As filed with Securities and Exchange Commission on June 26, 2008

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

OR

For the fiscal year ended December 31, 20072008

OR

OR

Date of event requiring this shell company report

Commission file number 001-14714

[GRAPHIC APPEARS HERE]

(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.

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  ¨    No  x

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

Indicate by check mark 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 basis of accounting the registrant has used to prepare the financial statements included in this filing:

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

CAUTIONARY STATEMENT

This Annual Reportannual report contains forward-looking statements, which do not relate to historical financial information. The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “intend,” “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. These statementsamended. The terms “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will” and similar expressions are subjectintended to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. We caution you not to place undue reliance on any suchidentify forward-looking statements, which speak only as of the date they are made.statements. These forward-looking statements include, without limitation, statements relating to:

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 depend on a number of risks and uncertainties, which could cause actual results to differ materially from our historical results and expectations. These risks are more fully described in further detail in the section entitled “Item 3. Key Information – Risk Factors”.Factors.”

Consequently, allAll of the forward-looking statements made in this Annual Reportannual report are qualified by this cautionary statement. 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, our business or operations.

We caution you not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. Unless otherwise indicated, statistical and market trend information, as well as statements relatedwe are required to market position and competitive data, is based on our internal statistics and/do so under U.S. federal securities laws or estimates gathered from our own research and/other applicable laws, we do not intend to update or various publicly available sources.revise any forward-looking statements.

DEFINITIONS AND SUPPLEMENTAL INFORMATION

As used in this Annual Report,annual report, references to “Yanzhou Coal” and “the Company” refer to Yanzhou Coal Mining Company Limited, on a stand-alone basis and do not include itsour subsidiaries that have been consolidated into our accounts for the purposes of the consolidated financial statements. Yanzhou Coal is a joint stock limited company incorporated under the laws of the PRC in 1997, with its H Shares, American Depositary Shares and A Shares listed on the Hong Kong Stock Exchange, the New York Stock Exchange and the Shanghai Stock Exchange, respectively.

References to “we”“We”, “our”, “our Company” or “us” referrefers to Yanzhou Coal and its subsidiaries, which have been consolidated into the accounts of Yanzhou Coal for the purpose of the consolidated financial statements, unless the context indicates otherwise.

References to the “Yankuang“Yankuang Group”, “Controlling Shareholder” or “Parent Company” referrefers to Yankuang Group Corporation Limited, a company with limited liability established under the laws of the PRC in 1996, (formerly known as Yanzhou Mining (Group) Corporation Limited). Yankuang Group controlled 52.86% of the Company’s total share capital of as of December 31, 2007. References to any time prior to our incorporation, are to the businesses, assets and liabilitiesdate of the Predecessor (defined below) that were not transferred to us in the restructuring and incorporation of the Company in 1997 and, where the context requires, includes our subsidiaries. References to the “Predecessor” mean the entity that held all our assets and liabilities as well as the assets and liabilities of the Controlling Shareholder prior to the restructuring in 1997.this annual report.

“Yulin Nenghua” refers to Yanzhou Coal Yulin Nenghua Company Limited, a company with limited liability incorporated under the laws of the PRC in 2004 and a 97% non-whollywholly owned subsidiary of the Company. Yulin Nenghua is mainly engaged in the construction and operation of a 600,000 tonne methanol project.project and a supporting power plant in Shaanxi Province.

“Yushuwan Coal Mine Company” refers to Shaanxi Yushuwan Coal Mine Company Limited, a joint venture among the Company, Chia Tai Energy & Chemicals Company Limited and Yushen Coal Company Limited, of which we will hold a 41% equity interest. As of the date of this Annual Report,annual report, the establishment of Yushuwan Coal Mine Company was still pending review by the relevant regulatory authorities. Yushuwan Coal Mine Company will engage in the construction and operation of Yushuwan Coal Mine in Yulin City, Shaanxi Province.

“Heze Nenghua” refers to Yanmei Heze Nenghua Company Limited, a company with limited liability incorporated under the laws of the PRC in 2004 and a 96.67% non-wholly owned subsidiary of the Company.

“Shanxi Nenghua” refers to Yanzhou Coal Shanxi Nenghua Company Limited, a company with limited liability incorporated under the laws of the PRC in 2002 and a wholly-ownedwholly owned subsidiary of the Company. Shanxi Nenghua mainly engaged in the management ofmanages the Company’s investment projects in Shanxi Province.

“Tianchi Energy” refers to Shanxi Heshun Tianchi Energy Company Limited, a company with limited liability incorporated under the laws of the PRC in 1999 and an 81.31% non-wholly owned subsidiary of Shanxi Nenghua. Tianchi Energy is mainly engaged in the operation of Tianchi Coal Mine.

“Tianhao Chemicals” refers to Shanxi Tianhao Chemicals Company Limited, a joint stock company incorporated under the laws of the PRC in 2002 and a 99.85% non-wholly owned subsidiary of Shanxi Nenghua. Tianhao Chemicals is mainly engaged in the construction and operation of a 100,000 tonne methanol project.project and a supporting power plant.

“Yancoal Australia” refers to Yancoal Australia Pty Limited, a company with limited liability incorporated under the laws of Australia in 2004 and a wholly-ownedwholly owned subsidiary of the Company. Yancoal Australia is mainly engaged the management of the Company’s investment projects in Australia.

“Austar Company” refers to Austar Coal Mine Pty Limited, a company with limited liability incorporated under the laws of Australia in 2004 and a wholly-ownedwholly owned subsidiary of Yancoal Australia Pty Limited. Austar Company is mainly engaged in the construction and operation of Austar Coal Mine.

“Hua Ju Energy” refers to Shangdong Hua Ju Energy Company Limited, a joint stock company incorporated under the laws of the PRC in 2002 and a 74% non-wholly owned subsidiary of the Company. Hua Ju Energy operates six power plants that generate power utilizing coal gangue and coal slurry, by-products of our coal mining process.

“Railway Assets” referrefers to theour railway assets specifically used for transporting coal by the Company.network that we use to transport coal.

“Shares” herein referrefers collectively to our (i) domestic invested shares held bylisted on the Controlling Shareholder on behalf of the State,Shanghai Stock Exchange, par value RMB1.00 each (the “State Legal Person“Domestic Shares” or “A Shares”), (ii) domestic invested shares other than those held by the Controlling Shareholder, par value RMB1.00 each (the “RMB Ordinary A Shares”), (iii) overseas listed foreign invested shares issued and traded in HK dollars and listed on the Hong Kong Stock Exchange, par value RMB1.00 each (the “H Shares”), and (iv)(iii) American Depositary Shares (the “ADSs”), each of which represented 50 H Shares in 2007. The ADSs are evidenced by American Depositary Receipts (“ADRs”). “Domesticup until the stock split on June 27, 2008 and now represent 10 H Shares.

“Promoter Shares” herein referrefers to the State Legal PersonDomestic Shares and RMB Ordinary A Shares collectively.held by our Controlling Shareholder.

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

“Articles of Association” referrefers to our articlesArticles of association,Association, as amended from time to time.

“Hong Kong Stock Exchange” meansrefers to The Stock Exchange of Hong Kong Limited.

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

As used herein, “Annual Report”municipality and “Southern China” refers to the annual report of Yanzhou Coal Mining Company Limited, prepared on Form 20-F for the fiscal year ended December 31, 2007.Guangdong Province and Hunan Province and Guangxi autonomous region.

As used herein, “PRC“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.

“Tonne” means metric tonne, equalwhich is equivalent to 1,000 kilograms or approximately 2,205 pounds.

“Ex-mine” refers to an arrangement for the sale of coal where the seller delivers coal at the coal mine and the buyer arrangesis responsible for arranging and bearing the transportation for the deliveryrelated costs and expenses of transporting the coal from the mine and bears the related costs or expenses.mine.

Certain mining terms used hereinin this annual report are defined in the “Glossary of Mining Terms”, which iswas included as Appendix B to our registration statement on Form F-l that waswe filed with the U.S. Securities and Exchange Commission. A copy of the “Glossary of Mining Terms” may be obtained upon written request to the Company.

Our financial statements are denominated in Renminbi or RMB, the lawful currency of the PRC. Except as otherwise stated, all monetary amounts in this Annual Report are presented in RMB.

Our audited financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

References to the “Financial Statements” herein refer to the financial statements in Item 18 of this Annual Report.

EXCHANGE RATES

Unless otherwise specified, references in this Annual Reportannual report to “U.S. dollars” or “US$” are to United States dollars, references to “HK dollars” or “HK$” are to Hong Kong dollars, references to “AUD” are to Australian dollars and references to “RMB” are to Renminbi.Renminbi, the lawful currency of the PRC. Our financial statements are denominated in RMB and, except as otherwise stated, all monetary amounts in this annual report are presented in RMB.

Solely for your convenience, certain items in this Annual Reportannual report contain translations of Renminbi amounts into U.S. dollars. All translations of amounts from Renminbi to U.S. dollars, which have been made except as otherwise stated, 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, 20072008 of US$1.00 = RMB7.2946.RMB6.8225. No representation is made that the Renminbi amounts or any other currency, could have been or could be converted into U.S. dollars at that rate, or at all.

SPECIAL NOTE ON OUR FINANCIAL INFORMATION

We make an explicit and unreserved statement of compliance with IFRSInternational Financial Reporting Standards (“IFRS”) with respect to our consolidated financial statements as of December 31, 2007 and 2008 and for the three years ended December 31, 2006 and 20072008 included in this Annual Report.annual report. Deloitte Touche Tohmatsu, our independent registered public accounting firms for fiscal year 2006 and fiscal year 2007, and Grant Thornton, our independent registered public accounting firm hasfor fiscal year 2008, respectively, have issued an auditor’s report on our financial statements prepared in accordance with IFRS, as issued by the IASB.International Accounting Standards Board (“IASB”).

In accordance with rule amendments adopted by the U.S. Securities and Exchange Commission, or the SEC, which became effective on March 4, 2008, we are not required to provide a reconciliation to generally accepted accounting principles in the United States, or U.S. GAAP.

PART I

Not applicable.

Not applicable.

A. Selected Financial Data

Historical Financial InformationData

The following selected consolidated financial information presents data was derived from our balance sheet, income statement and cash flow statement as of and for the years ended December 31, 2003, 2004, 2005, 2006, 2007 and 2007. The following2008. You should read this financial information should be read in conjunctiondata together with the audited financial statements included elsewhere in this Annual Report.annual report. Unless otherwise indicated, the financial statements are prepared and presented in accordance with IFRS, as issued by the IASB.

		As of and for the Year Ended December 31,
		2003			2004			2005			2006			2007			2007
		RMB			RMB			RMB			RMB			RMB			US$
		(Amounts in millions except Share, per Share, and per ADS data)
CASH FLOW DATA
Net cash provided by operating activities		2,701.2			4,418.4			3,939.3			3,767.2			4,558.6			624.9
Depreciation		920.5			958.7			952.1			1,062.0			1,237.1			169.6
Net cash used in investing activities		(1,310.3	)		(2,300.8	)		(2,262.5	)		(3,625.5	)		(3,790.9	)		(519.7	)
Net cash (used in) provided by financing activities		(911.4	)		1,075.4			(1,009.3	)		(1,291.5	)		(1,018.7	)		(139.7	)
BALANCE SHEET DATA
Total current assets		4,430.5			8,319.6			10,951.1			9,871.9			9,908.2			1,358.3
Total current liabilities		2,372.0			2,545.1			3,429.0			3,828.0			4,099.5			562.0
Net current assets		2,058.5			5,774.5			7,522.1			6,043.9			5,808.7			796.3
Property, plant and equipment, net		8,616.4			8,537.2			9,318.5			12,139.9			13,524.6			1,854.1
Total assets		13,909.9			18,336.7			21,254.4			23,458.7			26,187.4			3,590.0
Total long-term bank borrowing		400.0			200.0			—			330.0			258.0			37.5
Equity attributable to our equity holders		11,083.2			15,523.8			17,618.6			18,931.8			21,417.5			2,936.1

Number of Shares Outstanding

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:

On June 20, 200819, 2009, the noon buying rate for Renminbi was US$1.00 = RMB6.8796.RMB6.8360.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Our business and results of operations are dependentdepend on the historically cyclicalvolatile domestic and international coal markets.

As substantially all of our revenue is derived from the sales of coal, our business and operating results are dependentdepend on domestic and international supply and demand for coal. The domestic and international coal markets are cyclical and experiencehave historically experienced pricing volatility, in supply and demand. The coal markets are influenced by a number ofwhich reflect, among other factors, beyond our control, including, but not limited to, the conditions of the PRC and global economy and demand fluctuations in key industries that have high demand for coal. Fluctuationscoal consumption. Difficult economic conditions have resulted in supply of and demand for coal affectlower coal prices, which in turn affect our operational and financial performance. The average selling price of our coal products was RMB349.5, RMB341.8, RMB409.0 and RMB409.0RMB640.2 per tonne in 2005, 2006, 2007 and 2007,2008, respectively. Our products have historically experienced substantial price fluctuations, and we believe that we will continue to experience volatilitySince reaching record high levels in pricing. In addition, as2008, domestic coal prices have reached record-high levels infallen due to weakening demand as a result of the global economic downturn. We expect our 2009 average selling prices for coal to be lower than our 2008 weaverages and cannot assure you that we will continue to sell ourreach the same level of profitability as in 2008.

The domestic and international coal as profitably as at present.

markets are affected by supply and demand. The demand for coal is primarily affected by the global economic developmenteconomy and coal demand bythe performance of power generation, chemical, metallurgy and construction materials industries. In addition, the availability and prices of alternative sources of energy to coal, such as natural gas, oil, hydropower and nuclear power as well as international shipping costs also affect demand for coal. The supply of coal, on the other hand, is primarily affected by the geographical location of coal reserves, the transportation capacity of coal transportation railways, the volume of domestic and international coal supplies and the type, quality and price of competitors’ coal. Developments in the international coal market may adversely affect our export sales and future operational results. A significant increase in global coal supply or reduction in coal demand for our coal by foreign or domestic electricity generation or metallurgy industries may have an adverse effect on coal prices, which in turn, may reduce our profitability and adversely affect our business and results of operations.

Our business and profitability are affected by global economic conditions.

The current global financial crisis and economic downturn have adversely affected economies and businesses around the world, including in China. Due to the global economical downturn and a decrease in consumer demand, the economic situation in China has been quite severe since the second half of 2008. This change in the macro-economic conditions has and is expected to continue to have an adverse impact on our business and operations. Coal prices and margins are likely to remain lower than in previous year due to reduced demand. We have experienced pricing pressure on our coal products, which has an adverse effect on our profitability. These factors may also lead to intensified competition for market share and available margin. The financial and economic situation may have a negative impact on third parties suppliers and customers. Any of these factors may affect our results of operations, financial condition and cash flow.

Our business is dependent on our major customers.

Prior toSince 2004, Shandong Power and Fuel Company was our largest customer. In 2005, 2006 and 2007, Huadian Power International Corporation Limited (“Huadian International”) washas been our largest customer. We supplied 5.6 million, 4.9 million, 5.4 million and 5.48.8 million tonnes of coal to Huadian International in 2005, 2006, 2007 and 2007,2008, respectively, which represented 13.7%14.2%, 11.5%15.5% and 12.2%23.3% of our net sales of coalvolume in the same periods, respectively. Substantially all of Huadian International’s coal purchases were supplied to Zouxian Electric Power Plant (“Zouxian Power Plant”). The portion of our coal sales, conducted through Huadian International, to Zouxian Power Plant accounted for 13.4%11.3%, 11.3%12.1% and 12.1%12.9% of our net sales of coal in 2005, 2006, 2007 and 2007,2008, respectively.

Zouxian Power Plant used approximately 8.611.8 million tonnes of coal in 2007.2008. We estimate that we supplied approximately 83.6%92.9%, 92.9%60.8% and 60.8%57.3% of Zouxian Power Plant’s annual coal requirement in 2005, 2006, 2007 and 2007,2008, respectively. Our sales volume and net sales of coal generated from Zouxian Power Plant increased from 2006 to 2007. However, Zouxian Power Plant underwent a capacity expansion in the fourth quarter of 2006 and therefore, significantly increased its coal demand in 2007. As a result, the coal that we supplied decreased as a percentage of Zouxian Power Plant’s total coal demand in 2007. We believe we will remain the principal coal supplier to Zouxian Power Plant because (i) our geographic proximity to Zouxian Power Plant, (ii) our railway network is the only network with direct access to Zouxian Power Plant and (iii) Zouxian Power Plant’s boilers have been custom designed to use the type of coal that we produce. Because purchases by Zouxian Power Plant compose a large portion of our revenue, any adverse developments at Zouxian Power Plant could adversely affect our results of operations.

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

Approximately 87.0%87.3%, 87.3%86.9% and 86.9%87.5% of our sales in 2005, 2006, 2007 and 2007,2008, respectively, were derived from sales contracts or letters of intent. These sales contracts and letters of intent generally specify the quantity and delivery schedule of purchases for a term generally not exceeding one year. Coal prices under the letters of intent are generally determined subsequently at the time of sale.sale to reflect prevailing market prices. A decline in coal prices at the time of actual sale would have an immediate and adverse impact on our results of operations. An omission of a material term may make a letter of intent unenforceable. Any changes in regulations, cost or availability of labor, raw materials or shipping and foreign exchange rates during the period between the formation and performance of these letters of intent may affect our ability to perform the contract.

Historically, we and our customers have carried out a significant majority of the transactions contemplated under the letters of intent we enter into. However, a sudden and significant increase in the proportion of unperformed letters of intents or unrealized sales could have a material adverse impact on our results of operations. Furthermore, asany changes in regulations, cost or availability of labor, raw materials or shipping and foreign exchange rates during the priceperiod between the formation and performance of coal sold pursuant to suchthese letters of intent is generally determined atmay affect our ability to perform a contract or 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.contract’s profitability.

Our products may be subject to governmental price control measures, which may adversely affect our profitability.

The PRC Government has implemented a series of measures to overhaul historical mechanisms to control the purchaseprice and pricing of coalsupply controls with the aim to encourage market practices. As a result, the domestic coal industry has become increasingly market-driven since 2002.

The PRC Government continues to indirectly influence coal prices through the regulation of the closely-related power generation industry, primarily through the allocation of national railway capacities and the announcement of coal pricing policies that are intended to align the use of coal resources with national production policies. Prior to 2006,In 2008, the PRC Government continued its efforts to implement temporary measuresencourage market-based negotiations and to prevent and control significant fluctuations inbring thermal coal prices in line with market prices. AsThe National Development and Reform Commission (“NDRC”) issued a result, thermalnotice in December 2008 reaffirming that coal contract prices for certainshould continue to be set by market pricing mechanisms and be determined based on the negotiations of suppliers and consumers that reflect supply and demand, resource scarcity and the external costs of coal production. Despite the increasing market-orientation of the PRC coal market, our major consumers were lower thanoperations continue to be subject to price-control risks. The PRC Government has historically intervened in the market when market prices during the periods these price controls were in effect. We cannot assure you that developments in governmental regulations, policies and measures will not have an adverse affect on our business and profitability.fluctuate excessively to regulate supply.

To ensure the uninterrupted operation ofpower generation at power plants during the peak season for electricity demand, the NDRC imposed price caps on coal prices twice in 2008,the summer of 2008. Similarly the provincial governments of Shandong and Shaanxi have implemented temporary measures to control the supply of thermal coal. Thecoal such as the enforcement of coal supply contracts, mandatory increases in coal supply and price moratoriums.

Even though the above temporary measures promulgated by Shandong government require (i)had all existing thermal coal contracts between coal enterprises and power plants to be strictly enforced; (ii) coal producers in Shandong Province to increase their collective supply of thermal coal to power plants in Shandong Province on a monthly basis by 2.56 million tonnes in July, August and September of 2008; and (iii) the coal provided pursuant to these measures to be offered at a price that is RMB10 lower than prevailing coal prices in June 2008. The government of Shaanxi has placed a price moratorium on thermal coal until September 15, 2008. In eachbeen abolished as of the three months during which these measures will be effective,December 31, 2008, we estimate that we will provide an additional 1.5 million tonnes of coal to power plants in Shandong Province. We cannot assure you that relevantPRC government agencies will not impose additional price restrictions,intervene in the domestic coal market in the future, which may have a negative impact on our operations, pricing and profitability.

Our product delivery reliesWe rely on the PRC’s railway transportation system.system to deliver our products.

We rely on the PRC national railway system and our railway network to delivery coal to our customers. Approximately 54.4%50.2%, 50.2%37.3% and 37.3%32.9% of our total net sales of coal in 2005, 2006, 2007 and 2007,2008, respectively, were derived from sales of coal that were transported on the PRC national railway system (excluding coal soldsales to Zouxian Power Plant, which waswere transported entirelyexclusively on our own railway network). The limited transportation capacity of the national railway system is not sufficient to meet domestic coal transportation requirements, and railway regulators allocate use of the national railway system. Ourrequirements. Even though, our domestic customers are mainly located in Eastern China, where the railway system is relatively more advanced than other parts of the PRC.PRC, our delivery can potentially be affected. In addition to railway systems, we use major coal shipping ports along the eastern coast of China to ship coal to our customers located in the coastal region of China and overseas. We cannot assure you that we will continue to secure sufficient railway and port capacity to transportdeliver our coal or that we will not experience any material delays in transporting our productsdeliveries or substantial increases in transportation costs as a result of insufficient rail capacity.

The coal reserve data in this Annual Reportannual report are only estimates.

TheOur coal reserve data provided by us are only estimates, which may differ materially from the actual reserves. Our reserve estimates may change substantially if new information subsequently

becomes available. There are inherent uncertainties in estimating reserves, which require the consideration of a number of factors, assumptions and variables, which may be beyond our control and cannot be ascertained despite due investigation. Our actual results of operations may differ materially from our long-term business and operational plans, which are based on our coal reserve estimates. We cannot assure you that we will not adjust our coal reserve estimates downward in the future, and in such event, our resultsproduction and the useful life of operationsour mines may be materially and adversely affected.

Competition in the PRC and the international coal industry is intensifying, and we may not be able to continue to compete effectively.

We face competition in all aspects of our business, including pricing, production capacity, coal quality and specifications, transportation capacity, cost structure and brand recognition. Our coal business competes in the domestic and international markets with other large domestic and international coal producers. Ongoing consolidation in the PRC coal industry has increased the level of competition in our industry. Our overseas competitors may have stronger financial, marketing, distribution and other resources than we do and have brand names with wider recognition in the domestic and international markets.

We may not be able to remain as competitive if changes or developments in the market weaken our existing competitive advantages. The quality of our coal products positions us favorable against our competitors. However, we cannot assure you that we will continue to compete favorably due to quality improvements by our competitors.

competitors will not erode this advantage. We also cannot assure you that continual improvements in China’s transportation infrastructure, particularly the development of the PRCnational railway transportation network, will not diminish our geographic advantage of being located in Eastern China, the area of PRC withwhere coal demand is the strongest coal demand.in China. We believe that we have competed favorably on transportation capabilitycapacity and costs because ourdelivery costs. Our principal competitors are located mainlypredominately in Shanxi Province, Shaanxi Province and the Inner Mongolia Autonomous Region, where there are occasional rail capacity shortages and significant costs that have to be incurred to transport coal from these regions to Eastern China. However, improvements in the PRC national rail network will reduce our competitive advantage in transportation. For example, the PRC Government is planninghas and plans to continue to construct additional railways to transport coal from northern and northwestern China to Eastern China. Accordingly, theThe completion of these railway projects may increase the supply of coal availablethat can be delivered 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 mining operations, our operations are affected by certain risks inherent in mining, such as a deterioration in the quality or variations in the thickness of faults and/or coal seams, pressure in mine openings, mine water discharge, weather, flooding and other natural disasters. Additionally, we are exposed to operational risks associated with industrial or engineering activities, such as unexpected maintenance problems or equipment failures. Although we conduct geological investigations on mining conditions and adapt our mining plans to address the mining conditions of each mine, there can be no assurance that the occurrence of any adverse mining conditions would not endanger our workforce, increase our production costs, reduce our coal output or temporarily suspend our operations.

Underground mining is also subject to certain risks such as fires and explosions from methane gas or coal dust, roof collapses and ground falls. We can not assure you that the occurrence of such events or conditions would not have a material adverse impact on our business and results of operations.

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

The recoverable coal reserves in our existing mines decline as we produce coal. As our ability to significantly increase our production capacity at existing mines is limited, our ability to increase our coal production will depend on increasing the production of our recently developed coal reserves acquisitions ofand acquiring new mines, orand to a lesser extent, the expansion ofexpanding our existing coal mines.

We acquired Jining III Coal Mine and Southland Colliery in 2001 and 2004, respectively. In 2005, we acquired from our Controlling Shareholder 95.67% of the equity interest in Heze Nenghua, followed by the acquisitiongrant of the mining rights of Zhaolou Coal Mine through Heze Nenghua in May 2008. This acquisition was approved by our shareholders and the relevant government authorities. Zhaolou Coal Mine is expected to commence preliminary operationscommenced production in the fourth quarter of 2008.March 2009. In February 2007,

our Company acquired 100% of theincreased our equity interest ofin Shanxi Nenghua whichfrom 98% to 100%, by acquiring the 2% equity interest that was previously held by our Controlling Shareholder and Lunan Fertilizer Plant.Plant of Yankuang Group. Shanxi Nenghua owns Tianchi Coal Mine, which is owned by Shanxi Nenghua, commenced operations in November 2006. We are also in the process of establishing a joint venturean associate company for a coal mining project in Yushuwan, Shaanxi Province.

The acquisition of new mines by PRC coal companies, either within China or overseas, and the procurement of related licenses and permits are subject to the PRC Government approval. Delays in securing or failure to secure relevant PRC Government approvals, licenses or permits, as well as any adverse change in government policies may hinder our expansion plans, which may materially and adversely affect our profitability and growth prospects. In connection with overseas acquisitions and expansion, we may encounter challenges due to our unfamiliarity with local laws and regulations, suffer foreign exchange losses on overseas investments or face political or regulatory obstacles to acquisitions. We cannot assure you that our overseas expansion or investments will be successful.

We cannot assure you that we will be able to continue to identify suitable acquisition targets or acquire these targets on competitive terms.terms and in a timely manner. We may not be able to successfully develop new coal mines or expand our existing ones in accordance with our development plans or at all. Failure to timely or successfully acquire suitable targets on competitive terms, or successfully complete the development ofdevelop new coal mines or to expand our existing coal mines could have an adverse effect on our results of operations and financial condition.

The acquisition of new mines by PRC coal companies and related licenses and permits, either within China or overseas, is subject to the approval of the PRC Government. Delays in securing or failure to secure the relevant PRC Government approvals, licenses or permits as well as any adverse change in government policies may impair our expansion plans, which may materially and adversely affect our profitabilitycompetitiveness and growth prospects.

In connectionOur operations may be affected by uncertain mining conditions.

As with all underground mining operations, our overseas expansion,operations are affected by certain risks inherent in mining, such as rock and roof falls, deterioration in the quality or variations in the thickness of faults and coal seams, methane gas, water discharge, spontaneous combustion, gaseous ignition and other mining hazards. Additionally, we could encounter unforeseenare exposed to operational risks associated with industrial or engineering activities, such as maintenance problems dueor equipment failures. Although we conduct geological investigations on mining conditions and adapt our mining plans to address the mining conditions at each mine, we cannot assurance you that adverse mining conditions would not endanger our unfamiliarity with local lawsworkforce, increase our production costs, reduce our coal output or temporarily suspend our operations.

Underground mining is also subject to certain risks such as fires and regulationsexplosions from methane gas or suffer foreign exchange losses in relations to overseas investments.coal dust, roof collapses and ground falls. We cannot assure you that the occurrence of such events or conditions would not have a material adverse impact on our overseas expansion or investments will be successful.business and results of operations.

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

Our coal mines and operating facilities may be damaged by water, gas, fire or cave-ins due to unstable geological structures. As a result, we, likeLike other coal mining companies, we have experienced accidents that have resulted in property damage and personal injuries. Although we have implemented safety measures for our production facilities and provide on-the-joboccupational safety training for our employees, and in accordance with relevant laws, set aside approximately 2.0% of each employee’s total remuneration for personal injury insurance, there can be no assurance that industry-related accidents will not occur in the future.occur. We regularly contribute to our work injury insurance fund that compensates employees who sustain work injuries.

WeConsistent with what we believe to be customary practice among PRC enterprises, we do not currently maintain fire, casualty or other property insurance for our properties, equipment or inventories, other than for our 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.

Underground mining may cause the land above underground mining sites to subside. Depending onBefore the circumstances and conditionscommencement of each site,mining, we may relocate inhabitants above certain undergroundin areas surrounding our mining sites, prior to the commencement of mining, or we may compensate the inhabitants for any property losses or damages caused by land subsidence after the underground sites have been mined. We may also be requiredmining. PRC regulations require us to set aside provisions forto cover the costs associated with land subsidence, restoration, rehabilitation orand environmental protection to mitigate the effects of our mining activities.protection. An estimate of these costs is recorded in the period in which the obligation is identified andestimated provision is deducted as an expense in our income statement in proportion tobased on the amount of coal actually extracted. Payment

In 2008, RMB2,938.4 million of our provision for land subsidence, restoration, rehabilitation and environmental protection was deducted as an expense. We significantly increased our provision for these costs in 2008 mainly because government policy changes increased the basis of calculating compensation and reclamation costs to reflect rising income levels and costs. Government policy changes also enlarged the area surrounding mining sites that is funded by working capital and amountedsubject to RMB593.5 million in 2007.reclamation. The provision for land subsidence, restoration, rehabilitation and environmental protection costs is determined by our directors based on past occurrences of land subsidence. However, the provision is only an estimate and may be adjusted to reflect the actual effects of our mining activities on the land above our mining sites. Therefore, there can be no assurance that such estimates are accurate or that our land subsidence, restoration, rehabilitation and environmental protection costs will not substantially increase in the future or that the PRC Government will not impose new fees in respect of land subsidence, the occurrence of any of which 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 PRC coal producer, we are subject to significant, extensive and increasingly stringent environmental protection laws and regulations in China.regulations. These laws and regulations:

Our coal mining operations produce waste water, gas emissionemissions and solid waste materials. The PRC Government has tightened enforcement of applicable laws and regulations and adopted more stringent environmental standards. Similarly, our Australian operations are subject to Australia’s stringent environmental regulations. Our budgeted amounts of capital expenditureamount for environmental regulatory compliance may not be sufficient, and we may need to allocate additional funds for this 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 greenhouse gas emissions. On March 14, 2006, the PRC Government released the outline of the Eleventh Five-Year Plan for National Economic and Social Development, thatwhich sets goals to decrease the amount of energy consumed per unit of GDP by 20 percent and to reduce the emission of certain major pollutants by 10ten percent. If efforts to reduce energy consumption and control greenhouse gas emissionemissions reduce coal consumption, our revenue would decrease and our business would be adversely affected.

We face pricing volatility and intense competition in our methanol operations.

We have invested in and commenced the limited production of coal-based methanol at Tianhao Chemicals for domestic sale in September 2008, as well as trial production at Yulin Nenghua in December 2008. The methanol business is a competitive commodity industry with dynamic supply and demand fundamentals. After a number of years of high demand growth that resulted in supply shortage in 2007, the PRC methanol market slowed sharply towards the second half of 2008 and is currently negatively affected by overcapacity and weak demand from major downstream markets. We expect the PRC methanol market to experience oversupply for the next few years. Methanol prices have historically been, and are expected to continue to be, characterized by significant cyclicality. As of May 2009, PRC benchmark methanol prices fell to around RMB1,970 per tonne from record highs of RMB4,170 per tonne in 2008, representing a 52.8% decrease. We expect our methanol prices to be affected by a number of factors, including, but not limited to:

As of the end of 2008, we had a total methanol production capacity of 700,000 tonnes. As with developing any new business, we may not progress as planned and may face unexpected obstacles in addition to the anticipated challenges presented by inexperience and market entry barriers. For example, due to the closure of Tianhao Chemicals’ sole supplier of coke oven waste gas, which was delivered through a transmission pipeline that connects our methanol plant with the supplier’s, we temporarily suspended methanol production at Tianhao Chemicals and have not resumed operations as of the date of this annual report. In 2008, our operations at Tianhao Chemicals sustained at a lost of RMB59.1 million compared with our profit of RMB 6,479.6 million for the year. We cannot assure you if Yulin Nenghua will continue to procure raw materials at acceptable terms or if Tianhao Chemicals’ operations will be affected or even suspended because of a raw material shortage.

If our projections for the domestic methanol market prove incorrect or if we are unable to otherwise compete effectively, we may not recover the capital and resources we have already invested in our methanol operations. In that event, our business and profitability will be adversely affected.

Our electric power business is heavily regulated, which may affect our results of operations.

We generated RMB59.8 million of revenue from electric power sales, which represented a small percentage of our total revenue in 2008. The significant majority of electricity that we produce is intended for our own use and only a small portion will be sold. To the extent that we do sell electricity, government management of grid power prices, the price at which power grid operators purchase electricity from power plants, may reduce our profitability and adversely affect our results of operations.

The operation of coal-fired power plants is subject to increasingly stringent emission standards of the PRC government, which will set new standards for air pollutant emission in 2010 under the Emission Standard of Air Pollutants for Thermal Power Plants. As a result, our compliance costs will likely increase. As a result of the foregoing, we may experience delays or failure to realize the expected benefits from our acquisition and not realize a full return on our investment.

PRC quotas for coal exports may adversely affect the level of our coal export sales.

Our export sales (not including the sales by Yancoal Australia) accounted for 25.8%19.5%, 19.5%4.3% and 4.3%0.8% of our net sales of coal in 2005, 2006, 2007 and 2007,2008, respectively. In JanuarySince 2004, the PRC Government promulgated a regulation entitled “Measures for the Administration of Quotas for Coal Export,” which became effective on July 1, 2004. Pursuant to the regulation, the National Development and Reform CommissionNDRC and the Ministry of Commerce will determine the total volume of the PRC’ssets an annual export quota for domestic coal producers and allocate the quota among authorized coal exporters. The announcement of the export quota available for each fiscal year must be made no later than October 31st of the prior year. After the export quota has been announced, the National Development and Reform CommissionNDRC and the Ministry of Commerce will begin accepting written applications from authorized coal exporters for an allocation of the following year’s quota.

This regulation did not have a material adverse effect on our export sales in 2007 because ourOur export agents have historically received an allocation of the export quota sufficient to satisfy our export volume. However, we are unable to predict what impact, if any, the export quota may have on the level of our export coal sales in 20082009 and later years. In 2005, 2006, 2007 and 2007,2008, our export sales of coal (not including the sales by Yancoal Australia) accounted for approximately 10.2%9.9%, 9.9%3.2%, and 3.2%,0.7% respectively, of the PRC’s total coal export. If the quota for national coal exports is reduced, the level of our export sales in future periods could be affected, which in turn could adversely affect our results of operations.

We do not have an export permit and consequently, do not have direct export rights for our coal. As a result, all of our export sales must be made through intermediary export agents. We use export agent services provided by China Coal Energy Group Company, China National Minerals Import and Export Company Limited and Shanxi Coal Import and Export Group Company (collectively, the “Export Agency Companies”). The volume, coal specifications, pricing and final destination of our export sales are determined collectively by us, the Export Agency Companies and our overseas customers. Although we have applied to the PRC Central Government for direct export rights with the assistance of the Shandong provincial government, there can be no assurance that we can obtain such rights. If we cannot obtain an export permit granting us direct export rights, we will have to continue to rely on export agents to export our coal.

The Controlling Shareholder’s operations have a significant impact on us.

As of December 31, 2007, the2008, our Controlling Shareholder, Yankuang Group, owned 52.86% of our outstanding shares and thereby its operations haveexerts significance impact oninfluence over us. We may continue to enter into a number of connected transactions with Yankuang Group. Pursuant to the regulations of the Hong Kong Stock Exchange and the Shanghai Stock Exchange on continuing connected transactions, and the actual operations of us and the Controlling Shareholder, we completedcomplete the necessary review and approval procedures for ourbefore entering into continuing connected transactions as required by law and continued or entered intotransactions. From 2006 to 2008, we had six continuing connected transaction agreements, (“Continuing Connected Transaction Agreements”), including the Provision of Materials and Water Supply Agreement, Provision of Electricity Agreement, Provision of Labor and Services Agreement, Provision of Equipment Maintenance and Repair Works Agreement, Provision of Products and Services Agreement and Provision of Administrative Services for Pension Fund and Retirement Benefits Agreement withAgreement. In the Controlling Shareholder in the firstfourth quarter of 2006.2008, we approved the amendment and renewal of five continuing connected transactions (the “New Continuing Connected Transactions”), taking care to ensure that the transaction amount for each of these agreements stayed within approved annual limits. For details on the execution ofagreements for the New Continuing Connected Transactions, see “Item 7. — Major Shareholders and Related Party Transaction”. Any material financial or operational developments experienced by the Controlling Shareholder which lead to the disruption of its operations or impairs its ability to perform the Continuing Connected Transactionscontinuing connected transactions could materially affect our operations and future prospects.

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

A significant majority of our assets and operations are located in the PRC, as such, we are subject to a number of risks relating to the PRC, including, but not limited to, the following:

We are exposed to fluctuations in exchange rates.

We face risks stemming from currency exchange fluctuation between the Australian dollar and U.S. dollar because our export sales are denominated in U.S. dollars but our operations in Australia incur costs and expenses in Australian dollars. An appreciation of the Renminbi against the U.S. dollar may similarly reduce the value of our export sales, and a depreciation of the Renminbi would increase our costs of importing equipment and components.

In 2008, we entered into forward foreign exchange contracts to buy Australian dollars at a specified rate to manage the currency risks of forecasted sales denominated in U.S. dollars. As of December 31, 2008, the fair value liability of our forward contracts was approximately RMB29.4 million as a result of the Australian dollar’s depreciation. We cannot assure that our hedging arrangement will be effective or that our results of operations will be not negatively affected by exchange fluctuations.

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 other PRC energy companies, are subject to extensive regulation by the PRC Government. National governmental authorities, such as the National Development and Reform Commission, the StateMinistry of Environmental Protection, Administration, the Ministry of Land and Resources, the State Administration of Coal Mine Safety and the State Bureau of Taxation, as well as corresponding provincial

and local authorities and agencies exercise extensive control over various aspects of the mining and transportation (including rail and sea transport) of coal in China. Oversight from these authorities and agencies affectsmay affect, among others, the following aspects of our operations:

As a result of regulatory oversight, our ability to execute our business strategies or to carry out or expand our business operations may be limited.restricted. We may experience substantial delays in obtaining regulatory approvals, permits and licenses in connection withfor our business operations. Our business may also be adversely affected by future changes in the PRC Government’s regulations and policies related tothat affect the coal industry. The adoption of new legislation or regulations, or the new interpretation of existing legislation or regulations, may materially and adversely affect our operations, our cost structure or demand for our products.product demand. The occurrence of any of the foregoing may cause us to substantially change our existing operations or incur significant compliance costs.

A. History and Development of our Company

Yanzhou Coal Mining Company Limited was established on September 25, 1997 as a joint stock company with limited liability under the Company Law of the PRC (the “Company Law”). The Predecessorpredecessor of our Company, Yanzhou Mining Bureau, was established in 1976. Upon the approval from the former State Economic and Trade Commission and the former Ministry of Coal Industry

(“MOCI”) in 1996, the Predecessorpredecessor was incorporated under the name Yanzhou Mining (Group) Corporation Limited and subsequently, renamed Yankuang Group Corporation Limited after undergoing reorganization in 1999.

In January 1999, 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 total outstanding shares as of December 31, 2007.2008.

Our contact information is:

We primarily engage in the underground mining, preparation and sale of coal as well as the railway transportation of coal. In 2007, weWe believe we were one of the largest coal producerproducers in Eastern China.China in 2008.

In 2007,2008, we produced approximately 35.636.1 million tonnes of raw coal, including 32.833.1 million tonnes by the Company, 1.61.1 million tonnes by Shanxi Nenghua and 1.9 million tonnes by Yancoal Australia and 1.2 million tonnes by Shanxi Nenghua.Australia. We sold 35.137.6 million tonnes of coal in 2007,2008, of which 32.532.4 million tonnes was produced and sold by the Company.Company and 2.6 million tonnes was sales of coal that we had purchased from other coal producers for resale. In the same year, Yancoal Australia sold 1.41.5 million tonnes of coal, and Shanxi Nenghua sold 1.21.1 million tonnes of coal. In 2007, we had2008, our overseas coal sales of 3.2volume was 1.8 million tonnes of coal, including 1.7approximately 0.3 million tonnes of export sales by the Company and 1.41.5 million tonnes of coal sales by Yancoal Australia.

The Company has six coal mines located in Shandong Province: Nantun, Xinglongzhuang, Baodian, Dongtan, Jining II and Jining III (collectively, the “Six Coal Mines”), which commenced production in 1973, 1981, 1986, 1989, 1997 and 2000, respectively. As of December 31, 2007,2008, the Six Coal Mines had an estimated collective in-place proven and probable reserve base of approximately 1,898.61,866.0 million tonnes. Not included in this estimate are theThe reserves of Yancoal Australia’s Austar Coal Mine, Shanxi Nenghua’s Tianchi Coal Mine and Heze Nenghua’s Zhaolou Coal Mine.Mine are not included in this estimate. Yancoal Australia and Shanxi Nenghua commenced production in the fourth quarter of 2006 and held recoverable reserves of approximately 50.048.0 million tonnes and 29.228.5 million tonnes of coal, respectively. Asrespectively, as of the date of this Annual Report,December 31, 2008. Zhaolou Coal Mine has yet to commencecommenced production in March, 2009 and hadheld an estimated recoverable coal reserve of approximately 106.0 million tonnes.tonnes as of December 31, 2008.

We have successfully developed and introduced into our operations a full set of equipment that is capable of a comprehensive mechanized caving processprocesses designed to extract coal from medium to thick coal seams. The technology content of this patented mechanized caving method meets leading international technology standards. We intend to continue to improve our proprietary caving method for our internal use and for third party licensing.

The significant costs of transporting coal make the location of coal mines a significant competitive factor. We believe that the locationsproximity of our mines to key customers enhance our competitivenesscompetitiveness. The location of our mines positions us for long-term growth given the rapid economic growth of Eastern China region, the insufficient supply of coalregionally produced in the Eastern China regioncoal and the substantial costs involved in transporting coal from other major coal-producing provinces such as Shaanxi Province, Shanxi Province and Inner Mongolia Autonomous Region to Eastern China. NetOur net sales of coal representrepresents our invoiced value of coal sold and are net ofwith deductions for returns, discounts, sales taxes, transportation costs, port fees and various miscellaneous fees relating to salesa sale, as well as transportation costs if the invoiced value includes transportation costs charged to our customers. In 2005, 2006, 2007 and 2007,2008, we generated 50.2%55.2%, 55.2%64.3% and 64.3%61.7%, respectively, of our total net sales of coal from sales tofrom customers within Shandong Province. Our largest end customer, Zouxian Power Plant of Huadian International, accounted for 13.4%11.3%, 11.3%12.1% and 12.1%12.9% of our total net sales of coal in 2005, 2006, 2007 and 2007,2008, respectively. Net sales to customers located in the rapidly growing Yangtze deltaDelta region, encompassingwhich encompasses Shanghai Municipality, Jiangsu Province and Zhejiang Province, composed 15.3%composed13.8%, 13.8%13.3% and 13.3%10.3% of our total net sales of coal in 2005, 2006, 2007 and 2007,2008, respectively. Our overseas sales, which include the export sales of the Company and the sales of Yancoal Australia, accounted for 25.8%20.7%, 20.7%8.9% and 8.9%7.1% of our total net sales of coal in 2005, 2006, 2007 and 2007,2008, respectively.

The coal reserve base of the Six Coal Mine’s coal reserve baseMines primarily consists of premium quality, low-sulfurlow-sulphur coal, thatwhich is capable of yielding a processed coal product with an ash content as low as 6%7%. Our other coal mines, Austar Coal Mine, Tianchi Coal Mine and Zhaolou Coal Mine, produce semi-hard coking coal, steam coal and ¹/3 coking coal, respectively. We primarily sell thermal coal, which is suitable for large-scale electricitypower generation, as well as semi-soft coking coal and pulverized coal, which are used in metallurgical production. Our primary customers include power plants and metallurgical mills located in Eastern China and the areasregions along the Beijing-Hangzhou Grand Canal, which are generally more economically developed than other regions of China, as well asChina. In addition, we export a portion of our coal to foreign enterprises located in East Asia. 20.8%22.9%, 22.9%23.1% and 23.1%27.7% of our total net sales of coal in 2005, 2006, 2007 and 2007,2008, respectively, were derived from sales to power generation companies in the PRC, and the remainder of our net sales of coal were sales to metallurgical mills, chemical manufacturers, construction materialsmaterial manufacturers and fuel trading companies. Our major domestic customers include Huadian International, Dongguan City Ming Shing Energy Limited, Baoshan Iron & SteelLinyi Yehua Coking Co., Ltd, AluminumBaosteel Resource Group Corporation, of China Limited Shandong Branch and Zhejiang Fuxing Electric FuelTiexiong Energy Corp. Co., Ltd. and Huangdao Power Plant of Shandong. We believe that we have well-established relationships with ourthese key customers.

Establishment of Shaanxi Yushuwan Coal Mine Company Limited

We entered into a joint venture agreement on August 16, 2006 to set up Yushuwan Coal Mine Company with Chia Tai Energy Chemical Limited (“Chia Tai Company”) and Yushen Coal Company Limited (“Yushen Company”) of Yulin City. As of the date of this annual report, the application for the establishment of Yushuwan Coal Mine Company was still pending review by the relevant regulatory authorities. The registered capital of Yushuwan Coal Mine Company is RMB480.0 million. According toIn accordance with the joint venture agreement, the Company will contribute RMB196.8 million to acquire a 41% equity interest in Yushuwan Coal Mine Company. Chia Tai Company will contribute RMB192 million to acquire 40% of the equity interest in Yushuwan Coal Mine Company;Company, and Yushen Company will contribute RMB91.2 million to acquire a 19% equity interest.

Yushuwan Coal Mine Company will primarily engage in the construction and operation of Yushuwan Coal Mine. Yushuwan Coal Mine is located in the Yushen coal mining area in Yulin City, Shaanxi Province in the PRC.China. Yushuwan Coal Mine has a designed annual capacity of 8 million tonnes of coal, which will primarily consist of steam coal and thermal coal. As of December 31, 2007,2008, we had made a deposit of RMB118.0 million in relation to this joint venture, and we are committed to invest a furtheran additional RMB78.8 million. As of the date of this Annual Report,annual report, the application for the establishment of Yushuwan Coal Mine Company was still pending review by the relevant regulatory authorities.

Acquisition of Shanxi Nenghua

In December 2006, the Company acquired a 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, aanother subsidiary of Yankuang Group and became the sole owner of Shanxi Nenghua. Shanxi Nenghua owns an 81.31% equity interest in Tianchi Energy and approximately 99.85% equity interest in Tianhao Chemicals.Energy. Tianchi Energy is primarily engaged in the operation of Tianchi Coal Mine, which commenced production in November 2006. Shanxi Nenghua also owns a 99.85% equity interest in Tianhao Chemicals. Tianhao Chemicals is primarily engaged in the operation and construction of a methanol facility with a 100,000 tonne annual capacity, which commenced preliminary productioncommercial operations in the beginning ofSeptember 2008.

Increasing the registered capital ofInvestment in Heze Nenghua

On April 20,In 2007, the Board approved an increase in Heze Nenghua’sNenghua increased its registered share capital of RMB 900 million from RMB600 million to RMB1,500 million of whichand the Company contributed an additional RMB876.0 million to Heze Nenghua based on its relative ownership interest.interest in this subsidiary. After the capital contribution, the Company’s equity interest in Heze Nenghua increased from 95.67% to 96.67%. The increased registered capital will bewas mainly used for the construction of Zhaolou Coal Mine.Mine, which commenced operations in March 2009.

Establishment of Huadian Zouxian Power Generation Company Limited

On August 23, 2007, the Company entered into a joint venture investmentan agreement to establish Huadian Zouxian Power Generation Company Limited. This joint ventureHuadian Zouxian, an associate company, was established by the Company, together with Huadian International and Zoucheng Municipal Assets Operation Company on November 21, 2007. The registered capital of Huadian Zouxian Power Generation Company Limited, is RMB3,000 million, of which 69% was contributed by Huadian International, 30% by the Company contributed RMB900 million, representing approximately 30% ofand the registered capital.remaining 1% by Zoucheng Municipal Assets Operation Company.

According to the joint venture investment agreement, the joint ventureThis company will be principally engaged in the construction, operation and management of two coal-fired generating units, each with capacity of 1,000 MW, forMW. The construction of these generating units is part of the Phase IV capacity expansion project of Zouxian Power Plant. This agreementcollaboration is expected to foster a long-term strategic alliance between us and Huadian International, our largest customer.customer, and us.

Heze Nenghua’s Acquisition of the Mining Rights of Zhaolou Coal Mine

We acquired 95.67% equity interest in Heze Nenghua on December 25, 2005. Pursuant to the relevant acquisition agreements, Heze Nenghua held the right to acquire the mining rights of Zhaolou Coal Mine from Yankuang Group after Yankuang Group obtain the mining rights for the coal mine. In the second quarter of 2008, we acquired the mining rights of Zhaolou Coal Mine as part of our acquisition of Heze Nenghua. We acquired approximately 95.67% equity interest in Heze Nenghua from Yankuang Group in December 2005. Pursuant to the relevant acquisition agreements, Heze Nenghua had right to acquire the mining rights of Zhaolou Coal Mine from Yankuang Group’s after Yankuang Group’s acquisition of the same mining rights. On June 28, 2006, Yankuang Group obtained thea mining right permit offor Zhaolou Coal Mine from the Ministry of Land and Resources. At the firstan extraordinary general meeting of the Company in 2008 held on January 30, 2008, the shareholders approved the acquisition of the mining rights of Zhaolou Coal Mine for a consideration of RMB747.3 million, and wemillion. We obtained Zhaolou Coal Mine’s mining rights on May 5,2008 as approved by the Ministry of Land and Resources.

Establishment of Yankuang Group Finance Company Limited

On August 3, 2007, the Board approved our establishment of Yankuang Group Finance Company Limited (“Yankuang Finance”), which is a joint venture project with Yankuang Group and Zhongcheng Trust and Investment Company Limited. Yankuang Group will provide depositary and loan provision services to its members, as well as internal transfers for the settlement of funds among its account holders. The name and business scope of the company are subject to approval by China Banking Regulatory Commission and other relevant industry and commerce registration authorities. The proposed registered capital of Yankuang Finance is RMB500 million, of which the Company will contribute RMB125 million, representing 25% of the equity interest. As of the date of this annual report, we were still in the process of establishing Yankuang Finance.

Acquisition of equity interests and increase in registered share capital of Yulin Nenghua

In May 2008, we acquired the remaining 2% equity interest of Yulin Nenghua from Shandong Chuanye Investment development Co., Ltd and 1% equity interest from China Hualu Engineering Company for a total cash consideration of RMB24.0 million. We completed the required registration procedure for these equity transfers in June 2008. After these acquisitions, Yulin Nenghua became one of our wholly owned subsidiaries.

In May 2008, we injected RMB600 million into Yulin Nenghua to fund Yulin Nenghua’s methanol project construction, raising the registered capital of Yulin Nenghua from 800 million to RMB1,400 million. We used the proceeds raised in the issuance of new H Shares in 2004 for the capital injection.

Acquisition of 74% Equity Interest in Hua Ju Energy

On December 23, 2008, our shareholders approved our acquisition of a 74% equity interest in Hua Ju Energy from Yankuang Group, for a total consideration of RMB593.2 million. The necessary share transfer procedures were completed on February 18, 2009. The objective of the Hua Ju Energy acquisition is to secure a reliable and cost-effective supply of electricity for our coal mining operations, which will be beneficial to the future development of our Company. The acquisition enables us to (i) reduce the number of connected transactions with Yankuang Group; (ii) secure a stable supply of electricity and reduce operating costs; and (iii) apply the by-products of our mining operations, such as coal gangue and coal slurry products, to generate revenue from a environmentally-friendly power generation business.

Capital Expenditures

Our principal source of cash in 20072008 was cash generated from our operating activities. Our principal capital expenditures in 20072008 were for operational expenses, the acquisition of property, plantplants and equipment and the distribution of shareholders’ dividends and the establishmentacquisition of Huadian Zouxian Power Generation Company Limited.mining rights to Zhaolou Coal Mine. In 2005, 2006, 2007 and 2007,2008, our total capital expenditure on property, plant and equipment was RMB1,290.5 million, RMB3,363.4 million, RMB2,928.0 million and RMB2,928.0RMB2,066.2 million, respectively. For more information, see “Item 5. –— Operating and Financial Review and Prospects –— B. Liquidity and Capital Resources”.

Implementation of Share Reform

The table below summarizes special undertakings made by Yankuang Group as the shareholderholder of the original non-tradable shares of our Company pursuant to thea share reform plan entered into on March 31, 2006 and an update on the performance status of the undertakings:

Name of Shareholders		Special Undertakings		Performance of Undertakings
		and competition between Yankuang Group and the Company. Yankuang Group must allow the Company to jointly participate and invest in a coal liquefaction project, which is being developed by Yankuang Group.		Report.
		3)(3)    All related expenses accrued by the share reform for the non-tradable shares should be borne by Yankuang Group.		The undertaking has been fulfilled.

B. Business Overview

Principal Products and Services

We are primarily engaged in the underground mining, preparation and sale of coal, as well as the provision of railway transportation services for coal. In 2008, we also commenced the production and sale of methanol and electric power.

Coal ProductionProducts and Railway Transportation Services

We produce premium quality, low-sulfur coal that is capable of yielding a processed coal product with an ash content as low as 5%. Our products consist principally of thermal coal and semi-soft coking coal, which are suitable for large-scale power generation and metallurgical production, respectively. The following table sets forth the ash and sulfur content, calorific value and principal applications of our coal products.

In 2007, we producedWe sold approximately 35.637.6 million tonnes of coal in 2008, representing a decreasean increase of 0.42.5 million tonnes or 1.1%7.0%, as compared with our production in 2006.to 2007. In particular, (1) the Company sold 32.4 million tonnes of coal, representing a slight decrease of approximately 100,000 tonnes or 0.3%, compared to 2007. Shanxi Nenghua produced 32.81.1 million tonnes of raw coal, representing a decrease of 2.7approximately 90,000 tonnes or 7.6%, compared to 2007 and Yancoal Australia sold 1.5 million tonnes or 7.5%, as compared to 2006; (2) Yancoal Australia produced 1.6 million tonnes of raw coal; representing an increase of 1.1 million tonnes, as compared to 2006; and (3) Shanxi Nenghua produced 1.2 million tonnes of raw coal, representing an increase of 1.1 million tones, asapproximately 60,00 tonnes or 4.2%, compared to 2006. Yancoal Australia2007. To capitalize on our coal marketing network and Shanxi Nenghua commenced commercial productionincrease our profits, we purchased coal from other producers for resale and conducted these external sales in October and November 2006, respectively.

2008. We sold approximately 35.12.6 million tonnes of externally purchased coal, which was produced by other companies, in 2007, representing an increase of 0.5 million tonnes or 1.3%, as compared to 2006. In particular, (1) the Company sold 32.5 million tonnes of coal, a decrease of 1.8 million tonnes, or 5.4%, as compared to 2006; (2) Yancoal Australia sold 1.4 million tonnes of coal, an increase of 1.2 million tonnes, as compared to 2006; and (3) Shanxi Nenghua produced 1.2 million tonnes of raw coal, an increase of 1.1 million tones, as compared to 2006.2008.

Net sales of coal represent our invoiced value of coal sold and are net of returns, discounts, sales taxes, transportation costs, port fees and various miscellaneous fees relating to sales if the invoiced value includes transportation costs to our customers. The following table sets out our principal coal products by sales volume and net sales of coal in 2005, 2006, 2007 and 2007.2008.

Railway Transportation Services

In 2002, we acquired from the Controlling Shareholder our local minefield railway transportation network (the “Railway Assets”), consisting of a total of 184 kilometers of railway track that connects our coal mines in Shandong to the national railway system, nearby distribution points and the facilities of certain key customers. As of the date of this Annualannual report, our railway network spanned a total length of 204 kilometers. Our ownership and operation of the Railway Assets provides us a greater degree of control over a major mode of product transportation, an additional revenue-generating source and the potential synergies of having a consolidated coal operation that comprises coal production, transportation and sales.

In addition to transporting coal among our facilities, we offer railway transportation services to customers, including the Controlling Shareholder. In 2007,2008, we transported 17.919.2 million tonnes of coal on our railway network, representing a decreasean increase of 1.61.3 million tonnes or 8.4%7.4% from 2006. Although our overall transportation volume decreased, our2007. Our railway transportation services income was RMB203.7RMB247.2 million in 2007,2008, representing an increase of RMB43.3RMB43.5 million or 27.0%21.3% from 2006.2007. This increase was principally due to an increase of 3.22.1 million tonnes in the volume of coal transported for external sales on an ex-mine basis, for which our customers bear theseparately pay transportation expenses associated withfor a coal purchase.

Sales and Marketing

A significant portion of our domestic sales in 20072008 was made pursuant to sales contracts and letters of intent entered into during the Annual National Coal Trading Convention, while the remainder of our coal sales are based on purchase orders placed by our customers from time to time. These agreements are the result of market-based negotiations where the parties to an agreement determine the contract price. These sales contracts and letters of intent generally specify the quantity and delivery schedule in agreements to purchase coal, generally for a term not exceeding one year. The contract prices for letters of intent are generally not determined until the time of sale.sale to reflect prevailing market prices. The remaining portion of our sales is derived from purchase orders placed by customers throughout the year when they require additional coal.

We have a flexible credit policy and adjust our credit terms for different types of customers. Depending on the customer, we may allow open accounts, require acceptance bills or require cash on delivery. Using data from our ERP system, we consider the creditworthiness and the requested credit

amount of each customer when determining the appropriate payment arrangementsarrangement and credit terms, which generally do not exceed a period over 180 days. We evaluate the creditworthiness of potential new customers before entering into a sales contract with them and reassess the creditworthiness of all of our customers on an annual basis. For customers without a strong credit history, we require them to settle their accounts upon delivery. A majority of our domestic coal sales is made to power plants, metallurgical mills, chemical manufacturers and construction materialsmaterial manufacturers. We have established long-standing and stable relationships with many of these companies. In addition, we export to overseas customers in East Asian countries such as Japan and Korea. Our export sales are made through export agency companies, to whom we pay a fee for them to enter into export sales contracts with foreign customers on our behalf.

In accordance with the relevantrecent years, PRC regulations steadily lowered the VAT export refund for our coal export sales conducted from China decreased from 13% to 11%.until the refund was completely abolished in 2006. The PRC VAT export refund further decreasedsystem generally disallows an exporter from applying the full amount of the VAT tax it has already paid for materials and equipment to 8% on May 1, 2005 and was completely abolished asoffset the amount of September 15, 2006.VAT tax it must pay for export sales. Prior to 2007,the abolishment, the difference between our VAT tax payable and our VAT refund, in relation to export sales of coal, was charged as a cost of our export sales. The abolishment of the VAT export refund for export coal sales decreased our cost of export sales by eliminating all VAT tax rate differentials.

According to the Notice of the Customs Tariff Committee of the State Council on Revising the Provisional Tariff Rates on the ImportAluminium Alloy, Coke and Export of Certain GoodsCoal (Issued by the Customs Tariff Committee of the State Council as document Shui Wei Hui [2006][2008] No. 30)25), from November 1, 2006,August 20, 2008, the State will impose a 5% exportraised the tariff rate on certain types of exported coal. Thiscoal and a 10% export tariff is not applicable to the coal exported by usus. However, we generally request our customer to bear such tariff in our coal sales agreements and such change is not expected to have a directmaterial effect on us .our business or profitability.

Net sales of coal represent the invoiced value of coal sold and are net of returns, discounts, sales taxes, 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 theinclude 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 rate for our coal mines located in Shandong Province increased from RMB2.4 to RMB3.6 per tonne on 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 mines in Shanxi Province is RMB3.2 per tonne. These taxes are paid to the local tax bureau.

The following table sets out our net sales of coal by industry for 2005, 2006, 2007 and 2007:2008:

Our domestic coal sales are concentrated in Eastern China, particularly in Shandong Province. The following table sets out our net sales of coal by geographical region for 2005,the years ended December 31, 2006, 2007 and 2007:2008:

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

As of December 31, 2007,2008, Huadian International was our largest customer. In 2005, 2006, 2007 and 2007,2008, we provided 5.6 million, 4.9 million, 5.4 million and 5.48.8 million tonnes of coal respectively to Huadian International, which represented 13.7%14.2%, 11.5%15.5% and 12.2%23.3% of our net sales of coal,volume, respectively. A substantial portion of Huadian International’s coal purchases was, in turn, supplied to Zouxian Power Plant. Zouxian Power Plant’s total demand for coal in 20072008 was 9.011.8 million tonnes. We provided an estimated 83.6%92.9%, 92.9%60.8% and 60.8%57.3% of Zouxian Power Plant’s annual coal requirement in 2005, 2006, 2007 and 2007,2008, respectively. Our sales volume and net sales

As of coal generated from Zouxian Power Plant increased from 2006 to 2007. However, Zouxian Power Plant underwent a capacity expansion in the fourth quarterdate of 2006 and therefore, significantly increased its coal demand in 2007. As a result, the coalthis annual report, we supplied decreased as a percentage of Zouxian Power Plant’s total coal demand in 2007. Nevertheless, we expect to continue our role as the major coal supplier for Zouxian Power Plant. In addition, we also increased our sales to construction materials and chemicals manufacturers from 2005 to 2007, who generally purchase our coal at a higher price than power plants.

We have entered into a sale and purchase agreement with Huadian Internationaldomestic sales agreements to provide 7.37.8 million tonnes of coal for its operations during 2008 at a price of RMB470.15RMB502.62 per tonne. This agreement represented a 2.5tonne inclusive of tax. Among which, the Company has, with the coordination of government authorities, entered into main electric sales contracts for 4.3 million tonnes of coal at the average benchmark price of RMB463.86 per tonne (inclusive of tax), representing an increase of RMB17.83 per tonne, or 52.1% sales volume increase4%, from the average benchmark price of electric coal in 2008. In 2006, 2007 and a RMB129.12 or 37.9% price increase per tonne of coal. We estimate that we will generate approximately RMB3,432.1 million in sales from this agreement.

In 2005, 2006 and 2007,2008, net sales to our five largest domestic customers accounted for 20.2%22.4%, 22.4%26.0% and 26.0%33.0%, respectively, of our total net sales of coal. We generated RMB4,318.5 million from Huadian International in 2008, which represented 18.0% of our net sales.

Excluding the sales of Yancoal Australia, we exported 7.3 million, 6.3 million and 3.2 million tonnes of coal in 2005, 2006 and 2007, accounting for approximately 10.2%, 9.9% and 3.2% of the PRC’s total coal export volume in the respective periods. Our Company’s export sales as a percentage of our total net sales of coal decreased from 19.8% in 2006 to 4.3% in 2007.2007 to 0.8% in 2008. We have

decreased our export sales in recent years as our gross margins for domestic coal prices have exceeded export coal prices and madeincreased, making domestic sales more profitable.profitable than export sales. Most of our major overseas end-users are located in East Asian countries, such as Japan and Korea, with Japan being our largest export market. Even though we conduct all of our export sales from the PRC through export agency companies, we have establishedmaintain close relationships with our overseas customers.

Our sales and marketing department conducts routine customer visits and customer satisfaction surveys to keep abreast on market developments and continually improve our business. In addition, we collect market information throughoutfrom Eastern China, and Southern China and other regions, which is used by the entire Company for business planning and execution purposes.

Product Pricing

The pricing for our coal products is generally based on negotiation between contracting parties that reflect market conditions. However, a portion of our thermal coal sales may be affected by pricing guidance announced by the PRC Government from time to time or subject to temporary price controls. See “Item 3. –— D. Risk Factors—Factors — Our products may be subject governmental price control measures, which may adversely affect our profitability.”

We consider the following when we make pricing decisions:decisions for our coal products: (i) prevailing prices in the relevant local coal markets (inclusive of transportation costs); (ii) the grade and quality of the coal; and (iii) the strength of our customer relationship with the potential purchaser. In most domestic sales transactions, customers bear the transportation costs for the delivery of the coal. 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 determined by us, the Exports Sales Companies, and our final customers after negotiations.

Product Delivery

Most of our major coal customers are located in Eastern China and, the remaining customers are located in Southern and Northern China. We primarily use railways and the highways to transport our coal. To a lesser extent, we also to ship our coal on domestic and international shipping lanes.

With our railway network, we are able to deliver coal directly to our largest end-user customer, Zouxian Power Plant. Our railway network also connectsPlant or connect to the national railway system, enabling us to deliver products to other consumers.

We also deliver our coal on the national railway system to ports such as, Rizhao, Qingdao and Lianyungang, from which we ship coal to customers. Rizhao port is our main port for shipping coal. We also use the Beijing-Shanghai railway line to access Qingdao and Lianyungang ports. In 2005, 2006 and 2007, approximately 54.4%, 50.2% and 37.3% of our total net sales of coal, respectively, were derived from sales of coal that were transported on the PRC national railway system. The decrease primarily resulted from a decrease in our export sales of coal, which are generally transported on the national railway system to the export port.

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 coal market surrounding the Beijing–Hangzhou Grand Canal, which commenced operations in the first quarter of 2004.

We plan to construct a privately operated railway to connect Zhaolou Coal Mine with the national railway system. Before the completion of such plan, we rely on trucking to deliver coal from Zhaolou Coal Mine to the national railway and certain customers.

In the Shanxi Province, we use the Yangshe Railway that intersects the Tianchi Coal Mine area to directly deliver coal to Hebei Province and nearby areas, as well as to connect to variousthe national railways.railway system.

To transport Yancoal Australia’s coal products to Newcastle Port in Australia, we use the private railway networks of other transportation providers and use the Australia’s state railways.

Mining ProcessesProcess

Our underground mining operations consist of four main steps: tunneling, coal extraction, transportation and coal preparation. The tunneling process is necessary for the construction of underground roadways, which is required for the installation of mining equipment. We conduct a

majority of our tunneling using high-powered headers and use this method whenever geological conditions permit. When the use of headers is not feasible, we use explosives to excavate tunnels. Coal extracted during tunneling is carried by conveyor belts to our underground storage bunkers to be stored together with coal extracted from the coal work-faces. Rock and other minerals produced during the excavation of roadways are separated and transported out of the mine.

The extraction process is completed by a standardized and fully mechanized longwall operation, which includes shearers that work in conjunction with conveyers to cut and transport the coal away from the longwall work-face. For coal seams up to 4.5 meters, we use a fully mechanized method to extract coal from the longwall work-face. For coal seams that are thicker than 4.5 meters, we add a caving method to the fully mechanized longwall mining operation, whereby coal beyond the reach of our shearers collapse in a controlled manner as the coal support under it is removed and are collected by conveyers positioned behind the roof supports. Coal is then transported away from a longwall work-face by a series of conveyors located before and behind the system of hydraulic roof supports. Roof supports provide continuous support and coverage along the length of the work-face and also facilitate the advancement of the conveyors and shearers with the use of horizontal hydraulic rams positioned at the base of each support. Our hydraulic roof supports are manufactured in China.

The shaft hoist system equipment that we use at most of our mines is imported. Coal is transported from the coal shaft either to a surface storage or directly to a coal preparation plant. In addition to the main coal shaft, each mine also has a service shaft, which is used by workers or to transport equipment throughout the underground mines. There are also supplemental roadways and rail systems in the mines that provide a means of underground transportation for workers and equipment.

After raw coal is carried to the surface, it undergoes a mechanized selection process that separates coal from other mineral materials. A small portion of such selected coal is directly sold to customers as raw coal, and the remainder is transported to our coal preparation plants for further processing and classification. Each of the Six Coal Mines and Austar Coal Mine has a coal preparation plant. In general, the coal-washing conducted in our coal preparation plants include a water bed washing and separation process by jig machines, a sink-and-float separation process and a final floating separation process. Most of the equipment used in our coal preparation plants is automated, enabling our personnel to exercise precise control over the ash content and grade of our processed coal. The aggregate recovery rate of our coal preparation plants was 72.9%75.9%, 75.9%78.4% and 78.4%66.6% in 2005, 2006, 2007 and 2007,2008, respectively.

Materials, Water and Energy Supply

The primary materials we use to conduct our coal mining and processing operations are: (i) steel to support work-faces and underground tunnels; (ii) cement for the construction of underground tunnels and ground structures; and (iii) water used in our production process. We source ourprocure steel principally from Anhui Maanshan Iron & Steel Co. LtdLtd., Laiwu Iron & Steel Group Corp. Ltd., and JinanShandong Shiheng Special Steel HoldingsGroup Co., Ltd. We source our cement from Shandong Lucheng Cement Company, Ltd. and Taishan Cement Works. We procure water principallyprimarily from the Controlling ShareholderYankuang Group pursuant to the Materials and Services Supply Agreement and its supplemental agreements.agreements, and to a lesser extent, from local water companies. The price of materials is set at market rates or determined through negotiation. We believe that we have well-established, cooperative relationships with our suppliers, enabling us to secure reliable supplies of materials required in our production process. We believe that a number of alternative suppliers exist for our key materials in our coal operations, and, therefore, we do not foresee any difficulty in obtaining adequate supplies of key materials.supplies.

In 2005, 2006, 2007 and 2007,2008, purchases from our largest supplier accounted for approximately 1.8%3.3%, 3.3%3.8% and 3.8%0.7%, respectively, of our total cost of sales and service provided. In the same periods, 7.5%6.6%, 6.6%8.4% and 8.4%2.7%, respectively, of our total cost of sales were attributable to purchases from our five largest suppliers.

We use significant amounts of electricity in our operations. Electricity prices in China are regulated by the government. Our total electricity costs amounted to RMB291.6 million, RMB345.2 million, and RMB387.5 million and RMB373.0 million in 2005, 2006, 2007 and 2007,2008, respectively. WeEven though we have not experienced any material disruption indisruptions to our electricity supply in the past three years.years, we acquired a 74% equity interest in Hua Ju Energy to reduce our electricity costs and number of connected transactions.

Our costs for materials, water and electricity supplies amounted to RMB2,068.6 million in 2008, representing a increase of RMB430.2 million, or 26.3%, from RMB1,638.4 million in 2007, representing a decrease of RMB41.8 million, or 2.5%, from RMB1,680.2 million in 2006.

Quality Control

Coal ProductionProducts

In each of our coal mines located within the PRC, we have implemented a quality assurance program pursuant to which we closely control quality throughout the production and transportation of our coal. 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 coal. Our sales and marketing department has a quality inspection division, which conducts spot inspections on our coal with the objective to improve quality.

Nantun Coal Mine, Xinglongzhuang Coal Mine, Baodian Coal Mine, Dongtan Coal Mine, Jining II Coal Mine and Jining III Coal Mine and Tianchi Coal Mine have all obtained ISO 9002 quality and ISO 14000 environmental management certification. Tianchi Coal Mine has obtained ISO 9000 quality and ISO 14000 environmental management certification.

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

Railway AssetsTransportation Services

We continually endeavor to improve the quality of our railway network to meet the quality of our coal production. Our Company has obtained ISO 9001 quality accreditation, ISO 14001 environmental management certification and GB/T19022-2003 management certificate for the operation of our Railway Assets.

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 compensation of the officers and managers of each division reflects the division’s safety record. 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 Controlling Shareholder’s safety training center to provide systematic training to our personnel. We reward employees who report potential unsafe conditions to encourage proactive prevention of accidents.

As a result of our safety control program, we have been able to maintain a solid safety record. Our workers’ fatality rate per million tonnes of raw coal produced was 0.087 in 2005 andfell to 0.11 in 2006. In 2007 and 2008, we did not have any fatalities.

Environmental Protection

We are subject to PRC environmental protection laws and regulations which impose fees for the discharge of waste material and fine severe polluters. In addition PRC regulations authorize government agencies to close any facility that fails to comply with orders to cease, or bring into compliance with relevant laws and regulations, operations that cause environmental damage. In addition, Yancoal Australia’s operation in Australia is compliant with relevant Australian environmental protection laws and regulations.

According to the Provision of Labor and Services Supply Agreement that we entered into with the Controlling Shareholder, it will provide us environmental protection services. In 2008, we paid the Controlling Shareholder a total of RMB26.7 million for environmental protection services to reduce the effects of our fatality rate reached zero.operations on the environment.

Competition

Coal Production

The PRC coal industry is characterized by a large number of small scale enterprises and the wide geographical distribution of coal reserves. However, there are relatively few large scale coal production enterprises. Statistics from the China Coal Industry Association show that, in 2008, the PRC coal industry had:

The table below sets forth the top ten coal production enterprises in the PRC by production volume in 2008:

Source: China Coal Industry Association

Our primary market, the PRC domestic coal market is characterized by a significant number of coal suppliers and the absence of a dominant nationwide supplier. The domestic coal market is segmented principally by geographical region, as a result of the significant costs associated with transporting coal and customers’ coal quality requirements, which are categorized by ash and sulfur content levels, calorific value and the extent and quality of washing or processing. We compete principally on the basis of the availability and costs of transportation, coal quality and reliability of delivery.

Our domestic competitors primarily include a number of coal mines located in Shanxi Province, Shaanxi Province and the Inner Mongolia Autonomous Region. Certain of our competitors from these regions have substantial reserves and favorable geological conditions. However, these competitors incur significant transportation costs when they supply to end-user 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.

We export coal to several countries in East Asia, including Japan and Korea. These countries have high energy consumption levels but limited coal reserves, creating a significant dependence on 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 Transportation Services

Our railway network connects us to the national railway system, such as Jinghu railway and Yanshi railway, and provides us access to Zouxian Power Plant, our largest end-user customer. We use our railway network to provide railway transportation services for our own internal use as well as to the Controlling Shareholder and other customers. We do not face significant competition from other railway operators. However, we may compete with other ground transportation services that serve the same region as our railway network.

Seasonality

Our coal business segment is not affected by seasonality.

Methanol and Electric Power

Our methanol and electric power business was represented by the activities of Yulin Nenghua and Tianhao Chemicals. The main product for our coal-related chemical operations is methanol, a liquid commodity that can be produced from coal or natural gas. Our methanol production is based on coke oven waste gas and coal. We commenced the production of methanol in September 2008 through Tianhao Chemicals. In 2008 Tianhao Chemicals produced 20,000 tonnes of methanol and sold 16,000 tonnes of the same for RMB38.6 million in revenue. Due to a key supplier’s closure, we temporarily suspended methanol production at Tianhao Chemicals in October 2008 and have not resumed production as of the date of this

annual report. Tianhao Chemical sustained an operating loss of RMB59.1 million in 2008, which represented approximately 0.2% of our revenue in 2008, which did not have a material impact on our results of operation. In December 2008, we also commenced trial operations at our Yulin Nenghua methanol plant, which also has a power plant at its facilities. Yulin Nenghua did not sell any methanol in 2008.

Both of these methanol plants have power plants, which we used to generate electricity and achieved RMB59.8 million in electric power sales in 2008. The supporting power plant at Tianhao Chemicals produced 70.38 million kWh and sold 68.74 million kWh of the same for RMB14.9 million in revenue. The power plant at Yulin Nenghua produced and sold 181.1 million kWh of electric power for RMB44.9 million in revenue. The power plants at Yulin Nenghua and Tianhao Chemicals have an aggregate installed capacity of 84 MW.

Sales and Marketing

Our sales in 2008 were made pursuant to sales contracts of methanol which we entered into from time to time with customers. We price our methanol based on prevailing market prices and market conditions, taking into consideration the creditworthiness of customers. We sold our methanol exclusively in the domestic market predominately to chemical plants in Northern and Eastern China. The power generated by our power plants was mainly for our own use and, to a lesser extent, sold to other end-users through regional power grids.

Product Pricing

The pricing of our methanol products is generally based on negotiation with our customers taking in consideration supply and demand and prevailing market prices. The pricing and adjustments for on-grid tariff are determined by the PRC Government.

Product Delivery

We transport methanol on the highways if Northern and Eastern China, where our customers are primarily located.

Production Process

Yulin Nenghua. We use coal as raw material to manufacture methanol at our Yulin Nenghua facility. The coal is first pulverized and cleaned, then fed to a gasifier bed where it reacts with oxygen and steam to produce the synthesis gas. The synthesis gas is, after sulfur tolerant reforming and low temperature methanol purification process, synthesized into crude methanol in a pipe-shell reactor and then purified by distillation.

Tianhao Chemical. We use coke oven waste gas as raw materials to manufacture methanol at our Tianhao Chemical facility. We reduce sulphur in coke oven through gas wet desulfurization and fine desulfurization procedures and then reform the coke-oven gas into synthesis gas, a mixture of carbon monoxide, carbon dioxide and hydrogen. The synthesis gas is synthesized into crude methanol in a pipe-shell reactor. The crude methanol is then recovered and purified by distillation.

Materials, Water and Energy Supply

Coal and coke oven waste gas are the primary materials in our methanol production. Production at Tianhao Chemicals is reliant on coke oven waste gas and gaseous raw material was transmitted to Tianhao Chemicals’ methanol plant through pipelines running from the plant’s only supplier of coke oven waste gas. This supplier ceased operations due to poor market conditions, and in turn, we suspended methanol production at Tianhao Chemicals since October 2008. As of the date of this annual report, we have not been able to find an alternative supplier.

The power plants of Hua Ju Energy generate electricity by recycling by-products of our coal mining operations, such as coal gangue and coal slurry. The coal-fired power plants at Tianhao Chemicals and Yulin Nenghua use thermal coal.

Quality Control

We have implemented a series of product analysis procedures and quality control measures for our methanol operations to ensure quality. Hua Ju Energy has also obtained ISO 9001 quality and ISO 14001 environmental management certification. We have also scheduled periodic overhauls and regular maintenance of our methanol and power plants.

Safety Control

For our methanol operations, we have implemented safety control measures in compliance with the People’s Republic of China Production Safety Law, the People’s Republic of China Regulations on the Safety Administration of Dangerous Chemicals and other safety guidelines for chemical manufacturers. Safety measures for our electric power operations were designed to meet the requirement of the Electricity Law.

Competition

We compete with domestic methanol manufacturers in Shanxi and Shaanxi Provinces and Inner Mongolia Autonomous Region. We expect to benefit from economies of scale after Yulin Nenghua’s 600,000 tonne methanol project commences commercial operations and achieves full utilization of its capacity.

Seasonality

Our methanol and electric power operations are not affected by seasonality.

Regulatory Overview

Coal Industry — PRC Regulatory Matters

To establish a coal mining enterprise under the Coal Law of the PRC (the “Coal Law”), the applicant must submit an application to the relevant department in charge of the coal industry. After obtaining approval to establish a coal mining enterprise, the applicant will be granted a mining permit by the Ministry of Land and Resources. Thereafter, the applicant must obtain a coal production permit before it commences coal production. Coal mining enterprises which have legally obtained coal production licenses shall have the right to sell coal that they produce. For establishment of a coal trading enterprise, an applicant must apply for a different business license and may engage in coal trading only after it obtains a trading license from the administrative department of industry and commerce.

Mining activities in the PRC are also subject to the Mineral Resources Law of the People’s Republic of China (the “Mineral Resources Law”). The Mineral Resources Law regulates any matters relating to the planning or the exploration, exploitation and mining of mineral resources. According to the Mineral Resources Law, all mineral resources in China, including coal, are owned by the State. Any enterprise planning to engage in the exploration, development and mining of mineral resources must obtain exploration rights and mining rights before commencing the relevant activities. The transfer of exploration and exploitation rights shall be subject to governmental approval pursuant to the Coal Law, the Mineral Resources Law and other relevant regulations.

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

coal export activities and export quotas jointly with the Ministry of Commerce. The NDRC is also responsible for the evaluation and implementation of the pricing mechanism that links the prices of coal and power;

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

Pricing

Until 2002, the production and pricing of coal have generally been subject to close control and supervision by the PRC Government, which centrally manages the production and pricing of coal. To transition from a planned economy to market economy practices, the PRC Government eliminated state guideline for coal prices on January 1, 2002 and aimed to establish pricing mechanism that reflect market demand.

Under the Price Law of the People’s Republic of China, the PRC Government reserves the right to intervene in price fluctuations of important commodities such as coal. The State Council and the provincial governments, autonomous regions and municipalities directly under the PRC Government may adopt intervention measures, such as restricting margins or profits, and imposing price limits. Since 2002, NDRC has executed temporary measures several times to prevent and control unusual fluctuations in thermal coal prices.

To ensure the stable supply of thermal coal and reduce pricing pressure on electric power companies, NDRC issued Announcement No. 46 on June 19, 2008 to implement, from such date until December 31, 2008, temporary price caps on thermal coal. On December 3, 2008, NDRC issued the Notice Relating to the Good Preparation for Inter Provincial Coal Production Transportation Works (Fa Gai Yun Xing [2008] No. 3294), which announced the elimination of the price control measures implemented in June 2008. On December 30, 2008, NDRC issued an announcement (No. 67) to abolish the temporary price intervention measures on thermal coal, which became effective on January 1, 2009.

Currently, major domestic coal suppliers and coal purchasers attend the Annual National Coal Trading Convention to negotiate and discuss the price and volume 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.

Fees and Taxes

The table below sets forth material taxes and fees that are imposed upon coal producers in China, as well as reserves which we are required to set aside.

Item		Base		Rate
Corporate income tax		Taxable income		25%
VAT		Sale Revenue		17%
Business tax		Revenue from service		3% or 5%
City construction tax		Amount of VAT and business tax		5% to 7%
Education surcharge		Amount of VAT and business tax		3%
Local education surcharge		Amount of VAT and business tax		1%
Resource tax		Aggregate volume of raw coal sold or used(1)		RMB3.6 per tonne (Shandong Province) RMB3.2 per tonne (Shanxi Province)
Compensation for the depletion of coal resources		Proceeds from coal sales		1%
Price adjustment fund		Volume of raw coal produced		Jining city, Shandong Province RMB8 per tonne

Coal producers may be fined if they damage the environment, arable land, grasslands or forest areas. Under the Mineral Resources Law, if a mining enterprise’s mining activities results in damage to arable land, grasslands or forest areas, the mining enterprise must return the land to an arable state or plant trees or grass or take other restorative 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 living standards is liable for the loss and must compensate the affected persons and remedy the situation.

Additionally, 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.

Imports and Exports

According to the Foreign Trade Law, the Cargo Import and Export Ordinance and the Administrative Measures of Coal Export Quota, coal exports remain subject to State control and require governmental approval.

Our company has not been authorized as a PRC coal exporter. Our coal export is conducted through three export agent including China Coal Energy Group Company, China Minmetals Corporation and Shanxi Coal Import and Export Group Company.

Pursuant to the Administrative Measures of Coal Export Quota, the NDRC and the Ministry of Commerce are responsible for determining China’s national coal export quota and allocating the quota among authorized coal exporters. Upon receiving a quota approval, authorized coal exporters may apply for coal export permits to the relevant authority designated by the MOFCOM. Authorized coal 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:

The total national quota approved for 2007, 2008 was 70 million and 53 million, respectively, and the 2009 quota is 26 million tonnes.

The PRC Government VAT refund has been abolished since 2006 under the Notice of Taxation on Adjusting the Tax Refund Rates of Certain Commodities and Supplementing the Catalogue of Prohibited Commodities in Processing Trade, which was promulgated jointly by the Ministry of Finance, NDRC, Ministry of Commerce, General Administration of Customs, and State Administration of Taxation.

According to the Notice of the Customs Tariff Committee of the State Council on Revising the Tariff Rates on the Export of Aluminium Alloy, Coke and Coal (Shui Wei Hui 2008 No. 25), beginning August 20, 2008, the provisional tariff rate of coke, coking coal and soft coal will be 40%, 10%, and10% respectively. Export tariffs are generally passed to the purchaser. Therefore, changes in export tariffs do not directly affect us.

Domestic Trading of Coal

Pursuant to the Measures for the Regulation of Coal Operations promulgated by the NDRC on December 27, 2004, the State implemented a system to examine the qualifications of an entity to engage in 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 entity can engage in coal operations, it must obtain a coal operation qualification certificate. A coal production enterprise that deals in coal products produced and processed by a third party is required to obtain a coal operation qualification.

Environmental ProtectionRegulatory Overview

Coal Industry — PRC Regulatory Matters

To establish a coal mining enterprise under the Coal Law of the PRC (the “Coal Law”), the applicant must submit an application to the relevant department in charge of the coal industry. After obtaining approval to establish a coal mining enterprise, the applicant will be granted a mining permit by the Ministry of Land and Resources. Thereafter, the applicant must obtain a coal production permit before it commences coal production. Coal mining enterprises which have legally obtained coal production licenses shall have the right to sell coal that they produce. For establishment of a coal trading enterprise, an applicant must apply for a different business license and may engage in coal trading only after it obtains a trading license from the administrative department of industry and commerce.

Mining activities in the PRC are also subject to the Mineral Resources Law of the People’s Republic of China (the “Mineral Resources Law”). The Mineral Resources Law regulates any matters relating to the planning or the exploration, exploitation and mining of mineral resources. According to the Mineral Resources Law, all mineral resources in China, including coal, are owned by the State. Any enterprise planning to engage in the exploration, development and mining of mineral resources must obtain exploration rights and mining rights before commencing the relevant activities. The transfer of exploration and exploitation rights shall be subject to governmental approval pursuant to the Coal Law, the Mineral Resources Law and other relevant regulations.

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

coal export activities and export quotas jointly with the Ministry of Commerce. The NDRC is also responsible for the evaluation and implementation of the pricing mechanism that links the prices of coal and power;

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

Pricing

Until 2002, the production and pricing of coal have generally been subject to close control and supervision by the PRC Government, which centrally manages the production and pricing of coal. To transition from a planned economy to market economy practices, the PRC Government eliminated state guideline for coal prices on January 1, 2002 and aimed to establish pricing mechanism that reflect market demand.

Under the Price Law of the People’s Republic of China, the PRC Government reserves the right to intervene in price fluctuations of important commodities such as coal. The State Council and the provincial governments, autonomous regions and municipalities directly under the PRC Government may adopt intervention measures, such as restricting margins or profits, and imposing price limits. Since 2002, NDRC has executed temporary measures several times to prevent and control unusual fluctuations in thermal coal prices.

To ensure the stable supply of thermal coal and reduce pricing pressure on electric power companies, NDRC issued Announcement No. 46 on June 19, 2008 to implement, from such date until December 31, 2008, temporary price caps on thermal coal. On December 3, 2008, NDRC issued the Notice Relating to the Good Preparation for Inter Provincial Coal Production Transportation Works (Fa Gai Yun Xing [2008] No. 3294), which announced the elimination of the price control measures implemented in June 2008. On December 30, 2008, NDRC issued an announcement (No. 67) to abolish the temporary price intervention measures on thermal coal, which became effective on January 1, 2009.

Currently, major domestic coal suppliers and coal purchasers attend the Annual National Coal Trading Convention to negotiate and discuss the price and volume 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.

Fees and Taxes

The table below sets forth material taxes and fees that are imposed upon coal producers in China, as well as reserves which we are required to set aside.

Item		Base		Rate
Corporate income tax		Taxable income		25%
VAT		Sale Revenue		17%
Business tax		Revenue from service		3% or 5%
City construction tax		Amount of VAT and business tax		5% to 7%
Education surcharge		Amount of VAT and business tax		3%
Local education surcharge		Amount of VAT and business tax		1%
Resource tax		Aggregate volume of raw coal sold or used(1)		RMB3.6 per tonne (Shandong Province) RMB3.2 per tonne (Shanxi Province)
Compensation for the depletion of coal resources		Proceeds from coal sales		1%
Price adjustment fund		Volume of raw coal produced		Jining city, Shandong Province RMB8 per tonne

Coal producers may be fined if they damage the environment, arable land, grasslands or forest areas. Under the Mineral Resources Law, if a mining enterprise’s mining activities results in damage to arable land, grasslands or forest areas, the mining enterprise must return the land to an arable state or plant trees or grass or take other restorative 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 living standards is liable for the loss and must compensate the affected persons and remedy the situation.

Additionally, all coal producers are subject to PRC environmental protection laws and regulations which currently impose fees for the discharge of waste materialsubstances, require the payment of fines for serious pollution and fines on severe polluters and authorizeprovide for the discretion of the PRC Government to close any facility which fails to comply with orders requiring it to cease or bring into compliance with relevant laws and regulationscure operations causing environmental damage. We believe all of our facilities are in compliance with the requirements of the relevant PRC environmental protection laws

Imports and regulations. In addition, Yancoal Australia’s operation in Australia is compliant with relevant Australian environmental protection laws and regulations.Exports

According to the laborForeign Trade Law, the Cargo Import and services agreement approved by our shareholders,Export Ordinance and the Controlling Shareholder will provide environmental servicesAdministrative Measures of Coal Export Quota, coal exports remain subject to us. In 2007, we paid the Controlling ShareholderState control and require governmental approval.

Our company has not been authorized as a total of RMB26.7 million for environmental protection services to reduce the effects of our operations on the environment.

Insurance

In accordance with what we believe is the customary practice among PRC coal mining entities, we do not maintain fire, casualty or other property insuranceexporter. Our coal export is conducted through three export agent including China Coal Energy Group Company, China Minmetals Corporation and Shanxi Coal Import and Export Group Company.

Pursuant to cover our properties, equipment or inventory other thanthe Administrative Measures of Coal Export Quota, the NDRC and the Ministry of Commerce are responsible for our vehicles. In addition, we do not maintain any business interruption insurance or any third party liability insurancedetermining China’s national coal export quota and allocating the quota among authorized coal exporters. Upon receiving a quota approval, authorized coal exporters may apply for coal export permits to cover claims in respect of personal injury, property or environmental damage arising from accidents on our properties or relatingthe relevant authority designated by the MOFCOM. Authorized coal exporters are also required to our operations, other than

third party liability insurance with respectreport their monthly quota usage to our 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 each employee’s total remuneration for personal injury insurance and currently maintain personal injury insurance for our employees.

Competition

Coal Productionthe NDRC.

The PRC coal industry is characterized by a large number of small scale enterprises andregulations provide that quotas may be adjusted in the wide geographical distribution of coal reserves. However, there are relatively few large scale coal production enterprises. Statistics from the China Coal Industry Association show that, in 2006, the PRC coal industry had:event of:

The total national quota approved for 2007, 2008 was 70 million and 53 million, respectively, and the 2009 quota is 26 million tonnes.

The PRC Government VAT refund has been abolished since 2006 under the Notice of Taxation on Adjusting the Tax Refund Rates of Certain Commodities and Supplementing the Catalogue of Prohibited Commodities in Processing Trade, which was promulgated jointly by the Ministry of Finance, NDRC, Ministry of Commerce, General Administration of Customs, and State Administration of Taxation.

According to the Notice of the Customs Tariff Committee of the State Council on Revising the Tariff Rates on the Export of Aluminium Alloy, Coke and Coal (Shui Wei Hui 2008 No. 25), beginning August 20, 2008, the provisional tariff rate of coke, coking coal and soft coal will be 40%, 10%, and10% respectively. Export tariffs are generally passed to the purchaser. Therefore, changes in export tariffs do not directly affect us.

Domestic Trading of Coal

Pursuant to the Measures for the Regulation of Coal Operations promulgated by the NDRC on December 27, 2004, the State implemented a production capacity that exceeded 100.0 million tonnes, at 203 million tonnessystem to examine the qualifications of an entity to engage in coal operations, including the wholesale and retail of raw coal and processed coal products and the processing and distribution of coal which accounted for 8.7% of national production.

The table below sets forth the top tencivilian use. Before an entity can engage in coal operations, it must obtain a coal operation qualification certificate. A coal production enterprisesenterprise that deals in the PRC by production volume in 2006:

Source: China Coal Industry Association

We principally compete in two markets: the PRC domestic marketcoal products produced and the East Asian market. The PRC domestic coal market is characterizedprocessed by a significant number ofthird party is required to obtain a coal suppliers and the absence of a dominant nationwide supplier. The domestic coal market is segmented principally by: (i) geographical region, as a result of the significant costs associated with transporting coal and (ii) coal quality, which is categorized by ash and sulfur content levels, calorific value and the extent and quality of washing or processing. We compete principally on the basis of the availability and costs of transportation, coal quality and reliability of delivery.

Our domestic competitors primarily include a number of coal mines located in Shanxi Province, Shaanxi Province and the Inner Mongolia Autonomous Region. Certain of our competitors from these

regions have substantial reserves and favorable geological conditions. However, these competitors incur significant transportation costs when they supply to end-user 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.

Coal mining companies that supply to power plants generally have long-term, well-established relationships with their customers. PRC power plants typically specify their future coal suppliers in their feasibility studies and customize the design of their power generation equipment to use the type and quality of coal produced by their selected suppliers. A power plant that changes one of its coal suppliers will have to bear the costs and risks associated with modifying its power generation equipment to operate using the new supplier’s coal.

We export coal to several countries in East Asia, including Japan and Korea. These countries have high energy consumption levels but 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 connects us to the national railway system and provides us access to Zouxian Power Plant, our largest end-user customer. We use our railway network to provide railway transportation services for our own internal use as well as to the Controlling Shareholder and other customers. We do not face significant competition from other railway operators. However, we may compete with other surface transportation services that can service the same region as our railway network.operation qualification.

Seasonality

Our business operation is not affected by seasonality.

Regulatory Overview

Coal Industry — PRC Regulatory Matters

To establish a coal mining enterprise under the Coal Law

On August 29, 1996, of 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 the operation of all coal mines, including state-owned mines and privately owned mines, which regulates resource exploitation planning, new mine approvals, mining and work safety permits, safety standards, coal processing, business management, sustainable use of mine areas and worker safety and administrative supervision.

According to the Coal Law, entities seeking to establish mining enterprisesapplicant must applysubmit an application to the relevant government office and obtain all necessary approvals. Thedepartment in charge of the coal industry. After obtaining approval to establish a coal mining enterprise, the applicant will be granted a mining permit by the Ministry of Land and Resources will grant anResources. Thereafter, the applicant entity a mining permit upon approving its application. Thereafter, an entity must obtain a coal production permit and a coal operation permit and other related quality permits before it commences coal production. Coal mining enterprises which have legally obtained coal production licenses shall have the right to sell coal that they produce. For establishment of a coal trading enterprise, an applicant must apply for a different business license and may engage in coal trading only after it obtains a trading license from the domestic saleadministrative department of coal. The PRC Government is in the process of amending the Coal Law, to improve the coordination of the national development plan for coal miningindustry and utilization of coal resources as well as to address the need for effective penalties or to strengthen enforcement of existing provisions in the Coal Law.commerce.

Mining activities in the PRC are also subject to the Mineral Resources Law of the People’s Republic of China Mineral Resources Law (“Mineral(the “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 the exploration, exploitation and mining of mineral resources. According to the Mineral Resources Law, all mineral resources in China, including coal, are owned by the State. Except under limited circumstances, anyAny enterprise planning to engage in the exploration, development 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 generally prohibits the transfer of exploration and exploitation rights except under limited circumstances.shall be subject to governmental approval pursuant to the Coal Law, the Mineral Resources Law and other relevant regulations.

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

coal export activities and export quotas jointly with the Ministry of Commerce. The NDRC is also responsible for the evaluation and implementation of the pricing mechanism that links the prices of coal and power;

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

Pricing

Until 2002, the production and pricing of coal have generally been subject to close control and supervision by the PRC 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 sets out suggested prices for coal. To effectuate the transformationtransition from a planned economy to market economy practices, the PRC Government eliminated the state guideline prices for coal prices on January 1, 2002 and allowed theaimed to establish pricing for all types of coal to be determined in accordance withmechanism that reflect market demand. However, as the PRC Government continues to maintain control over the national railway system, which is the primary means to transport coal in China, the PRC Government may continue to exert influence over the pricing of coal through its allocation of railway transportation capacity for coal.

However, underUnder the Price Law of the People’s Republic of China, promulgated on December 29, 1997, effective beginning May 1, 1998, the PRC Government reservedreserves the right to intervene in the event of an actual increase or potential increase in the pricesprice fluctuations of important productscommodities such as coal. The State Council and the provincial governments, autonomous regions and municipalities directly under the PRC Government may adopt intervention measures, such as restricting the ratio of price differentialsmargins or of profits, and imposing price limits, etc. In August 2004,limits. Since 2002, NDRC has executed temporary measures several times to prevent and control unusual fluctuations in thermal coal prices.

To ensure the stable supply of thermal coal and reduce pricing pressure on electric power companies, NDRC issued a notice setting forthAnnouncement No. 46 on June 19, 2008 to implement, from such date until December 31, 2008, temporary price caps on thermal coal. On December 3, 2008, NDRC issued the Notice Relating to the Good Preparation for Inter Provincial Coal Production Transportation Works (Fa Gai Yun Xing [2008] No. 3294), which announced the elimination of the price control measures implemented in June 2008. On December 30, 2008, NDRC issued an announcement (No. 67) to be imposedabolish the temporary price intervention measures 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, coal suppliers and their customers may not negotiate for the sale of coal at prices beyond the government suggested price range.

Similar to coal pricing, the production and supply of coal, which is dictated by the PRC Government’s annual state coal allocation plan, has been gradually liberalized and largely determined by market forces. MajorCurrently, major domestic coal suppliers and coal purchasers attend the Annual National Coal Trading Convention to negotiate and discuss the price and quantityvolume 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.

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 negotiate prices in accordance with market demand and coal quality. On December 27, 2006, the relevant government departments and entities such as the National Development and Reform Committee for railway operations and Transportation Department convened for 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. On November 23, 2007, the NDRC promulgated the Coal Industry Policy, which promotes the use of market mechanisms to set coal prices and the establishment of fair trade rules.

Fees and Taxes

The table below sets forth material taxes and fees that are imposed upon coal producers in China, as well as reserves which we are required to set aside.