Us China Mining Group (OTC BB:SGZH)

First Quarter Results:

"We continue to benefit from strong demand for coal in China," explained Mr. Hongwen Li, President of US China Mining Group. "Production and sales were up significantly during the first quarter in Tong Gong and Xing An mines. After a slow seasonal period, we expect our coal brokerage and coal sorting business to accelerate through the second half of 2011."

• Gross profit was $8.7 million for the first quarter of 2011 compared to $4.8 million for the same period of 2010, an increase of 80%
• Net income for the three months ended March 31, 2011 was $4.1 million compared to net income of $2.1 million for the same period of 2010, an increase of 92%.
• Diluted earnings per share for the first quarter 2011 were $0.22 compared to $0.14 in the same period of 2010

Management reaffirmed its prior guidance of $95.7 million of revenues and $20.3 million of net income for the full year 2011.

For the three months ended December 31, 2010, the Company recorded revenues of $28.7 million compared to $10.8 millionfor the same period of 2009, an increase of 165%.

"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."

• 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%.
• 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.

GeoTeam Note: 2010 vs 2009 adjusted EPS for

• Full year: $0.97 vs. $1.66
• Fourth quarter: $0.41 vs. $0.07

Preliminary financial guidance for the year ended 2011, ending December 31. The Company expects the following:

Assumptions to forecast:

"Our 2011 financial forecast reflects our confidence in executing our growth strategy," started Mr. Hongwen Li, President of US China Mining Group. "We expect strong organic growth from our coal brokerage and coal production business, which will benefit from completing the mining equipment upgrade at our Xing An mines by February 2011.  Once mining production and our coal sorting operations both reach full production by May 2011, we anticipate revenues and profits to accelerate."

"With strong cash flows, minimal capital expenditure needs, $40 million of cash on our balance as of September 30, 2010 and an additional $15 million from our private placement in the fourth quarter of 2010, we are supremely positioned to make strategic acquisitions," continued Mr. Li. "We are currently evaluating several attractive acquisition candidates both domestically and in the U.S. Based on our preliminary due diligence and progress to date, we expect to complete at least two acquisitions during 2011. We have not included any contribution from acquisitions in our 2011 forecast, which would be additive to our overall growth rate."

Management expects the Company to generate

• revenue of approximately $66.5 million
• net income of approximately $14.1 million for the 2010 Fiscal year ending December 31, 2010.  

This represents a revenue increase of approximately 2.3% and decrease in net income of approximately 44%, from 2009 levels. The decrease in net income is primarily attributed to a decrease in production at the Xing An mine due to maintenance and retrofit projects that began in the fourth quarter of 2009.  

As previously reported, the Company began programs to increase production efficiencies and safety at the Xing An mine in December of 2009.  Upon completion of these programs and modifications, the Xing An mine will be able to maintain coal processing operations year-round and will increase coal production from 600,000 metric tons per year to 900,000 metric tons per year pending approval from local Government in 2012.  The Company expects to be at the full production of 600,000 tons when all upgrades have been completed, in May of 2011.

Status of retrofit of project:

The Xing An project is expected to take about 12 to 14 months. We expect to partially resume production in November of 2010 and fully resume production in February of 2011. We expect that these mine improvements will improve efficiencies, lower costs and greatly enhance our growth and profitability once completed.

Songzai International Holding Group Announces Entry Into Agreement to Acquire Liujiaqu Coal Mine in Inner Mongolia:

Estimated Mine Resources Exceed 140 Million Metric Tons

Terms:

Completion of the proposed acquisition is subject to a number of conditions including, but not limited to, completion of customary due diligence, obtaining all regulatory approvals and the consummation of financing conditions by the Company. Pursuant to the Asset Purchase Agreement, the Company shall acquire the Liujiaqu Coal Mine in consideration for a cash payment in the amount of USD $30 million and the issuance of an aggregate of 10,000,000 shares of the Company's common stock. Under the terms of the Asset Purchase Agreement, if the average closing price of the Company's common stock on the Over-The-Counter Bulletin Board (the "OTCBB") over the 10-day period ending on the day prior to the closing date is greater than $7.00 per share, then the number of shares of common stock to be issued by the Company in connection with the proposed acquisition shall be reduced to such number as determined by dividing USD $70 million by the average closing price for the Company's common stock on the OTCBB during such 10-day period. In addition, the sellers will receive a continuing interest equal to 30% of the net profits from the operation of the Liujiaqu Coal Mine.

Mr. Hongwen Li, CEO of the Company, commented, "We are pleased to have entered into this agreement to complete the large, strategic acquisition of the Liujiaqu Coal Mine. As the further execution of 'develop-the-west strategy' by the PRC government continues, energy, as a dominating developing industry in western China, will experience continued demand. The geographic location of the mine, combined with its resources of approximately 143 million metric tons, make this an important and compelling deal that will more than double the size of our company. Based on our research and information provided, we expect that beginning operation in the third quarter of 2010 will deliver meaningful revenues from the mine this year and upwards of $50 million in revenues during its first full year of operation in 2011."

Mr. Hongwen Li, CEO of Songzai International Holding Group, commented, "In order to better position ourselves for future growth both organically and through strategic acquisitions, the management team has fully committed to increasing and improving the Company's overall public and investor relations efforts. We want to take the proactive steps of addressing shareholder questions, meeting new institutional investors and communicating our accomplishments efficiently." Mr. Li continued, "We are extremely pleased to be working alongside ACV in our investor relations, public relations and marketing initiatives. ACV has a strong track record of assisting high growth international companies like ours in increasing their visibility, expanding U.S investor platform and adding value to the company and its shareholders."

Source: Market Wire (April 22, 2010)

On SGZH April 15, 2010 released its 2009 10K

Of course, no press release was originally issued. And we can see why. Working the numbers, the fourth quarter was horrible on all fronts.

Looking back at the SGZH third quarter release and 10Q, the company at least reassured us that the quarter's subpar performance was based on short-term occurrences.

In the 2009 10K, SGZH left you to delve into the filing to assess the situation.

Our initial thoughts: How can you be in China coal sector and not grow right now? In the 10K the company inferred that it did not aggressively pursue its coal brokerage business, typically used to fill excess demand, due to the increase in coal prices.

In reaction to the plummeting stock price, it appears that the company eventually realized that maybe communicating with investors is not such a bad idea and spent the whopping $500 to issue a release Monday afternoon. We have been on SGZH for some time to improve shareholder communication efforts. Maybe now they will get the point, especially since their CFO recently resigned.

When all is said and done it appears that the fourth quarter results were affected by temporary issues.

Our results were temporarily impacted by the one month closing of a major power plant customer in July and, during the latter part of the year, by our beginning maintenance and retrofit project at our Xing An mines, thereby decreasing our sales volume. We expect, however, these mine improvements will improve efficiencies and lower costs and greatly enhance our growth and profitability once completed in 2010." Mr. Li continued, "

Unfortunately, the company did not give a timeline on this matter nor did it indicate how much of the company’s decline in revenues was from this project or its reduced coal brokerage business.

Management also states…

“As we look ahead we expect to continue our top line growth and profitability in 2010 and take advantage of our strong balance sheet to actively pursue strategic opportunities to improve and grow business."

While encouraging, this statement does not indicate that the company will grow its EPS, only that it will it will maintain profitability.

If the company pursues an acquisition we estimate this initial cash outlay could be at least $40.0 million. If SGZH tapped the equity markets at the current price we are talking around 6 million shares, which would be horrible unless EPS accretion is significant.

If not for the press release, we were inclined to remove SGZH from the GeoBargain list. Since it seems that the cessation of 30% EPS growth may be temporary we will maintain the GeoBargain code, but on a thin line. We are assuming that that the first quarter may still feel the impact of the ongoing maintenance program. We will attempt to gain more clarity on the timeline for the completion of its maintenance project and acquisition goals.

Additional input from a GeoInvesting Member:

The Tong mine rarely produces significant volume in Q4 (Didn't in 2007 or 2008 either)... The Xian An mine actually did twice as much production in 2009 than in 2008.

The problem was that the brokerage segment fell off a cliff this quarter (Which, as far as I can tell, is incredibly random in where it contributes to the bottom line...I could not detect any repeat seasonality there).

In 2009 Q1 was 53% of annual coal production...In 2008, Q1 was 60% of annual coal production...

Disclosure: GeoTeam Long SGZH

Excerpt from GeoBargain & Special Update - Performance Laggards Article

Songzai Intl Holdings (OTCBB:SGZH)

As we indicated on Monday, November 16, 2009 GeoBargain Songzai Intl Holdings reported weak third quarter results. The stock responded by falling sharply. We are keeping SGZH on the GeoBargain list as it appears that the poor third quarter performance may be due to a one time event. Excerpt from our recent discussion note: "The decrease in sales was mainly due to the temporary closing of a major power plant customer for one month in July for overhauling and maintenance of its boilers.” Unfortunately, with no press release, investors have to dig into Songzai’s 10Q filing to locate this info. It is our belief that a responsible public company should take the time to alert investors with press releases to compliment its filings. We will make a suggestion to the Company to issue a press release, an action that may alleviate recent concerns. Songzai should also communicate how much of the decline in sales was the result of the closing of its power plant; would the revenue comparison have been flat or shown growth?

GeoBargain Songzai Intl Holdings reported pretty weak third quarter results today via a 10Q filing.

At face value this report appears pretty dismal.  Closer inspection, per commentary in the filing, indicates that the weak results should be temporary:

"The decrease in sales  was mainly due to the temporary closing of a major power plant customer for one month in July for overhauling and maintenance of its boilers. Our total sales volume was 209,793 tons for the third quarter of 2009, as compared to 409,426 tons of sales for the third quarter of 2008, a decrease of 199,633 tons or approximately 49%.

The average selling price per ton for the third quarter of 2009 was approximately $44.17, compared to the average selling price of approximately $37.61 per ton for the third quarter of 2008, an increase of 17%. Our high average selling price for the third quarter of 2009 was a result of adjusting our selling price in 2009 according to the market price in Heilongjiang province, and our selling price can vary dramatically depending on the prevailing market price of coal in Heilongjiang Province."

We suspect that the stock may take a short-term hit, until investors locate this commentary. A press release by the company would be advisable.  The GeoTeam® is curious how much sales were lost as result of this situation.