Sinocoking Coal & Coke (NASDAQ:SCOK)

Fiscal 2012 Third Quarter

• Revenue decreased by 15.4% to approximately $16.8 million from approximately $19.9 million.
  • Coal and coke products accounted for 48.2% and 51.8% of revenue, respectively, as compared to 55.2% and 44.8%, respectively in the same periods of last year.
  • Volume of coal products sold decreased by 42.5%, while volume of coke products sold increased by 2.7% from a year ago.
• Gross margin decreased to 15.7%, as compared to 36.4%.
• Income from operations decreased to $1.9 million from $6.3 million.
• Net income, including the foreign currency transaction adjustment, was $2.1 million or $0.07 per diluted share, as compared to $19.8 million or $0.81 per diluted share.

Discussing mining operations for the 2012 three and nine month periods, SinoCoking's Chairman and CEO, Mr. Jianhua Lv noted, "Coal supplies in Henan Province remained limited as were production activities for all producers due to the ongoing mining moratorium. Since the provincial-wide mining moratorium imposed in June 2010, our Hongchang mine has been operating at approximately 50% capacity, while operations at our other three coal mines (acquired in August 2011) were halted as these mines were waiting to receive clearance from local authorities to commence operations. As required by provincial guidelines, Hongchang mine also halted operations in early September 2011 to complete certain mine engineering work and safety upgrades, which were completed by the end of that month. However, due to an accident inNovember 2011 at one of the mines owned by Yima Coal Group, a state-owned enterprise and one of the six provincial level consolidators in Henan, all mid-scale mines in Henan province, including our four mines, were ordered to shut down their operations and undergo additional safety checks and inspections. Thus far, local authorities have not issued clearances to mines to resume operations and the timing as to when such clearances will be issued remains unknown."

He continued, "Due to the inadequate raw coal supply in Henan province, and due to the halt of operations at our Hongchang mine, as of September 2011 we have met our coal requirements largely by: (a) using the raw coal and washed coal we had accumulated over the last few quarters in anticipation of the commencement of operations of new coking facility which is still under construction and (b) purchasing raw coal from other provinces, such as Gansu, Shanxi and Inner Mongolia. As a result of these purchases, for the three and nine month periods ended March 31, 2012, our cost of raw coal increased and our margins decreased. We don't expect a return to historical margins until the mining moratorium for mid-size coal producers in Henan province is lifted."

Mr. Lv added, "In the meantime, due to our vertically integrated business model, we have been able to continue to optimize our product mix and take advantage of market conditions for coal and coke products. Specifically, as compared to the 2011 third quarter and nine month periods:

GeoTeam® Note: Second quarter 2011 vs. 2010 Adjusted EPS was $0.07 vs. $0.22

PINGDINGSHAN, China – December 23, 2011 - SinoCoking Coal and Coke Chemical Industries, Inc. (NASDAQ: SCOK) (the "Company" or "SinoCoking"), a vertically-integrated coal and coke processor, today provided a business update relating to the construction of its new coking facility and coal mine production.

Mining Activities Due to an accident at one of the mines owned by Yima Coal Group, a state-owned enterprise and one of the six provincial level consolidators in Henan, all mid-scale mines are required to undergo mandatory safety checks and inspections by relevant authorities before receiving clearance to resume coal mining operations. This requirement applies to all SinoCoking mines, including Hongchang and Xingsheng coal mines which were previously awaiting governmental confirmation to resume operations. At present, the Company expects to receive clearance for its four coal mines in spring 2012.

SinoCoking’s Chairman and CEO, Jianhua Lv noted, “We are disappointed that factors beyond our control caused delays in the completion of the new coking facility and the resumption of coal mining operations at full capacity. We have a dedicated team of construction workers, technicians and engineers who are working around the clock to expedite the construction of the coking facility and we will continue to provide investors with updates until construction is completed. Additionally, we are working closely with authorities in hopes that the permits and clearance notices for our four mines can be expedited so that we can resume coal mining operations at full capacity as soon as possible.”

First Quarter 2012 Results

• Revenue increased by 70.3% to $22,151,334 from $13,008,462, due to an increase in all product categories in terms of both sales volumes and selling prices except for the slight decrease in the raw coal sales volume.
• Net income, including the change in fair value of warrants, was $8,308,713, or $0.39 per diluted share as compared to $15,481,998, or $0.73 per diluted share(1).
• Excluding the change of fair value of warrants, net income increased by 106.4% to $5,288,991, or $0.25 per diluted share as compared to $2,562,323, or $0.12 per diluted share

Fourth Quarter and Full Year 2011 Results

GeoTeam® Note: 2011 vs. 2010 Adjusted EPS

Full Year: $0.80 vs. $0.93

Fourth Quarter: $0.23 vs. $(0.02)

From Press Release:

inoCoking's Chairman and CEO, Mr. Jianhua LV noted, "In fiscal 2011, we continued to try to optimize our product mix to take advantage of favorable market opportunities. Our revenue from the sale of coke and coal products (other than raw coal) increased in response to market demands. However, raw coal sales volume declined due to the continuing supply shortage created by the provincial-wide mining moratorium in connection with the mine consolidation program. The coal supply situation is reflected in our product mix, with 53% of fiscal 2011 total revenue coming from coke products, as compared to 49% in fiscal 2010, and 47% from coal products in fiscal 2011 as compared to 51% in fiscal 2010.

"The market drivers that have been in effect for the past two years should continue to have a direct impact on our operations. These drivers are:

• The continuing impact of mine consolidation and mining moratorium in Henan on the availability of metallurgical coal in the region, and on the prices of coal and coke products;
• The acceleration of government-mandated closure of small-sized and less-efficient coking facilities; and
• The central government's continuing efforts to provide economic stimulus to maintain momentum and growth in domestic consumption."
  

He went on to say, "Our first initiative, the construction of a new state-of-the-art $60 million coking facility is scheduled to be completed by December 2011, with production to begin shortly thereafter. This new facility is adjacent to our current coking plant in Pingdingshan, and as of the end of August we completed construction of the shallow foundation, an underground workshop and the furnace and chimney rack, and are in the process of building furnaces and installing equipment and machineries. When completed, the new plant should have coke-producing capacity of up to 900,000 metric tons per year, as well as the ability to generate power for its own use and/or sale, and distill chemicals such as crude benzol, sulfur and ammonium sulfate from byproducts of the coking process. We also intend to produce purified coal gas at this plant to sell as a fuel source to local residents through the state-owned gas grid."

Mr. Lv added, "Additionally, we completed our acquisitions of 60% of the operators of Shuangrui and Xingsheng coal mines and 100% of the operator of Shunli coal mine in May 2011. Since then, Xingsheng coal mine, as well as our Hongchang coal mine, has received clearance to resume coal production, and we are currently preparing Shuangrui and Shunli coal mines to do the same."

Mr. Sam Wu, SinoCoking's Chief Financial Officer noted, "Historically, funding for our business activities has been mainly provided by cash flow from operations and short-term bank loan financing. However, our acquisitions and new coking plant have and are expected to require additional capital resources. We have access to an aggregate of approximately $55.7 million (RMB 360 million) under a medium-term loan, and the credit to issue approximately $14 million bank guaranteed notes under our Hongli and Hongchang affiliates, with the term of 50% cash deposit of the face value in advance. Net cash used in investing activities for fiscal 2011 was $65.2 million, including approximately $34.9 million in connection with acquisitions, approximately $3.6 million for site expansion of our new coking plant, and approximately $15.5 million towards equipment and machinery purchases for the new coking plant."

Concluding, Mr. Lv noted, "We remain committed to implement our ambitious business plan and continue to profitably grow our Company. We look forward to report our progress in the upcoming months."

Third Quarter Results:

• Revenue increased by 30.3% to $19,872,461 from $15,247,494 due to higher prices of coke and coal products largely driven by the coal supply shortage, as well as increased coal tar and washed coal sales, although sales volumes of coke and raw coal decreased.
• Revenue from the sale of coal products increased by 66.8% to $11.1 million while total metric tons sold decreased by 3.7%.
• Revenue from the sale of coke products increased by 2.7% to $8.9 million while total metric tons sold decreased by 4.9%.
• Average selling prices for raw coal, coal tar and coke increased by 20.9%, 10.91% and 7.76%, respectively.
• Gross margin decreased to 36.4% as compared to 37.0%.
• Pre-tax income increased to $18,360,914, as compared to a loss of $35,592,355.
• Including the change in fair value of warrants, net income was $17,138,441, or $0.81 per diluted share, as compared to a net loss of $36,876,262, or $2.39 per share.
• Excluding the change in fair value of warrants, net income increased to $4,947,206, or $0.23 per diluted share as compared to $2,993,400, or $0.17 per diluted share

SinoCoking's Chairman and CEO, Mr. Jianhua Lv noted, "Our operating results for the third quarter were again impacted by the government's plan to consolidate small- and mid-sized coal mines and the related temporary moratorium of mining operations.   As this has been a massive undertaking and the deadline to complete the consolidation has been extended to the end of 2011, we believe that we, along with other consolidators, now have the time needed to work through governmental administrative procedures."

GeoTeam® note: EPS for the the December quarter was $0.21 after adding back change in fair value of warrants.(add back $0.54).

General. With coal production throughout Henan Province significantly affected by the ongoing consolidation initiative throughout the three and six months ended December 31, 2010, coal supply remained tight during these periods. Since the shutdown of mining operations in late June 2010 in connection with an industry-wide safety inspection prompted by the consolidation initiative, some mines (including our Hongchang Mines) were allowed to resume operations in late 2010, albeit at only 50% capacity. Coupled with the seasonal spike in heating demand, however, such limited resumption of coal production did not alleviate the coal supply situation, which we believe will continue until consolidation ends and coal outputs can resume at pre-consolidation levels.

Based on currently available information from the provincial government, the consolidation initiative that began in late 2009 is expected to conclude by the end of March 2011. Through Zhonghong Investment, we are currently exploring an opportunity to participate in the consolidation initiative under a joint-venture with Henan Coal Seam Gas and may ultimately carry out and complete our previously announced acquisitions under the framework of this joint-venture in lieu of proceeding on our own. As of the date of this report, however, no such decision has been made and the joint-venture has not been finalized.

• SinoCoking's revenues decreased by $5,120,999 or 28.25%, in three months period ended September 30, 2010, with total revenues of $13,008,462 as compared to $18,129,461 for the same period ended September 30, 2009.

• Adjusted net income for the three-month period ended September 30, 2010 was $2.6 million compared with $6.5 million in the same period in 2009.

• Adjusted diluted EPS were $0.12 for the three months ended September 30, 2010, and $0.50 for the three months ended September 30, 2009.

"During the first quarter of fiscal 2011, we saw an increase in coke demand as well as in prices for almost all product categories", said Mr. Jianhua Lv, Chairman and Chief Executive Officer of SinoCoking. "We continue to feel the negative effects of the current provincial mining moratorium on our business but are focusing our efforts on areas of the business we can control. We are encouraged by the progress we are making on both the construction of our new 900,000 metric ton coking facility our previously announced acquisitions. Furthermore, we continue to see a healthy overall market demand for coal, coke, and related products across China, and are confident SinoCoking is in a very strong position to take advantage of these market conditions moving forward".

Starting in the second quarter of fiscal 2010, the Henan provincial government moved forward to consolidate all small-and-mid-sized coal mines with annual production capacity between 150,000 metric tons and 300,000 metric tons, and a moratorium on mining is imposed on these mines until such time when the consolidation process is completed. While the government's intention to improve mining efficiency and reduce accidents through consolidation is laudable, it has also significantly reduced available coal supply and drove up coal prices.

As the only non-state-owned coal company in Pindingshan to be granted consolidator status, SinoCoking remains in active discussions with 20 non-state-owned mining companies potentially representing 3 million metric tons of combined annual capacity. The Company presently intends to complete 4 acquisitions before March 31, 2011, and 9 in total by the end of fiscal 2011. Including the two acquisitions announced in July with a combined annual production capacity of 300,000 metric tons, SinoCoking will potentially have 550,000 metric tons of total mining capacity. The Company is making its best effort to reach the aggregated one million metric ton annual capacity threshold.

Fiscal Year 2011 Guidance:

Management expects the Company to generate $114.9 million in revenues and $16.8 million of net income in fiscal 2011, an increase of 94.8% and 12.8%, respectively, excluding the effect of changes in the fair market value of warrants.

This guidance assumes the new 900,000 metric ton coking facility to commence production in June 2011 and average 60% capacity utilization in the fourth quarter of fiscal 2011. It also assumes the Company closes additional mining acquisitions, adding at least 600,000 tons of annual capacity, and that all of its mines are allowed to resume full production by the end of March 2011. Market price assumptions are based upon current prices and are subject to change. There can be no guarantees that this pricing will be accurate and any variances will cause deviations in guidance.

    Fiscal Year 2011 Cash Flow Projections

    Cash and restricted cash: 6/30/10      $ 40.3 million
    Cap ex                                 $ 56.8 million
    Acquisitions                           $ 12.8 million
    Cash flows from operations             $ 17.0 million
    Bank lines of credit                   $ 42 million plus $29 million note

Fiscal 2010 Results of Operations

• SinoCoking’s revenues increased by $7,631,498 or 14.85%, in fiscal 2010, with total revenues of $59,027,490 as compared to fiscal 2009 with total revenues of $51,395,992.

These increases were caused primarily by a strong increase in coal product sales revenue, offset by a moderate decrease in revenue from coke sales. Starting from the second quarter of fiscal 2010, the Henan province government started its consolidating process for all local private coal mines which included the temporary closure of coal mines so that safety inspections could take place. Such closures resulted in a decrease in the available coal supply in the market and prices for coal increased accordingly. In response, the Company started to increase its coal products sales in order to maintain its profitability. In the second half of the fourth quarter of fiscal 2010, the adverse impact of the Chinese government’s policy of slowing down the domestic economy began affecting the demand for our coke products, and thus the Company’s revenue from coke sales decreased. In the fiscal 2010, SinoCoking increased its coal product revenue by 52.63% as compared to the same period ending June 30, 2009. In the second half of the calendar year 2009, the market demand for coke products rebounded, and the market prices for coke also began to recover, peaking at $230 per ton in December 2009. Shortly after the end of 2009, local market prices for coke products began to moderate, fluctuating between $200 to $230 per ton. In response to these trends, in the first calendar quarter in 2010, the Company resumed coke production and sales, increasing production significantly though not to the levels achieved in the same period in 2009. However, in the fourth quarter of fiscal 2010, weak demand for coke affected the Company’s coke sales, and thus the contribution of coke sales to the Company’s total revenues was less than in fiscal 2009. However, the coke market, after June 30, 2010, subsequently recovered due to the decreased supply of coal material, and therefore both the demand and the price of coke increased. Management anticipates that this trend will continue, and the coke market will recover in the near future.

• Excluding non-cash expenses, adjusted net income of the fiscal 2010 and 2009 were approximately $15 million and $17 million, respectively, and resulted in $0.95 and $1.29 basic earnings per share, and $0.94 and $1.29 diluted earnings per share for the fiscal 2010 and 2009, respectively.

The decrease of our adjusted net income for fiscal 2010, as compared with the fiscal 2009, was primarily because of the approximately $1.4 million decrease in gross profit, $1.5 million expense related to reverse merger and equity financing expense incurred after the Company went to public, and a $1 million increase of the provision for income tax as stated above.