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Dear Honorable Shareholders,

On behalf of the Board of Directors of Shougang Fushan Resources Group Limited ("Shougang Resources" or the "Company"), I hereby present the annual results of the Company and its subsidiaries (collectively referred to as the "Group") for the year ended 31 December 2011 (the "Review Year").

Steady growth in steel production and coking coal selling prices in 2011

In 2011, China's economy maintained steady growth but gradually slowed down evidenced by a decrease in the growth of GDP from 10.3% in the fourth quarter of 2010 to 9.2% in the fourth quarter of 2011. Nevertheless, China's GDP reached RMB47.16 trillion, being the one as the fastest GDP growing economy in the world. The drivers of the economy were mainly led by real estate development increased by 27.9% year-on-year, fixed asset investment (excluded peasant household) increased by 20.3% year-on-year, sales of white goods such as refrigerator consumption increased by 19.2% year-on-year, washing machine consumption increased by 10% year-on-year and automobiles sales increased by 2.45% year-on-year. China has became the world's largest steel producer again since 2010 by producing 683 million tonnes of crude steel, representing a year-on-year increase of 8.93%.

In 2011, the Government continued to increase the efforts on eliminating backward steel production capacity and encourage steel producers to fully optimise the steel industry and increase competitiveness through technological upgrades and energy saving programs. In order to further implement the energy saving policy set out in the "12th Five-Year Development Plan for Steel Industry", the Government requires below 1,000 cubic meters of blast furnaces to be phased out and replaced by large-scale blast furnaces. The development of large scale blast furnaces is bound to shape the future trend in the industry and requires to use high quality coke with higher strength and resistance level; however high quality coking coal supply in China is still scarce, and high quality coking coal mines are mostly located in Shanxi Province which highlight the importance of the coal mines there. As Shougang Resources has three premium coking coal mines in Shanxi Province, we will be able to take advantage of this situation.

During the Review Year, the Group produced 6.36 million tonnes of raw coking coal and 2.31 million tonnes of clean coking coal. Management strictly followed the Company's long term strategic development plan to expand the clean coking coal business, representing a year-on-year increase of 43% in 2011. The increment in the production volume of raw and clean coking coal was the result of the Group's expenditure in infrastructure constructions, such as the completion of construction of the third coal preparation plant by the end of 2010, the changing of long walls, generators, underground ventilation system and underground safety monitoring system. Through strengthening infrastructure constructions enhance the Company to deliver the production targets set forth by the Company in an efficient and safety manner.

The average realised selling price (inclusive of VAT) of raw and clean coking coal year-on-year increased by 22% and 6% to RMB1,021/tonne and RMB1,812/tonne respectively. Benefit from the increase of average realised selling prices and production volume, the Group's gross profit increased substantially from HK$4,092 million in 2010 to HK$5,029 million in the Review Year, our gross margin reached 70%.

During the Review Year, as the holiday preferential tax for foreign-investment entities had expired, with effect from 2011, PRC enterprise income tax increased from 12.5% to 25%, but net profit of the Group for 2011 still increased. The Group's net profit reached HK$2,650 million, representing a year-on-year increase of 20% and profit attributable to owners of the Company (the "Owner") increased by 25% to HK$2,256 million. A non-cash share-based compensation expense of HK$177 million was recognised for 2011 arising from the share options granted by the Company in August 2009, had this non-cash expense been excluded, the net profit and profit attributable to Owners would have been HK$2,827 million and HK$2,433 million respectively.

Satisfactory performance of three premium operating coking coal mines in Shanxi Province, Liulin County

Our three premium coking coal mines in Liulin County, Shanxi Province each has their individual preparation plants, the total processing capacity of these three coal preparation plants is enough to process the entire raw coking coal to be produced from our three mines. Our strong infrastructures gives us the ability to capture future opportunities in the clean coking coal business.

Outlook for 2012

Looking ahead, there are still many uncertainties in the global economy, Europe is still suffering from sovereign debt crisis and countries like France and Austria are losing their AAA Sovereign Credit Rating; even in USA, the unemployment rate is still maintained at a relatively high level, housing market and retail sales still weak, these are potential risks that could trigger to a downturn in the global economy. As for China it is believed that GDP growth will be around 7.5% in 2012. However with weak economies in the global economy, China's economy is hard to remain strong alone. 2012 is a year of transition in China and it is believed that the government will continue to implement policies to suppress the private housing sector, but at the same time there is still a strong demand for social housing and this year the target is to build 7 million units. Ministry of Railway is planning to build 6,366 km of new train rails and investment in these projects is estimated to be RMB400 billion. The construction of these projects will continue to drive up the demand and production of steel and coking coal that will benefit as a whole.

In 2012, our primary focus is "safety first, implementing precautionary measures and integrated management", by providing better training and a safe working environment for our employees. At the same time implementing new measures to optimise the underground management, we are able to enhance the recovery rate and maximise the effectiveness of the mines production. In addition, the Group will take advantage of the strong cash resources and continue to actively look for acquisition opportunities both domestically and abroad to expand the resources and production capacity. We will continue to assess the situation, seise the opportunities and strive to maximise return for our shareholders.

To reward the continual support of our shareholders, the Board of Directors of Shougang Resources has proposed a final dividend of HK13 cents per share. Thus, the annual dividend for 2011 amounted to HK19 cents per share.

Last but not least, on behalf of the Board of Directors of Shougang Resources, I would like to express my heartfelt gratitude to our shareholders, management team, staff and business partners for their continued support to the Group over the past years.


Li Shaofeng
Chairman
22 March 2012

 

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