US China Mining Group, Inc. Reports Third Quarter 2011 Financial Results

CITY OF INDUSTRY, Calif., Nov. 15, 2011 /PRNewswire/ -- US China Mining Group, Inc., ("US China Mining") (OTCQB: SGZH) a Chinese leader in coal production and exploration in the People's Republic of China, today announced financial results for the third quarter ending September 30, 2011.

SUMMARY FINANCIALS

Third Quarter of 2011 Financial Results

For the three months ended September 30, 2011, the Company generated net sales of $6.3 million compared to $17.9 million for the same period in 2010, a 65% decline. The composition of sales for each period is as follows:

The Company sold approximately 113,474 metric tons of coal in the three months ended September 30, 2011, down 65% from 373,794 metric tons sold in the third quarter of 2010. The average sales price per ton increased 13% year-over-year, from $47.84 to $54.08. Coal production sales were up 46% while coal brokerage sales were down 82% due to difficulties securing railway access and higher inventory costs for brokered coal in our Xing An mines.

"While the third quarter has delivered several challenges, we believe that it will not take us long to pull through the temporary challenges," said Mr. Hongwen Li, President of US China Mining Group. "We are well capitalized and intently focused on completing the Guizhou acquisition in the near term which will meaningfully increase both our coal reserves and production capacity, while capitalizing on higher market prices to drive incremental revenue and net income growth."

Cost of sales for the three months ended September 30, 2011 was $4.2 million, a $5.8 million decrease, or down approximately 59% over the year ago period, due to lower production and sales.  

Gross profit was $2.1 million for the third quarter of 2011 compared to $7.8 million for the same period of 2010, a 73% decline. Gross margins decreased 960 basis points to 34.0% for the third quarter of 2011 due to higher labor and materials costs and increased mining fees.

Operating expenses were $3.2 million, up $0.7 million from $2.5 million in the third quarter of 2010. The increase was attributable to new fees and taxes levied by the provincial government, including a $0.65 million land use tax expensed in the third quarter for the Xing An mines. The tax started to levy this year based on the square meters of land used by Xing An. The Company made a payment of approximately $2.6 million during the second quarter, with $1.95 million expensed in the first three quarters and the other to be expensed in the fourth quarter of this year. The Company also incurred $0.1 million in non-cash stock compensation expenses.

Operating loss was $1 million for the three months ended September 30, 2011.

Net loss for the three months ended September 30, 2011 was $0.9 million compared to net income of $3.9 million for the same period of 2010. Diluted loss per share for the third quarter 2011 was $0.05 compared to diluted earnings per share of $0.25 in the same period of 2010. The weighted diluted shares outstanding increased 23% to approximately 18.9 million as a result of the equity financing completed in the first quarter of 2011.

Nine months 2011 Financial Results

(2) Adjusted Net Income and EPS for the nine months ended September 30, 2011 exclude $1.3 million non-recurring expenses related to the repairs /accessories of its mines in Xing An and $0.5 million related to non-cash stock compensation expenses.

For the nine months ended September 30, 2011, the Company generated net sales of $39.9 million compared to $40.4 million for the same period in 2010, a 1% decline. Coal production sales were up 116% while coal brokerage sales were down 62%. The composition of sales for each respective period is as follows:

Cost of sales for the nine months ended September 30, 2011 was $25.0 million, an increase of approximately 5% compared to $23.9 million in the comparable period last year.  

Gross profit was $14.9 million for the first nine months of 2011 compared to $16.5 million for the same period of 2010, a 10% decrease. Gross margins decreased 360 basis points to 37.3% for the third first nine months of 2011.

Operating expenses were $10.5 million, up $5.3 million from $5.2 million in the first nine months of 2010. Operating income decreased 61% to $4.4 million for the nine months ended September 30, 2011. Excluding $1.3 million non-recurring expenses related to the repairs /accessories of its mines in Xing An mines and $0.5 million related to non-cash stock options and warrants compensation expenses, operating income was $6.3 million, compared to $11.3 million for same period of last year.

Net income for the nine months ended September 30, 2011 was $2.8 million compared to $7.8 million for the same period of 2010. Diluted earnings per share for the first nine months of 2011 were $0.15 compared to $0.51 in the same period of 2010. Excluding non-recurring expenses, non-GAAP adjusted net income and EPS were $4.6 million and $0.24, respectively.

Balance Sheet and Cash Flow

Cash and cash equivalents totaled $45.6 million on September 30, 2011, compared to $46.2 million on December 31, 2010. US China Mining Group had cash outflows from operations of $5.6 million, as higher income were offset by a $4.5 million refundable advance for upgrades to a mine in Guizhou, which is a potential acquisition. The Company had a current ratio of 29.1 to 1 at September 30, 2011. Working capital on September 30, 2011 was approximately $50.5 million versus $36.4 million in the year ago period.

Business Updates

1) The Company continues working on completing the retrofitting at its mines in Xing An, which is expected to increase its output capacity by 50% by 2013. The estimated cost for the retrofit is approximately $15.5 million, $13.4 million of which has been spent as of September 30, 2011. Management expects construction to be completed by the first quarter 2012.

2) The Company continues to step up efforts in the potential acquisition project located in Guizhou province, which is estimated to have approximately 18 million tons of proven coal reserves and rights to produce 300,000 tons of coal per year. US China Mining made a $4.6 million refundable advance into an escrow account, which is fully refundable if the acquisition is not consummated. In order to satisfy a key component of the acquisition condition, the existing owner of the Guizhou mine recently reorganized the legal structure of the property to be suitable for acquisition while completing the necessary infrastructure upgrade to be compliant. Testing is underway and the local mining and safety authorities are going through the approval process.   This safety and operating approval is the only outstanding item needs to complete the acquisition.

2011 Guidance

Management is suspending financial guidance for 2011 due to uncertainties relating to its coal brokerage business.  

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 for 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. For more information about the Company, please visit: www.uschinamining.com.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures. 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 the expenses related to the repairs /accessories of its mines in Xing An and non-cash stock compensation expenses. 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.

Reconciliation of GAAP Net Income (Loss) to Non-GAAP Adjusted Net Income:

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:
MZ North America
Ted Haberfield, President
Phone: +1-760-755-2716
Email:  [email protected]
Web:  www.mz-ir.com

SOURCE US China Mining Group, Inc.