US China Mining Group, Inc. Reports Fourth Quarter and Full Year 2010 Financial Results

CITY OF INDUSTRY, Calif., March 31, 2011 /PRNewswire-FirstCall/ -- US China Mining Group, Inc., ("US China Mining") (OTC Bulletin Board: SGZH) a Chinese leader in coal production and exploration in the People's Republic of China, today announced financial results for the fourth quarter and full year ended December 31, 2010.

SUMMARY FINANCIALS

Fourth Quarter of 2010 Financial Results

For the three months ended December 31, 2010, the Company recorded revenues of $28.7 million compared to $10.8 million for the same period of 2009, an increase of 165%. The composition of sales for each respective period is as follows:

"We are pleased to report a strong increase in our fourth quarter operating results, which provides confirmation of our embedded growth plan and solid momentum as we move into 2011, said Mr. Hongwen Li, President of US China Mining Group. "The quarter benefitted from increased production at our Xing An mines while overall coal production increased 136.4% to 606,747 tons."

Cost of sales for the three months ended December 31, 2010 was $16.6 million, an increase of  $9.9 million or approximately 148% over the year ago period.  

Gross profit was $12.1 million for the fourth quarter of 2010 compared to $4.1 million for the same period of 2009, an increase of 194%. Gross margins increased 40 basis points to 42% for the fourth quarter of 2010 due to higher production volumes as a result of the Xing An mines coming back online in November 2010.

Net income for the three months ended December 31, 2010 was $5.6 million compared to net income of $0.9 million for the same period of 2009, an increase of 490%. Diluted earnings per share for the fourth quarter 2010 were $0.36 compared to $0.06 in the same period of 2009.

Full Year 2010 Financial Results

Sales for the full year of 2010 were $69.0 million, a 6% increase from the $65.0 million reported in the same period in 2009. Average selling price per ton for 2010 was $47.30, a 4% decrease from 2009 resulting from lower average selling prices to large utility plants in the Heilongjiang Province.  Total sales volume increased 10.3% to 1.46 million tons for 2010, and benefitted from growth in the coal brokerage business.

Beginning at the end of 2009, Xing An Mines commenced mine maintenance and retrofit projects that were necessary under new safety regulations and resulted in decreased production. The Company expected the projects to take from 12 to 21 month to complete; production partially resumed in November of 2010 and will fully resume when the retrofit is complete by the year-end 2011.  These mine improvements will enhance profitability by increasing output yields and lowering extraction costs. In addition, with enhanced production capabilities, management plans to request approval to increase the annual output by 50% to 900,000 MT per year.

Cost of sales for the year ended December 31, 2010 was $40.5 million, an increase of approximately 49% from 2009. The cost per ton in 2010 increased to $27.71 from $19.79 in 2009, due to higher labor and energy costs.

GAAP gross profit was $28.6 million for the year ended December 31, 2010, compared to approximately $37.8 million for the same period in 2009. Adjusted gross profit, excluding non-cash charges related to the difference in 2010 GAAP and PRC standards for amortization and depreciation, reached to $29.4 million, representing gross margins of approximately 42.6% and 60.6%, respectively. The decrease in gross profit margin was mainly attributable to the decreased saleable production volume, decreased average selling price per ton and increased average cost per ton.  

Operating expenses totaled $9.4 million for the full year 2010 compared to $5.8 million for 2009, an increase of $3.5 million or approximately 61%. Operating expenses were negatively impacted by increased payroll and welfare expenses, and electricity fees as a result of overall price inflation in China. In addition, the increase was attributable to three new fees ranging from approximately $1.50/ton to $3/ton levied by the provincial government and local authorities, which totaled $1.4 million for the year. Although the fees are expected to be temporary, the Company expects to pass these to customers if they become permanent. Deducting the fees, operating expenses would have been $8.0 million.

GAAP Net income for full year 2010 was $13.4 million compared to $25.1 million in the same period in 2009, a decrease of $11.7 million. Diluted earnings per share for the full year of 2010 were $0.87 compared to $1.63 in the same period of 2009.  Adjusted net income, excluding non-cash charges related to the difference in 2010 GAAP and PRC standards for amortization and depreciation, increased 8.2% to $14.5 million, or $0.94 per diluted share compared to $27.1 million or $1.76 per share for the same period last year.  Diluted earnings per share were calculated using weighted average shares of 15,342,139 and 15,348,088 for the years ended December 31, 2010 and December 31, 2009, respectively. (See "Reconciliation of GAAP Gross Profit and Net Income to Adjusted Gross Profit and Net Income, respectively" table below.)

Balance Sheet and Cash Flow

Cash and cash equivalents totaled $46.2 million on December 31, 2010, compared to $31.3 million on December 31, 2009. US China Mining Group generated approximately $20.7 million in cash flows from operating activities in 2010. The Company had current ratio of 4.2 to 1 at December 31, 2010. Working capital on December 31, 2010 was approximately $36.4 million versus $24.8 million in the year ago period. On January 2, 2011, the Company raised $15 million through an equity offering, which is not reflected on the year-end balance sheet.

Business Update

US China Mining Company owns 3 mines in two separate locations in Heilongjiang province which produces high grade thermal coal used to produce energy. The Company currently has approximately 20 million tons of reserves. Production will ramp throughout 2011 and management anticipates 830,000 tons will be mined and sold generating approximately $40 million in revenues. While the Xing An mine is currently approved for 600,000 tons of annual capacity, once the retrofit is completed management will submit requests to relevant provincial mining authorities to increase annual output approval to 900,000 tons.

The Company's coal brokerage and coal sorting are complementary in that they leverage a key asset, which is close proximity to railway access and an installed customer base of large Thermal Energy Power Plants, to increase total tons of coal sold. The brokerage business purchases coal from very small producers, consolidates and ships by railcar to the end customer. Management expects to generate over $33 million in revenues by selling 680,000 tons through coal brokerage. Sorting takes low grade coal from Inner Mongolia, processes and separates the impurities to create compliant coal, and then ships it by railcar to customers. The coal sorting business is expected to contribute $22.5 million in revenues for 2011, or approximately 25% of the total forecast, by processing 500,000 tons through this method.

The Chinese government is pushing industry consolidation throughout China and has set minimum production thresholds in order to remain as a stand-alone operator. This is creating numerous acquisition opportunities at attractive valuations for the company to evaluate.

"We have ramped production at the Xing An Mines and are now operating at full capacity, a move which in combination with sorting and brokerage will enable us to meet our 2011 forecast for $95.7 million in revenues and net income of $20.3 million," said Mr. Hongwen Li, President of US China Mining Group. "Our strong cash balance and positive cash flow provide enhanced flexibility when negotiating for acquisitions, especially with under-capitalized producers. We are currently in due diligence with assets both in China and abroad.  Our 2011 goals including expanding both our coal reserves and production capabilities as enhance our position as an established operator."

About US China Mining Group

US China Mining Group is a company engaged in coal production and sales by exploring, assembling, assessing, permitting, developing and mining coal properties in the People's Republic of China ("PRC"). After obtaining permits from the Heilongjiang Province National Land and Resources Administration Bureau and the Heilongjiang Economic and Trade Commission, we extract coal from properties to which we have the right to mine capped amounts of coal, and then sell most of the coal on a per metric ton ("ton") basis in cash on delivery, primarily to power plants, cement factories, wholesalers and individuals for home heating. We do not own the coal mines, but have mining rights to extract a capped amount of coal from a mine as determined by government authorized mining engineers and approved by the Heilongjiang Department of Land and Resources. Our business consists of the operations of Tong Gong coal mine in northern PRC, located approximately 175 km southwest of the city of Heihe in the Heilongjiang Province and the Hong Yuan and Sheng Yu coal mines located in the city of Mohe in Heilongjiang Province.

About Non-GAAP Financial Measures  

This press release contains non-GAAP financial measures on annual basis. The Company believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges that our management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of US China Mining Group.  Accordingly, management excludes expenses related to the difference in 2010 GAAP and PRC standards for amortization in mining right, amortization in asset retirement obligation, and depreciation in mining shafts for the Company's Xing An and Tong Gong mining operations when making operational decisions. The Company believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand the Company's financial performance in comparison to historical periods. In addition, it allows investors to evaluate the Company's performance using the same methodology and information as that used by our management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, our management compensates for these limitations by providing the relevant disclosure of the items excluded.

The following table provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure on yearly basins.

Reconciliation of GAAP Gross Profit and Net Income (Loss) to Adjusted Gross Profit and Net Income, respectively (Unaudited)

Safe Harbor Statement

This press release contains certain statements that may include 'forward-looking statements' as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by the use of forward-looking terminology such as "believe, expect, anticipate, optimistic, intend, will" or similar expressions. Such forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to be materially different from those described herein as anticipated, believed, estimated or expected. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and factors, including those discussed in the Company's periodic reports that are filed with and available from the Securities and Exchange Commission. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these risks and other factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.

Company Contact:
Tony Peng
Chief Financial Officer
US China Mining Group Inc.
Tel: 626-581-8878

Investor Relations:
HC International
Ted Haberfield, Executive Vice President
Phone: +1-760-755-2716
Email:  [email protected]
Web:  www.hcinternational.net

SOURCE US China Mining Group, Inc.