The demand for iron and steel products in China increased rapidly for a period
of years before the recent slowdown in the Chinese economy. We believe demand
for high quality iron ore concentrate will resume growing domestically and globally,
and intend to seek to profit from this growth by participating in various aspects
of the production of iron suitable for steelmaking, including, as suitable opportunities
arise, through the acquisition of mines or mining rights, and the acquisition
of iron processing facilities.
To date, we have constructed two facilities. Our first facility is an iron ore
processing facility in Zhuolu County, Zhangjiakou City, Hebei Province, China.
For a variety of reasons described below, this facility has not been able to
operate continuously and we have upgraded this facility to improve the grade
of iron concentrate it will produce and to add the capacity to produce Direct
Reduced Iron (DRI).
Our second facility is a DRI production facility in Haixing County, Hebei Province.
DRI Processing (Haixing Huaxin Mining Industry Co., Ltd.)
China Huaxin intends to produces Direct Reduced Iron (DRI) using advanced reduction
rotary kiln technology with iron sand as the principal raw material. China Huaxin
imports iron sands from New Zealand, Australia, Indonesia and the Philippines.
The total amount expended to construct the DRI Facility, inclusive of both hard
and soft costs, was approximately 244,270,000 RMB or US $39 million.
‘Reduced iron’ derives its name from the chemical change that iron
ore undergoes when it is heated in a furnace at high temperatures in the presence
of hydrocarbon-rich gasses. ‘Direct reduction’ refers to processes
which reduce iron oxides to metallic iron below the melting point of iron. The
product of such solid state processes are called direct reduced iron (DRI).
The Company’s DRI Facility is projected to produce DRI with an iron grade
of over 92%.
China Huaxin completed trial production and anticipated commencing commercial
production in May 2015. However, due to environmental initiatives by government
authorities in China, starting in June 2015, China Huaxin commenced upgrading
the DRI facilities by converting the existing coal-gas station systems to liquefied
natural gas (“LNG”) station systems. The conversion to LNG systems
will reduce pollutants and produce higher quality DRIs with less impurity. China
Huaxin is in the final stages of this upgrade and expects to commence commercial
production with upgraded DRI facilities in the second half of 2016.
The Company’s DRI Facility occupies an area of 200,000 m2 The DRI Facility
occupies 60,000 m2, of land and there is a raw material storage area of 14,000
m2 with a 100,000 ton storage capacity, a workshop area of 4500 m2, a water
storage pool of 4000 m3 to supplement water supplies, and an office building
of 2,400 m2. The plant design is intended to permit the processing of 2,000,000
tons of iron sand per annum with an annual output capacity of 1,000,000 tons
of DRI.
The equipment installed in the DRI Facility includes 2 sets of Rotary Kilns
that are 36m each in length and capable of processing 6000 tons of raw material
per day, and 3 sets of Gas Furnaces to produce carbon monoxide for use in the
reduction process. The equipment also includes 6 sets of Grinding Equipment
and 3 sets of Wet Magnetic Separation Machineries with processing capacity of
7200 tons per day. In addition there are 30 sets of Hydraulic Machines with
a capacity of 5,000 tons per day to press block the finished product.
Iron Ore (ZhuoluJinxin Mining Co., Ltd.)
China Jinxin is engaged in iron ore processing and the production of iron ore
concentrate. China Jinxin has an iron ore concentrate production line with an
annual capacity of 300,000 tons and associated plant and office buildings located
in Zhuolu County, Zhangjiakou City, Hebei Province, China. Construction of the
production facilities commenced in May 2007 and was completed in February 2010.
In December 2011, the Company halted production due to its inability to agree
upon the price of its product with its principal customer and to implement certain
design changes to upgrade the production lines at the facility to improve iron
ore refinement and increase the iron ore concentration rate and, subsequently,
add the ability to produce DRI. The construction for China Jinxin’s DRI
facility upgrade was mostly complete as of the date of this report date and
we are currently testing and adjusting the equipment prior to commencing production.
The Company expects it will have the ability to resume commercial production
in the second half of 2016.
Temporary manufacturing licenses for the production facilities were obtained
from Zhangjiakou City on March 22, 2009, March 23, 2010, January 1, December
30, 2011 and December 27, 2014, respectively. The Company is currently in the
process of applying for the new license; however, it is not able to give the
expected date for the license approval.
China Jinxin has entered into a 10 year contract with Handan Steel Group Company
(“HSG”), a subsidiary of Hebei Steel and Iron Company, a state owned
enterprise, which expires in January 2019, whereby China Jinxin agreed to sell
and HSG agreed to purchase all of the output from our production facility. The
price we receive for our output is determined by HSG in light of market prices
and the quality of our product and is to result in a reasonable profit margin
to us. If China Jinxin is not satisfied with the price set by HSG it can attempt
to renegotiate the price. China Jinxin has withheld deliveries from HSG since
the end of 2011 because of its dissatisfaction with the price offered by HSG.
If this dispute should continue, we will not be able to generate revenue from
our production of iron ore which would have a materially adverse effect on our
operations.
China Jinxin was established in December 2006 in Zhuolu County, Hebei Province,
Northern China. China Jinxin has registered capital of RMB 36 million ($5.7
million). When formed, China Jinxin had registered capital of RMB 6 million
($909,000).
We operate China Jinxin as a variable interest entity through the VIE Agreements,
a series of contractual agreements with China Tongda, our WFOE, which gives
us effective control of the management and operations of China Jinxin. As compensation
for its services China Tongda is entitled to receive each month an amount equal
to the pre-tax profits of China Jinxin. Through the VIE Agreements, we are irrevocably
given the right to control the operations of China Jinxin and to exercise the
rights of its shareholders and Board of Directors (“BOD”). The rights
we were granted include the right to make all decisions implicating the operational
management, financial management, capital management, asset management, human
resource management and daily operations of China Jinxin. Pursuant to the VIE
Agreements, we also assume all the operational risks associated with China Jinxin
and are responsible for any loss incurred by China Jinxin.
The PRC government continues to exercise substantial control over many sectors
of the Chinese economy. Part of this control is through regulations. Among these
are regulations on foreign ownership of certain companies and regulations on
the ability of Chinese citizens to shift ownership of domestic Chinese companies
to offshore enterprises. In August 2006, the Ministry of Commerce, or MOFCOM,
the China Securities Regulatory Commission, or CSRC, the State-owned Assets
Supervision and Administration Commission, the State Administration of Taxation,
or SAT, the State Administration of Industry and Commerce and the State Administration
of Foreign Exchange, or SAFE, jointly promulgated the “Rules on the Mergers
and Acquisition of Domestic Enterprises by Foreign Investors,” which became
effective in September 2006, and were amended on June 22, 2009. These rules
are referred to herein as the “M&A Rules.” The M&A Rules
confirmed that MOFCOM is a key regulator for mergers and acquisitions in China
and require MOFCOM approval of a broad range of mergers, acquisitions and investment
transactions. Among other things, the M&A Rules include provisions that
purport to require that an offshore special purpose vehicle, or SPV, controlled
directly or indirectly by PRC companies or individuals, formed for the purpose
of offering their equity interests in domestic companies they control, must
obtain the approval of the CSRC prior to the listing and trading of such SPV’s
securities on an overseas stock exchange.
On September 21, 2006, the CSRC published on its official website procedures
specifying documents and materials required to be submitted to it by SPVs seeking
CSRC approval of their overseas listings. However, the application of these
regulations remains unclear with no consensus currently existing among the leading
PRC law firms regarding the scope and applicability of the CSRC approval requirement
to various types of transactions, including those which involve the use of VIE
agreements.
At the time of the acquisition of Real Fortune BVI by Target, the shareholders
of China Jinxin desired to access the capital markets outside of China to expand
its operations. These shareholders believed that prior consent of the CSRC would
be required if they were to cause the shares of China Jinxin to be owned by
a foreign entity but that consent would not be required if they and China Jinxin
entered into the VIE Agreements with China Tongda, even if China Tongda was
owned by a foreign entity. Through these contractual arrangements or VIE Agreements,
acting through China Tongda, we have the ability to substantially influence
China Jinxin’s daily operations and financial affairs, appoint its senior
executives and approve all matters requiring stockholder approval. As a result
of these contractual arrangements pursuant to generally accepted accounting
principles in the United States (“US GAAP”), we are considered the
primary beneficiary of China Jinxin. The shareholders further believed that
there was no need to obtain the approval of the CSRC pursuant to the M&A
Rules given that:
Our Company and its offshore subsidiaries did not acquire an equity interest
in any PRC company.
China Tongda was incorporated as a wholly foreign-owned enterprise by means
of direct investment rather than by merger or acquisition by our Company of
the equity interests or assets of any “domestic company” as defined
under the M&A Rules, and no provision in the M&A Rules classifies the
contractual arrangements between China Jinxin and China Tongda as a type of
acquisition transaction falling under the M&A Rules.
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