SEC Company Response from CHINA NATURAL RESOURCES INC (CHNR) (CIK 0000793628) (CHNR) — Aug 10, 2009
CHINA NATURAL RESOURCES INC (CHNR) (CIK 0000793628)
Date: Aug. 10, 2009 · CIK: 0000793628 · Accession: 0000943440-09-000425
AI Filing Summary & Sentiment
Reasoning
Referenced dates: July 24, 2009, June 5, 2009
Letter
Response Letter
CHINA NATURAL RESOURCES, INC.
Room 2205, 22/F, West Tower, Shun Tak Centre
168-200 Connaught Road Central
Sheung Wan, Hong Kong
August 10, 2009
VIA EDGAR
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attn:
Chris White, Branch Chief
Gary Newberry, Staff Accountant
George Schuler, Mining Engineer
Re:
China Natural Resources, Inc.
Form 20-F for the Year Ended December 31, 2008
Staff Letter of Comment dated July 24, 2009
SEC File No. 0-26046
Ladies and Gentlemen:
We are writing to respond to the Staff’s letter dated July 24, 2009 relating to our Annual Report on Form 20-F for the year ended December 31, 2008 (the “Annual Report”).
We respond to the Staff’s comments as follows:
Form 20-F for the Fiscal Year Ended December 31, 2008
Quantitative and Qualitative Disclosures About Market Risk
Commodity price risk, page 67
1.
We note you hold copper future contracts as of December 31, 2008 as disclosed in your financial statements. Provide the quantitative and qualitative disclosures about market risk for these market risk sensitive instruments. Refer to Item 11(a) and (b) and related instructions in Form 20-F.
Response to Staff Comment 1:
Commodity Price Risk
From time-to-time, we enter into derivatives, including copper futures contracts, to mitigate the potential impact of fluctuations in the commodity price. We record these derivative contracts at fair value on our consolidated balance sheet as either an asset or liability.
United States Securities and
Exchange Commission
August 10, 2009
Page 2 of 8
As of December 31, 2008, Feishang Copper had 350 lots of outstanding copper future contracts for non-effective hedging purpose (with a fair value of approximately RMB 4.1 million (US$600,000)) to sell a total of 1,750 metric tons (5 metric tons per lot) of copper on March 15, 2009, at RMB22,610 (US$3,312) per ton. The Company acquired Feishang Copper on March 4, 2008, and, accordingly, preceding year information is not presented. These copper future contracts were purchased in December 2008 on the Shanghai Futures Exchange through Haitong Futures Brokerage Co., Ltd. The details of these copper futures contracts, which were settled in cash before their maturity date in January 2009, are as follows:
Lot of contracts
Position
Maturity date
Weighted average settlement price (per ton)
Closing
price as at December 31, 2008 (per ton)
RMB
US$
RMB
US$
Short
March 15, 2009
22,610
3,312
23,410
3,429
The commodity price of copper fluctuates widely and is affected by factors beyond our control but which impact our earnings and cash flow. These copper futures contracts were settled in cash before their maturity date, in January 2009, and as a result the Company incurred a loss of approximately RMB6.04 million (US$885,000).
As the Company’s futures contracts were settled in January 2009, we propose to make such disclosures pursuant to Form 20-F in future filings for any new derivative instruments we may enter into.
Note 2 – Summary of Significant Accounting Policies
(g) – Property and equipment, page F-15
2.
We have considered your response to our prior comments number three in our letter of June 5, 2009. We do not agree with your conclusions. The amortization of mining assets would include the mine development costs and any other associated buildings and equipment used in the Yang Chong Mine and the Zao Yun Mine. Please revise your analysis under Staff Accounting Bulletin (SAB) 99 and 108 to present the impact of this change, which includes your mine development costs.
Response to Staff Comment 2:
The Company will amortize its mining assets (including mine development costs and any other associated buildings and equipment) based on its reserve estimates as of December 31, 2004 for the Yang Chong Mine, and as of December 31, 2005 for the Zao Yun Mine, and give subsequent effect to the reserves extracted and processed by our past mining activities, including the adjustment/ upgrades we have made to the reserves due to any continuing exploration, geologic study, or sampling activities.
The Company recalculated the amortization/ depreciation expense of mining rights and mining related assets based on the revised reserve estimates for 2008, 2007, 2006 and 2005, and determined that the differences between the recalculated amounts of amortization/ depreciation each period and the amount recorded each period was approximately RMB 3,201,000 (US$469,000), RMB 1,425,000 (US$195,000), RMB 1,399,000 (US$179,000), and RMB 4,006,000 (US$496,000) in 2008, 2007, 2006 and 2005, respectively.
United States Securities and
Exchange Commission
August 10, 2009
Page 3 of 8
In connection with these calculations, management has reviewed the requirements of SAB 99, “Materiality” and SAB 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” for purposes of evaluating the materiality of the estimated amortization and depreciation related to the Company’s mining rights. Management determined that the impact on the Company’s balance sheets is not material, and the tax effected impact of the potential additional amortization/ depreciation is not significant in any of the impacted reporting periods. As such, management has concluded that it does not believe adjustments are necessary to the 2008, 2007, 2006 and 2005 consolidated financial statements.
A summary of this analysis is as follows:
Discussion
The SEC indicated in its comment letters dated June 5, 2009 and July 24, 2009 that amortization/ depreciation of mining rights/ mining related assets is to be based on established probable reserves as the denominator and that amortization of mining assets includes mine development costs and any other associated buildings and equipment. This approach differs from our previous calculation which includes mineralized material as the denominator on mining rights, and the use of a straight-line basis on mining related assets. We do not believe this is an error, but rather a change in accounting estimate with respect to the amortization of mining rights and depreciation of mining related asset because the probable reserve was not established until June 5, 2009. See response to Staff Comment 3, below.
Assessment of Materiality
SEC Staff Accounting Bulletin No. 99 – Materiality (“SAB 99”) is the relevant guidance to be applied to the facts of our situation. SAB 99 states that both quantitative and qualitative factors are to be taken into consideration when assessing materiality. Per SAB 99 “quantifying… the magnitude of a misstatement is only the beginning of an analysis of materiality; it cannot appropriately be used as a substitute for a full analysis of all relevant considerations. Materiality concerns the significance of an item to users of a registrant’s financial statements. A matter is ‘material’ if there is substantial likelihood that a reasonable person would consider it important.”
SAB 99 also refers to Statement of Financial Accounting Concepts No. 2, which defined materiality as “the omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.”
SAB 99 specifically states, “In the context of a misstatement of a financial statement item, while the ‘total mix’ includes the size in numerical or percentage terms of the misstatement, it also includes the factual context in which the user of financial statements would view the financial statement item. The shorthand in the accounting and auditing literature for this analysis is that financial management and the auditor must consider both ‘quantitative’ and ‘qualitative’ factors in assessing an item’s materiality.”
United States Securities and
Exchange Commission
August 10, 2009
Page 4 of 8
Quantitative Factors
An analysis of the numeric impact of the adjustments is as follows:
(Amount in thousands, except per share data)
Year ended December 31, 2005
Year ended
December 31, 2006
Year ended December 31, 2007
Year ended December 31, 2008
RMB
RMB
RMB
RMB
Total Assets
As reported
104,643 (US$12,967)
180,765 (US$23,159)
582,081 (US$79,768)
812,936 (US$119,065)
As adjusted
100,509 (US$12,454)
175,232 (US$22,451)
575,122 (US$78,815)
808,660 (US$118,438)
Difference
4,134
(US$513)
5,533
(US$708)
6,959
(US$953)
4,276
(US$627)
% thereon
3.95%
3.06%
1.20%
0.53%
Carrying Value of Mining Rights and Mining Related Assets
As reported
15,347
(US$1,902)
17,799
(US$2,280)
16,865
(US$2,311)
11,959
(US$1,752)
As adjusted
11,213
(US$1,389)
12,266
(US$1,572)
9,906
(US$1,358)
7,683
(US$1,125)
Difference
4,134
(US$513)
5,533
(US$708)
6,959
(US$953)
4,276
(US$627)
% thereon
26.94%
31.09%
41.26%
35.76%
Net Income
As reported
44,046
(US$5,458)
72,548
(US$9,295)
24,735
(US$3,390)
76,028
(US$11,135)
As adjusted
40,641
(US$5,036)
71,359
(US$9,143)
23,524
(US$3,224)
78,429 (US$11,487)
Difference
3,405
(US$422)
1,189
(US$152)
1,211
(US$166)
-2,401
(US$-352)
% thereon
7.73%
1.64%
4.90%
-3.16%
Basic EPS
As reported
4.41
(US$0.55)
6.36
(US$0.81)
1.86
(US$0.26)
3.94
(US$0.58)
As adjusted
4.07
(US$0.50)
6.26
(US$0.80)
1.77
(US$0.24)
4.06
(US$0.60)
Diluted EPS
As reported
4.36
(US$0.54)
5.26
(US$0.67)
1.43
(US$0.20)
3.41
(US$0.50)
As adjusted
4.02
(US$0.50)
5.17
(US$0.66)
1.36
(US$0.19)
3.52
(US$0.52)
United States Securities and
Exchange Commission
August 10, 2009
Page 5 of 8
The Company has already applied prospectively the effect of mining right adjustments in 2008. The adjustments of mining related assets will have an impact on the 2009 consolidated financial statements as the Company intends to apply prospectively the effect of adjustments in 2009.
Qualitative Factors
SAB 99 identifies certain qualitative considerations to take into account in assessing the materiality of an error which is not intended to be an exhaustive list. A summary of those considerations, and the Company’s analysis of the considerations to the case at hand is as follows:
1.
Is the misstatement subject to precise measurement? - NO.
2.
Does the misstatement mask a change in earnings or other trends? – NO.
3.
Does the misstatement hide a failure to meet analyst’s expectations? – NO.
4.
Does the misstatement change a loss into income or vice versa? – NO.
5.
Does the misstatement concern a segment or portion of the business playing a significant role in operations – N/A (the Company operated in only one segment through 2007).
6.
Does the misstatement affect compliance with regulatory requirements? – NO.
7.
Does the misstatement affect compliance with loan covenants or contractual requirements? – NO.
8.
Did the misstatement have the effect of increasing management compensation? – NO.
9.
Did the misstatement involve concealment of an unlawful transaction? – NO.
10.
Was the misstatement intentional? NO.
An additional qualitative consideration is that the Company is an early stage company with limited trading of its common stock. Management believes that investors are not currently evaluating the Company based primarily on operating results, but rather are focused on the amount of resource/ reserve that the Company possesses.
Conclusion
As stated above, we do not believe this is an error, but rather a change in accounting estimate in amortizing the Company’s mining rights and depreciating the mining related assets (see response to Staff Comment 3, below). Regardless, management does not consider the impact of these adjustments to be material to the consolidated financial statements taken as a whole and management does not believe restatements on Form 20-F for December 31, 2005, 2006, 2007 and 2008 are necessary or meaningful. We believe that the qualitative factors outweigh the quantitative factors under this set of facts and circumstances. We have concluded that the judgment of a reasonable person relying upon the report would not have been changed or influenced if the consolidated financial statements had been presented so as to include the differences discussed above at the time.
Our conclusion is based on the following factors. First, the Company is not currently valued on earnings or total assets. The factors most important to stakeholders (amount of resource/ reserve) were not affected by the adjustments. Second, while the adjustments may be quantitatively material in certain respects (December 31, 2005) it is not material in a number of others (December 31, 2005, 2006 and 2008) and a qualitative analysis of the quantitative impact also leads to a conclusion that the adjustment was not material. Specifically, we do not believe there is a meaningful difference between a RMB76.03 million (US$11.14 million) net income and a RMB78.43 million (US$11.49 million) net income for the year ended December 31, 2008, nor do we believe there is a meaningful difference between the RMB7.68 million (US$1.13 million) carrying amount of mining right and mining related assets compared to a RMB11.96 million (US$1.75 million) balance as of December 31, 2008. Third, the adjustment had no
United States Securities and
Exchange Commission
August 10, 2009
Page 6 of 8
bearing on contractual requirements, loan covenants, expectations, compensation nor did it conceal an unlawful transaction. Fourth, the adjustment was a matter of judgment. Based upon all information known to management at December 31, 2008, management believed they were properly accounting for the transactions, and all published guidance on the relevant issues support management’s beliefs.
In connection with these calculations, we performed an analysis pursuant to the requirements of SAB 99, “Materiality” and SAB 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” for purposes of evaluating the materiality of the estimated amortization related to mining rights. We have determined that the impact on the Company’s prior year consolidated balance sheets is not material and the tax effected impact of the potential amortization and depreciation are not significant in any of the impacted reporting periods. As such we have concluded that no adjustments to the Company’s consolidated financial statements are necessary.
3.
We further believe the specific guidance under Statement of Financial Standards (SFAS) 154 applies to this situation. Please tell us why you consider this to be a revision of your accounting policy and not a correction of an error.
Response to Staff Comment 3:
The Company considered SFAS 154 with respect to Response No. 2 above. Management believes that the Company’s change in amortizing/ depreciating mining assets related to the Yang Chong Mine and Zao Yun Mine represents a change in accounting estimate, to be accounted for on a prospective basis. SFAS 154, paragraph 2d, defines a “change in accounting estimate” as “… a necessary consequence of the assessment, in conjunction with the periodic presentation of financial statements, of the present status and expected future benefits and obligations associated with assets and liabilities. Changes in accounting estimates result from new information”.
The Company believes that the change in accounting estimate is the result of new information which came to management’s attention in 2009 (based upon the SEC Staff’s review and determination that the Yang Chong and Zao Yun Mines ha
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Response Letter
CHINA NATURAL RESOURCES, INC.
Room 2205, 22/F, West Tower, Shun Tak Centre
168-200 Connaught Road Central
Sheung Wan, Hong Kong
August 10, 2009
CORRESP
VIA EDGAR
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attn:
Chris White, Branch Chief
Gary Newberry, Staff Accountant
George Schuler, Mining Engineer
Re:
China Natural Resources, Inc.
Form 20-F for the Year Ended December 31, 2008
Staff Letter of Comment dated July 24, 2009
SEC File No. 0-26046
Ladies and Gentlemen:
We are writing to respond to the Staff’s letter dated July 24, 2009 relating to our Annual Report on Form 20-F for the year ended December 31, 2008 (the “Annual Report”).
We respond to the Staff’s comments as follows:
Form 20-F for the Fiscal Year Ended December 31, 2008
Quantitative and Qualitative Disclosures About Market Risk
Commodity price risk, page 67
1.
We note you hold copper future contracts as of December 31, 2008 as disclosed in your financial statements. Provide the quantitative and qualitative disclosures about market risk for these market risk sensitive instruments. Refer to Item 11(a) and (b) and related instructions in Form 20-F.
Response to Staff Comment 1:
Commodity Price Risk
From time-to-time, we enter into derivatives, including copper futures contracts, to mitigate the potential impact of fluctuations in the commodity price. We record these derivative contracts at fair value on our consolidated balance sheet as either an asset or liability.
United States Securities and
Exchange Commission
August 10, 2009
Page 2 of 8
As of December 31, 2008, Feishang Copper had 350 lots of outstanding copper future contracts for non-effective hedging purpose (with a fair value of approximately RMB 4.1 million (US$600,000)) to sell a total of 1,750 metric tons (5 metric tons per lot) of copper on March 15, 2009, at RMB22,610 (US$3,312) per ton. The Company acquired Feishang Copper on March 4, 2008, and, accordingly, preceding year information is not presented. These copper future contracts were purchased in December 2008 on the Shanghai Futures Exchange through Haitong Futures Brokerage Co., Ltd. The details of these copper futures contracts, which were settled in cash before their maturity date in January 2009, are as follows:
Lot of contracts
Position
Maturity date
Weighted average settlement price (per ton)
Closing
price as at December 31, 2008 (per ton)
RMB
US$
RMB
US$
350
Short
March 15, 2009
22,610
3,312
23,410
3,429
The commodity price of copper fluctuates widely and is affected by factors beyond our control but which impact our earnings and cash flow. These copper futures contracts were settled in cash before their maturity date, in January 2009, and as a result the Company incurred a loss of approximately RMB6.04 million (US$885,000).
As the Company’s futures contracts were settled in January 2009, we propose to make such disclosures pursuant to Form 20-F in future filings for any new derivative instruments we may enter into.
Note 2 – Summary of Significant Accounting Policies
(g) – Property and equipment, page F-15
2.
We have considered your response to our prior comments number three in our letter of June 5, 2009. We do not agree with your conclusions. The amortization of mining assets would include the mine development costs and any other associated buildings and equipment used in the Yang Chong Mine and the Zao Yun Mine. Please revise your analysis under Staff Accounting Bulletin (SAB) 99 and 108 to present the impact of this change, which includes your mine development costs.
Response to Staff Comment 2:
The Company will amortize its mining assets (including mine development costs and any other associated buildings and equipment) based on its reserve estimates as of December 31, 2004 for the Yang Chong Mine, and as of December 31, 2005 for the Zao Yun Mine, and give subsequent effect to the reserves extracted and processed by our past mining activities, including the adjustment/ upgrades we have made to the reserves due to any continuing exploration, geologic study, or sampling activities.
The Company recalculated the amortization/ depreciation expense of mining rights and mining related assets based on the revised reserve estimates for 2008, 2007, 2006 and 2005, and determined that the differences between the recalculated amounts of amortization/ depreciation each period and the amount recorded each period was approximately RMB 3,201,000 (US$469,000), RMB 1,425,000 (US$195,000), RMB 1,399,000 (US$179,000), and RMB 4,006,000 (US$496,000) in 2008, 2007, 2006 and 2005, respectively.
United States Securities and
Exchange Commission
August 10, 2009
Page 3 of 8
In connection with these calculations, management has reviewed the requirements of SAB 99, “Materiality” and SAB 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” for purposes of evaluating the materiality of the estimated amortization and depreciation related to the Company’s mining rights. Management determined that the impact on the Company’s balance sheets is not material, and the tax effected impact of the potential additional amortization/ depreciation is not significant in any of the impacted reporting periods. As such, management has concluded that it does not believe adjustments are necessary to the 2008, 2007, 2006 and 2005 consolidated financial statements.
A summary of this analysis is as follows:
Discussion
The SEC indicated in its comment letters dated June 5, 2009 and July 24, 2009 that amortization/ depreciation of mining rights/ mining related assets is to be based on established probable reserves as the denominator and that amortization of mining assets includes mine development costs and any other associated buildings and equipment. This approach differs from our previous calculation which includes mineralized material as the denominator on mining rights, and the use of a straight-line basis on mining related assets. We do not believe this is an error, but rather a change in accounting estimate with respect to the amortization of mining rights and depreciation of mining related asset because the probable reserve was not established until June 5, 2009. See response to Staff Comment 3, below.
Assessment of Materiality
SEC Staff Accounting Bulletin No. 99 – Materiality (“SAB 99”) is the relevant guidance to be applied to the facts of our situation. SAB 99 states that both quantitative and qualitative factors are to be taken into consideration when assessing materiality. Per SAB 99 “quantifying… the magnitude of a misstatement is only the beginning of an analysis of materiality; it cannot appropriately be used as a substitute for a full analysis of all relevant considerations. Materiality concerns the significance of an item to users of a registrant’s financial statements. A matter is ‘material’ if there is substantial likelihood that a reasonable person would consider it important.”
SAB 99 also refers to Statement of Financial Accounting Concepts No. 2, which defined materiality as “the omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.”
SAB 99 specifically states, “In the context of a misstatement of a financial statement item, while the ‘total mix’ includes the size in numerical or percentage terms of the misstatement, it also includes the factual context in which the user of financial statements would view the financial statement item. The shorthand in the accounting and auditing literature for this analysis is that financial management and the auditor must consider both ‘quantitative’ and ‘qualitative’ factors in assessing an item’s materiality.”
United States Securities and
Exchange Commission
August 10, 2009
Page 4 of 8
Quantitative Factors
An analysis of the numeric impact of the adjustments is as follows:
(Amount in thousands, except per share data)
Year ended December 31, 2005
Year ended
December 31, 2006
Year ended December 31, 2007
Year ended December 31, 2008
RMB
RMB
RMB
RMB
Total Assets
As reported
104,643 (US$12,967)
180,765 (US$23,159)
582,081 (US$79,768)
812,936 (US$119,065)
As adjusted
100,509 (US$12,454)
175,232 (US$22,451)
575,122 (US$78,815)
808,660 (US$118,438)
Difference
4,134
(US$513)
5,533
(US$708)
6,959
(US$953)
4,276
(US$627)
% thereon
3.95%
3.06%
1.20%
0.53%
Carrying Value of Mining Rights and Mining Related Assets
As reported
15,347
(US$1,902)
17,799
(US$2,280)
16,865
(US$2,311)
11,959
(US$1,752)
As adjusted
11,213
(US$1,389)
12,266
(US$1,572)
9,906
(US$1,358)
7,683
(US$1,125)
Difference
4,134
(US$513)
5,533
(US$708)
6,959
(US$953)
4,276
(US$627)
% thereon
26.94%
31.09%
41.26%
35.76%
Net Income
As reported
44,046
(US$5,458)
72,548
(US$9,295)
24,735
(US$3,390)
76,028
(US$11,135)
As adjusted
40,641
(US$5,036)
71,359
(US$9,143)
23,524
(US$3,224)
78,429 (US$11,487)
Difference
3,405
(US$422)
1,189
(US$152)
1,211
(US$166)
-2,401
(US$-352)
% thereon
7.73%
1.64%
4.90%
-3.16%
Basic EPS
As reported
4.41
(US$0.55)
6.36
(US$0.81)
1.86
(US$0.26)
3.94
(US$0.58)
As adjusted
4.07
(US$0.50)
6.26
(US$0.80)
1.77
(US$0.24)
4.06
(US$0.60)
Diluted EPS
As reported
4.36
(US$0.54)
5.26
(US$0.67)
1.43
(US$0.20)
3.41
(US$0.50)
As adjusted
4.02
(US$0.50)
5.17
(US$0.66)
1.36
(US$0.19)
3.52
(US$0.52)
United States Securities and
Exchange Commission
August 10, 2009
Page 5 of 8
The Company has already applied prospectively the effect of mining right adjustments in 2008. The adjustments of mining related assets will have an impact on the 2009 consolidated financial statements as the Company intends to apply prospectively the effect of adjustments in 2009.
Qualitative Factors
SAB 99 identifies certain qualitative considerations to take into account in assessing the materiality of an error which is not intended to be an exhaustive list. A summary of those considerations, and the Company’s analysis of the considerations to the case at hand is as follows:
1.
Is the misstatement subject to precise measurement? - NO.
2.
Does the misstatement mask a change in earnings or other trends? – NO.
3.
Does the misstatement hide a failure to meet analyst’s expectations? – NO.
4.
Does the misstatement change a loss into income or vice versa? – NO.
5.
Does the misstatement concern a segment or portion of the business playing a significant role in operations – N/A (the Company operated in only one segment through 2007).
6.
Does the misstatement affect compliance with regulatory requirements? – NO.
7.
Does the misstatement affect compliance with loan covenants or contractual requirements? – NO.
8.
Did the misstatement have the effect of increasing management compensation? – NO.
9.
Did the misstatement involve concealment of an unlawful transaction? – NO.
10.
Was the misstatement intentional? NO.
An additional qualitative consideration is that the Company is an early stage company with limited trading of its common stock. Management believes that investors are not currently evaluating the Company based primarily on operating results, but rather are focused on the amount of resource/ reserve that the Company possesses.
Conclusion
As stated above, we do not believe this is an error, but rather a change in accounting estimate in amortizing the Company’s mining rights and depreciating the mining related assets (see response to Staff Comment 3, below). Regardless, management does not consider the impact of these adjustments to be material to the consolidated financial statements taken as a whole and management does not believe restatements on Form 20-F for December 31, 2005, 2006, 2007 and 2008 are necessary or meaningful. We believe that the qualitative factors outweigh the quantitative factors under this set of facts and circumstances. We have concluded that the judgment of a reasonable person relying upon the report would not have been changed or influenced if the consolidated financial statements had been presented so as to include the differences discussed above at the time.
Our conclusion is based on the following factors. First, the Company is not currently valued on earnings or total assets. The factors most important to stakeholders (amount of resource/ reserve) were not affected by the adjustments. Second, while the adjustments may be quantitatively material in certain respects (December 31, 2005) it is not material in a number of others (December 31, 2005, 2006 and 2008) and a qualitative analysis of the quantitative impact also leads to a conclusion that the adjustment was not material. Specifically, we do not believe there is a meaningful difference between a RMB76.03 million (US$11.14 million) net income and a RMB78.43 million (US$11.49 million) net income for the year ended December 31, 2008, nor do we believe there is a meaningful difference between the RMB7.68 million (US$1.13 million) carrying amount of mining right and mining related assets compared to a RMB11.96 million (US$1.75 million) balance as of December 31, 2008. Third, the adjustment had no
United States Securities and
Exchange Commission
August 10, 2009
Page 6 of 8
bearing on contractual requirements, loan covenants, expectations, compensation nor did it conceal an unlawful transaction. Fourth, the adjustment was a matter of judgment. Based upon all information known to management at December 31, 2008, management believed they were properly accounting for the transactions, and all published guidance on the relevant issues support management’s beliefs.
In connection with these calculations, we performed an analysis pursuant to the requirements of SAB 99, “Materiality” and SAB 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” for purposes of evaluating the materiality of the estimated amortization related to mining rights. We have determined that the impact on the Company’s prior year consolidated balance sheets is not material and the tax effected impact of the potential amortization and depreciation are not significant in any of the impacted reporting periods. As such we have concluded that no adjustments to the Company’s consolidated financial statements are necessary.
3.
We further believe the specific guidance under Statement of Financial Standards (SFAS) 154 applies to this situation. Please tell us why you consider this to be a revision of your accounting policy and not a correction of an error.
Response to Staff Comment 3:
The Company considered SFAS 154 with respect to Response No. 2 above. Management believes that the Company’s change in amortizing/ depreciating mining assets related to the Yang Chong Mine and Zao Yun Mine represents a change in accounting estimate, to be accounted for on a prospective basis. SFAS 154, paragraph 2d, defines a “change in accounting estimate” as “… a necessary consequence of the assessment, in conjunction with the periodic presentation of financial statements, of the present status and expected future benefits and obligations associated with assets and liabilities. Changes in accounting estimates result from new information”.
The Company believes that the change in accounting estimate is the result of new information which came to management’s attention in 2009 (based upon the SEC Staff’s review and determination that the Yang Chong and Zao Yun Mines ha