Yongye Intl (NASDAQ:YONG)

We increased deposit to suppliers by US$41.9 million during the three month ended June 30, 2011 in anticipation of strong production demand in the third quarter following significant inventory reductions during the second quarter. The deposits were paid primarily to suppliers of lignite coal and chemical components to lock in price and secure availability. After our Wuchuan Facility was completed in the fourth quarter of 2010, we started to source lignite coal and extract humic and fulvic acid in-house in lieu of sourcing humic acid from the market. This new operating process creates a new and significant demand for lignite coal and more demand for chemical components used in the process of converting lignite coal. In addition to our substantial business growth, those factors require us to order significantly more lignite coal and chemical components from our suppliers compared to last year. In light of the higher demands for these raw materials, we needed to increase deposits paid in order to lock in price and guarantee availability in the current inflationary environment in China. All the raw materials for which we prepaid are expected to be delivered to us before the end of September 2011. We will work with our suppliers to manage payment terms as the procurement procedures supporting our new operating processes normalize following the ramp-up stages for the Wuchuan Facility.