In early 2010, the government of Henan Province announced that all coal mines with approvals for 300,000t of coal per annum ('p.a.'), or less, were required to suspend all production activities. This was part of a larger effort to achieve increased efficiency and improve mine safety. As a result, production was suspended at Sinovus' 90%-owned YangShan Coal Mine, which had a production capacity of 300,000t p.a.
On 8 July 2010 the government decreed, that the YangShan Coal Mine will be subject to a mandatory merger with Henan Shenhuo Group Co. Ltd ('Shenhuo'). Shenhuo is a large, state-owned industrial group that is involved in coal mining, electricity generation and aluminium manufacturing.
To this effect, a jointly-owned management company, called Gushi Shenhuo Xinyang Mining Co. Ltd (the 'Management Company'), has been established. With Shenhuo owning 51% and Sinovus' 90%-owned Co‐operative Joint Venture ('CJV') owning 49%. The Management Company has been issued the Mining Permit over the YangShan Coal Mine.
Under the agreement establishing the Management Company:
Sinovus' CJV will have Board representation in the management company, but no direct operational role over the YangShan Coal Mine. Shenhuo will be responsible for coal production and sales. As such, Sinovus will avoid the risks involved in operating a Chinese coal mine, whilst still accruing any potential profit from its operation.
The Management Company has almost finished construction of a new production shaft and a new auxiliary shaft. These shafts are designed to improve mine safety and maintain the mine’s 300,000t p.a. coal production capacity. Shenhuo is currently conducting safety checks, after which mining activities are expected to resume.
