IFRS

  —    —    —   

US GAAP adjustment:

    

Reclassification of interest income from bank deposits and investments in securities to other income

  94,372  91,715  92,711 

Reclassification of dividend income to other income

  6,311  4,465  4,465 
          

As adjusted under US GAAP

  100,683  96,180  97,176 
          

Income taxes

    

As reported under IFRS

  1,354,656  1,538,036  1,518,762 

US GAAP adjustments:

    

Additional deferred tax charges attributable to differences in cost bases of property, plant and equipment and prepaid lease payments

  61,992  62,002  61,848 

Additional deferred tax charges attributable to capitalization of mining rights

  2,186  2,186  2,186 

Additional deferred tax charges attributable to capitalization of Shanxi Group

  166  —    —   
          

As adjusted under US GAAP

  1,419,000  1,602,224  1,582,796 
          

Minority interest

    

As reported under IFRS

  1,017  (476) (253)

US GAAP adjustments:

    

Amortization of mining rights of Shanxi Group

  (102) —    —   

Additional deferred tax charges attributable to capitalization of Shanxi Group

  33  —    —   
          

As adjusted under US GAAP

  948  (476) (253)
          

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

47.46.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER US GAAP - continued

   Year ended December 31,
   2005  2004  2003
   RMB’000  RMB’000  RMB’000

Other income

      

As reported under IFRS

  —    —    —  

US GAAP adjustment:

      

Reclassification of interest income from bank deposits and investments in securities to other income

  91,715  92,711  17,814

Reclassification of dividend income to other income

  4,465  4,465  4,810
         

As adjusted under US GAAP

  96,180  97,176  22,624
         

Income taxes

      

As reported under IFRS

  1,538,036  1,518,762  587,710

US GAAP adjustments:

      

Additional deferred tax charges attributable to differences in cost bases of property, plant and equipment and prepaid lease payments

  62,002  61,848  62,103

Additional deferred tax charges attributable to capitalization of mining rights

  2,186  2,186  2,186
         

As adjusted under US GAAP

  1,602,224  1,582,796  651,999
         

YANZHOU COAL MINING COMPANY LIMITED

LOGO

47.SUMMARY OF DIFFERENCES BETWEEN IFRS AND US GAAP - continued

The following US GAAP condensed consolidated balance sheets and statements of income have been derived from the financial statements prepared in accordance with IFRS and reflect the adjustments and reclassifications presented above to conform to US GAAP.

CONSOLIDATED BALANCE SHEETS

 

   At December 31,
   2005  2004
   RMB’000  RMB’000

Assets

    

Current assets

  10,951,151  8,177,924
      

Mining rights

  53,906  32,634

Prepaid lease payment

  93,400  81,161

Property, plant and equipment

  8,744,650  7,979,405

Goodwill

  11,162  11,162

Deferred tax assets

  236,378  423,741

Other non-current assets

  98,732  673,035
      
  20,189,379  17,379,062
      

Liabilities and shareholders’ equity

    

Current liabilities

  3,429,030  2,589,403

Non-current liabilities

  31,827  241,057

Shareholders’ equity

  16,699,791  14,519,336

Minority interest

  28,731  29,266
      
  20,189,379  17,379,062
      

CONSOLIDATED STATEMENTS OF INCOME

   At December 31,
   2006  2005
   RMB’000  RMB’000

Assets

    

Current assets

  9,871,911  10,470,281
      

Mining rights

  51,226  53,906

Prepaid lease payments

  103,628  94,766

Property, plant and equipment

  11,742,949  9,171,448

Goodwill

  11,162  11,162

Deferred tax assets

  88,758  236,378

Other non-current assets

  264,418  98,732
      
  22,134,052  20,136,673
      

Liabilities and shareholders’ equity

    

Current liabilities

  3,828,048  3,489,925

Non-current liabilities

  353,138  35,283

Shareholders’ equity

  17,913,222  16,565,311

Minority interest

  39,644  46,154
      
  22,134,052  20,136,673
      

 

  Year ended December 31,   Year ended December 31, 
  2005 2004 2003   2006 2005 2004 
  RMB’000 RMB’000 RMB’000   RMB’000 RMB’000 RMB’000 

Gross sales of coal

  12,783,567  12,283,588  11,757,052 

Railway transportation service income

  163,437  220,771  154,585   160,399  163,437  220,771 

Gross sales of coal

  12,283,588  11,757,052  8,386,629 

Transportation costs of coal

  (930,103) (1,402,715) (1,592,294)  (936,619) (930,103) (1,402,715)

Cost of sales and service provided

  (5,116,287) (4,380,910) (3,584,940)  (6,017,838) (5,116,287) (4,380,910)

Selling, general and administrative expenses

  (1,913,651) (1,449,427) (1,230,469)  (2,300,131) (1,917,243) (1,449,427)

Other operating income

  38,858  40,936  55,601   65,154  38,858  40,936 

Interest expenses

  (24,611) (35,942) (59,966)  (31,410) (24,611) (35,942)

Other income

  96,180  97,176  22,624   100,683  96,180  97,176 
                    

Income before income taxes

  4,597,411  4,846,941  2,151,770   3,823,805  4,593,819  4,846,941 

Income taxes

  (1,602,224) (1,582,796) (651,999)  (1,419,000) (1,602,224) (1,582,796)
                    

Income before minority interest

  2,995,187  3,264,145  1,499,771   2,404,805  2,991,595  3,264,145 

Minority interest

  (476) (253) (522)  948  (476) (253)
                    

Net income

  2,994,711  3,263,892  1,499,249   2,405,753  2,991,119  3,263,892 
                    

YANZHOU COAL MINING COMPANY LIMITED

LOGOLOGO

 

47.46.SUMMARY OF DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENT PREPARED UNDER IFRS AND THOSE UNDER US GAAP - continued

Details of effect of recent accounting pronouncements in the US GAAP are as follows:

In December 2004,February 2006, the Financial Accounting Standards Board (“FASB”) issued StatementFASB No. 155, (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments—an amendment of Financial Accounting Standard (“SFAS”)FASB Statements No. 123 (revised 2004) (“133 and 140”. This statement is effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company will adopt SFAS No. 123-R”). “Share-Based Payment”, which is a revision155 in the first quarter of 2007. The Company has not determined the impact, if any, of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123-R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Generally, the approach in SFAS No. 123-R is similar to the approach described in SFAS No. 123. However, SFAS No. 123-R requires all share-based payments to employees, including grants155 on its financial position, results of employee stock options, to be recognized in the income statement based on the grant-date fair values. Pro forma disclosure previously permitted under SFAS No. 123 is no longer an alternative. The new standard, as recently amended, will be effective for the Group in the annual reporting period beginning after January 1, 2006. Under SFAS No. 123-R, the Group could elect the modified prospective or modified retroactive option for transition on the adoption of this new standard. Under the modified retroactive option, prior periods are adjusted on a basis consistent with the pro forma disclosures previously required for those periods by SFAS No. 123. Under the modified prospective option, compensation expense for all unvested stock options must be recognized on or after the required effective date based on the grant-date fair value of those stock options. The Group does not issue stock optionsoperations and therefore the adoption of SFAS No. 123-R did not have material impact on the Group’s financial statements.cash flows.

In November 2004,June 2006, the FASB issued SFASFASB Interpretation No. 151, “Inventory Costs — 48, “Accounting for Uncertainty in Income Taxes—an amendmentinterpretation of ARBFASB Statement No. 43, Chapter 4”. SFAS No. 151109” (“FIN 48”), which clarifies the accounting that requires abnormal amountsfor uncertainty in income tax positions in FASB Statement No. 109, ‘“Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of idle facility expenses, freight, handling costs, and spoilage costsa tax position taken or expected to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred on or after July 1, 2005. The Group adopted SFAS No.151 on July 1, 2005 and it did not havetaken in a material effect on the Group’s financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29” (“SFAS 153”), which amends Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions” to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153tax return. FIN 48 is effective for nonmonetary assets exchanges occurring in fiscal periods beginning after June 15, 2005. The Group does not anticipate that the adoption of this statement will have a material effect on the Group’s financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”) which replaces Accounting Principles Board Opinions No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.2006. The Group doesCompany will adopt FIN 48 in the first quarter of 2007. The Company has not anticipatedetermined the impact, if any, of FIN 48 on its financial position, results of operations and cash flows.

In September 2006 the FASB issued FASB Statement No. 157, (“SFAS 157”), “Fair Value Measurement”. SFAS 157 addresses standardizing the measurement of fair value for companies who are required to use a fair value measure of recognition for recognition or disclosure purposes. The FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure date”. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, of SFAS 157 on its financial position, results of operations and cash flows.

In September 2006, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No.108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of this statement willSAB 108 did not have a material effectimpact on the Group’sCompany’s consolidated financial position, or results of operations.operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, of SFAS 159 on its financial position, results of operations and cash flows.

 

F-71F-68