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Public company info - King Stone Energy Group Ltd. , 00663.HK

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King Stone Energy Group Ltd., 00663.HK - Company Profile
Chairman Xu Zhuliang
Share Issued (share) 7,828,000,000
Par Currency
Par Value 0.0
Industry Petroleum & Gases
Corporate Profile Business Summary: During the year, the Group were principally involved in (i) the mining and sale of silver in the mainland (“Mainland China”) of the People’s Republic of China (the “PRC”); (ii) the extraction, production and sale of oil and gas in the United States of America (the “USA”); (iii) the provision of asset financing services in the PRC; (iv) the trading of liquefied natural gas (“LNG”) in the PRC; and (v) the provision of tourism agency services in the PRC. Performance for the year: The Group recorded total revenue of approximately HK$18.1 million (2018: HK$23.6 million) during the year, representing a decrease of 23% compared with last year. Loss for the year attributable to shareholders of the Company was approximately HK$88.4 million (2018: HK$143.3 million). BUSINESS REVIEW King Stone Energy Group Limited (the “Company”, together with its subsidiaries, the “Group”) is principally engaged in exploring and drilling natural gas and oil in the United States of America (the “USA”), mining of silver minerals, provision of asset financing and factoring services, trading of liquefied natural gas (“LNG”) and provision of tourism agency services in the People’s Republic of China (the “PRC”) during the year. (1) Oil and gas exploration and production The Group currently operates an upstream oil and gas exploration and production (“Oil and gas E&P”) project in East Texas, the USA. The Group completed drilling of the first well and the second well (the “Operating Wells”) which have started production since July 2014 and March 2015 respectively. The oil and gas produced from the Operating Wells are sold to oil and gas storage and transportation companies in East Texas, the USA. Each well normally has a production life of over 10 years. The Group had entered into over 400 lease agreements (the “Lease Agreements”) with mineral owners. Pursuant to the Lease Agreements, the Group is entitled to explore and produce oil and gas in a total area of about 1,845 acres at East Texas, the USA (the “Mining Area”). Royalty fees are payable by the Group to the owners of the Mining Area based on total production from the Mining Area. The Lease Agreements contain provisions that the lease shall remain in force for a primary term of typically three years from the date of the Lease Agreement, and as long thereafter as oil and/or gas is being produced in economic quantities (i.e. value of sales exceed costs) or operations are being conducted at the relevant Mining Area. Such Lease Agreements are classified as “held by production”. The Operating Wells have been drilled within the Mining Area under the Lease Agreements which covers an area of approximately 1,628.1 acres with lease expiration dates between 2015 and 2019. The remaining Mining Area of approximately 151 acres are under Lease Agreements with lease expiration dates after 2019. As the remaining Mining Area is of non-contiguous nature, it would be uneconomical for the Group to drill wells on them without first leasing additional acreage. Accordingly, the Group currently does not expect any production from these Mining Area. It is also the Group’s commercial decision not to renew them. With the relatively low price level of oil and gas, it is more economical and in the interests of the Group to let the Lease Agreements expire upon the end of the lease term if there is no immediate concrete production plan in those acreages. Due to the fluctuations in oil and gas prices in the past years, the Group did not consider it commercially viable to increase the production from the Mining Area by drilling additional wells. Notwithstanding this, the Group is entitled to drill additional wells at the Mining Area subject to the necessary drilling permit for any such new well being obtained. The Group expects that six additional new wells can be drilled for production in the acreage where the Operating Wells are located. The cost to drill an additional well and build related infrastructures is estimated to be around US$4.5 million to US$5.0 million (equivalent to approximately HK$35.1 million to HK$39.0 million) and it takes about three months from the application of drilling permit to the commencement of drilling and production. There was no new well drilled during the year and the Group has been exploring other energy related projects in the USA. (2)Silver Mining Currently, the Group conducts its silver mining business through two silver mines in Ningde City, Fujian Province, the PRC, namely the “Western Section” located in Fu’an County of Ningde City (the “West Mine”) and the “Eastern Section” located in Zherong County of Ningde City (the “East Mine”). Based on an updated technical report issued by SRK Consulting China Limited (“SRK”), an independent technical consultant, dated 31 May 2018 (the “Technical Report”), the probable ore reserve as at 31 May 2018 of the West Mine was estimated to be approximately 0.69 million tonnes, while the probable ore reserve of the East Mine was estimated to be approximately 6.07 million tonnes, adopting the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves released by the Joint Ore Reserves Committee. The West Mine The overall production capacity of mining and processing at the West Mine is 100,000 tonnes per annum, or 300 tonnes per day. The safety production permit of the West Mine which expired in June 2019 has been renewed during the year. The ore mining at the West Mine has been resumed in fourth quarter this year. Meanwhile, the Group is also in progress of upgrading the ore processing plant in order to comply with more stringent rules in respect of environmental production imposed on the West Mine. The Group is also exploring other revenue stream generated from this segment. The East Mine The East Mine is designed to have a production capacity of 330,000 tonnes per annum (i.e. approximately 1,000 tonnes per day) with an expected life of 19 years. The exploration license for the East Mine held by the Group covers an area of 4.97 square kilometers and has expired. The Group has submitted an application to the relevant authorities for renewal of the exploration license in June 2019. As at the date of this report, such renewal application is still being processed. The Group is still coordinating and working with the certain relevant government bodies about such renewal given more stringent rules and regulations in respect of environmental protection. Barring any unforeseen circumstances, there is no legal impediment for such renewal process pursuant to the legal opinion advised by the PRC legal adviser. Meanwhile, the first-stage general exploration work on the mining area at the East Mine has been completed. The Company is in the process of preparing the application for the mining license, such as commissioning a geologist report and preparation of other relevant documents. Under normal circumstances, the time for applying for and obtaining a mining license is approximately 12 to 18 months. The Group intends to carry out infrastructure construction at the East Mine once the mining license is obtained. It is expected that infrastructure construction of the East Mine will begin by end of 2020. It will take about two years to complete the construction and trial production, and the mining production will begin in 2023. The above schedules may be delayed in view of the risks and uncertainties faced caused by the recent outbreak of the novel coronavirus (COVID-19) epidemic. Update on the possible construction of a reservoir close to the West Mine and the East Mine The government of Ningde City, Fujian Province, the PRC (the “Ningde Government”) is implementing a project to construct a reservoir (the “Project”) close to the West Mine and the East Mine. If the Project proceeds, it might affect the production activities in the West Mine and the East Mine and/or increase the cost of production, such as the cost of meeting the environmental requirement from the government or altering the mining roads. The Group is however not in the position to estimate the additional cost of production, if any, and the impact of the Project on the production/exploration at the West Mine and the East Mine, as no concrete plan of the Project has been published by the Ningde Government or provided to the Group. Based on the preliminary information provided by the Ningde Government, the highest elevation of the planned reservoir is 185 metres above sea level. Based on the review performed by SRK in May 2018, it is of the view that there will be certain impact on the mining of orebodies occurred below that elevation. However, given that the Project has not yet been concretely implemented, and the design, approval, and construction time of the reservoir are not finalised, the impact of the Project on the Group is considered to be limited due to the following reasons: (i) the amount of resources at the East Mine and the West Mine below 185 metres above sea level is limited; and (ii) there are no ore below 185 metres above sea level based on the latest feasibility study. The Group has been in discussions with the relevant bodies at Ningde Government in relation to the impact of the Project on the Group. The Group and the relevant governmental bodies have also discussed the possible compensation to the Group and agreed to engage an independent expert to perform an overall assessment of the impact of the Project on the Group. The Group has also enquired with the governmental bodies about the proposed timetable of the Project, compensation benchmark and relevant laws, regulations and policies. As at the date of this report, there are no material and official updates from the relevant governmental bodies. The Group will continue to follow up with the relevant governmental bodies for the implementation of the Project including determination of the compensation proposal, and announcement(s) will be made by the Company if there is any material update on the Project as and when appropriate. (3) Asset Financing The asset financing business of the Group is operated by three wholly-owned subsidiaries in the PRC (the “Asset Financing Subsidiaries”). The business scope of the Asset Financing Subsidiaries as set out in their business licenses includes finance leasing and factoring business in the PRC and the business models of the Group’s asset financing business are as follows: (i)the relevant Asset Financing Subsidiary purchases assets specified by its client (being the lessee) and leases the assets to the client in return for leasing income which is determined based on the purchase price of the relevant assets plus interest. At the expiry of the lease term, the client shall have the right to acquire the assets at a nominal consideration; (ii) the client sells its own assets to the relevant Asset Financing Subsidiary and leases back such assets from the relevant Asset Financing Subsidiary. Leasing income is earned for this sale and leaseback arrangement based on the purchase price of the relevant assets plus interest; and (iii) the relevant Asset Financing Subsidiary provides factoring services to client which sells its receivable balances to the relevant Asset Financing Subsidiary. The relevant Asset Financing Subsidiary charges an arrangement fee for the factoring services and interest on the receivable balances during the period from the factoring to the final settlement of the receivable balances by the debtors. In certain cases, the receivables are secured by assets of the debtors. On 6 June 2016, Qingrui Commercial Factoring Company Limited (“Qingrui Factoring”), one of the Asset Financing Subsidiaries, entered into a factoring agreement in the principal sum of RMB90 million (equivalent to approximately HK$105 million) for a term of 3 years as disclosed in the announcement of the Company dated 12 September 2016. On 4 June 2019, Qingrui Factoring entered into a supplemental agreement to extend the expiry date of the factoring agreement from 5 June 2019 to 5 June 2020. The rate of interest applicable to the facilities shall be at a floating rate in accordance with the lending rate promulgated by the People’s Bank of China. On 8 October 2016, Qingrui Factoring entered into factoring agreements for revolving facilities in the aggregate principal sum of RMB41 million (equivalent to approximately HK$46 million) for a term of 3 years as disclosed in the announcement of the Company dated 8 October 2016. On 8 October 2019, Qingrui Factoring entered into supplemental agreements to extend the expiry date of the factoring agreement from 8 October 2019 to 8 October 2020. During the year, Qingrui Factoring entered into factoring arrangements with revolving facilities in an aggregate of the principal sum of RMB60 million (equivalent to approximately HK$67.2 million) for a term of 3 years. In January 2020, Qingrui Factoring also entered into factoring arrangements with revolving facilities in an aggregate of the principal sum of RMB15 million (equivalent to approximately HK$16.8 million) for a term of 3 years. (4) Trading of LNG The Group acquired 51% equity interest of Shaanxi Wanxi Logistics Co., Ltd (“Shaanxi Wanxi”) in November 2018 and commenced business of trading of LNG in the PRC through Shaanxi Wanxi. Shaanxi Wanxi currently holds a Hazardous Chemical Products Operating Permit which is valid for a period of 3 years up to 8 July 2022. LNG were sold to certain LNG distributors during the year. (5) Tourism The Group acquired 60% equity interest of Beijing Jade Bird Tianjian Tourism Investment Development Co., Ltd. (“Tianjian Tourism”), which is principally engaged in local tourism business, in October 2019 (as detailed in section headed “Significant investments, material acquisitions and disposals” below) and commenced tourism business in the PRC through Tianjian Tourism. Tianjian Tourism has provided tourism agency services to a travel company in the PRC during the year. (6) New projects in development phrase During the year, a wholly owned subsidiary has been established by the Group in Guangdong Province, the PRC to develop and improve technology of car tire low-temperature pyrolysis and Buton Rock Asphalt modifier. The Group is negotiating to implement the projects in several regions in the PRC. During the year, the Group has also applied for five patents in respect of the above two projects in the PRC. Prospects: In 2020, the outbreak of novel coronavirus (COVID-19) has impacted the operations of the Group, which are mostly based in the PRC, to a certain extent. Due to the closures of cities and the measures taken by the local government in the PRC, the Group has been in limited operations in the PRC. The mining activities at the West Mine and certain businesses of the Group especially trading of LNG, tourism and photovoltaic power business in the PRC have been affected and/or suspended since the outbreak of COVID-19. Nevertheless, the Group has adopted “work from home” policy to maintain the basic operations of the Group and used the best endeavour to minimise the impact. The Group is resuming operations gradually and the Group is in progress to assess the impact on the Group’s operations. Looking forward, the Group remains very cautious with the outlook of commodity and oil and gas markets especially in view of the recent vigorous fluctuations in such markets. The Group is also monitoring the commodity market environment closely and formulating an appropriate strategy and timetable to expand the production by drilling additional wells when necessary. The Group will use its best endeavours to comply with more stringent rules and regulations on safety production and environmental protection in the PRC and resume ore mining and processing at the West Mine as soon as possible as well as explore other revenue stream generated from silver mining segment. For assets financing, trading of LNG and tourism businesses, the Group will continue to expand its customers base for broadening its revenue base. The Group has commenced the business of photovoltaic power through acquisition of 89% equity interests in Beijing Jiezhong in January 2020. Chengde Shuntian, the subsidiary of Beijing Jiezhong, is principally engaged in a 5 Mega Watts rooftop distributed photovoltaic power generation project located in Liugou Industrial Park, Liugou Town, Chengde County, Chengde City, Hebei Province, the PRC. Photovoltaic modules were installed on 32 rooftops within the industrial park with a power generation capacity of 4.038 Mega Watts. Such project has been under the photovoltaic power generation financial subsidy policies in the PRC which can ensure a steady income stream to the Group. The Group continues to develop and implement the projects for tire low-temperature pyrolysis and Buton Rock Asphalt modifier in various regions in the PRC. Meanwhile, the Group is also actively exploring other investment projects to diversify the Group’s businesses. Further announcement(s) will be made when any of the above investment opportunities materializes.

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