1. Why we shall buy the railway assets?

We are acquiring is a special purpose railway spur line network in our coal mining area. It connects our coal mines to the national railways and Zouxian power station ?one of our largest customers. It is an important and integral part of our operation. Over 98% of the volume transported on this network is coal products produced by us. It is our core business!

Almost all the international coal mining companies own their own railway surface infrastructure linking to national networks. These railway surface infrastructures were usually designed and built at the same time the coal mines were developed and built. Ours is no different from any of our global peers.

Should the railway assets continue to stay with the parent, we will have to live with an on-going connected transaction which will expand significantly over time. We are paying the Parent company for every tonne of coal transported to the Rizhao port where we sell to export and coastal customers on an FOB basis. This amounts to Rmb 210million in 2000 and has already increased to RMB120 million in the first half of 2001. With our plan to sell more coal products to export markets and coastal areas in East China, the connected transaction will balloon to an unacceptable level. This has the potential to increase commercial and financial risks to our company and in particular, the interests of minority shareholders. With this acquisition, we can solve the problem once and for all, and therefore improves our independence and transparency.

Also, the acquisition will significantly enhances our competitiveness (please refer question 5) and provide us with an expanded source of income. The acquisition will immediately become earnings enhancing (please refer to question 8).

2. How does the special purpose railway network link to the current operations owned by the company?

The special purpose railway network we are acquiring connects our existing six coal mines with Zouxian power station which is our largest customer. It also links to Yan-Shi (Yanzhou to Rizhao port) national railway and Jing-Hu (Beijing to Shanghai) national railway. Therefore it is a critical operation to ensure that our coal products can be delivered to domestic and export customers.

The key task to manage the railway assets is to ensure that our customers to be supplied with quality products and to receive timely services. Day-to-day management of the business essentially involves grouping of railway wagons to meet the demand, proper blending of different coal products to satisfy the required specification, and monitoring and control of quality consistency in the loading and transportation processes.

Therefore, in no sense the special purpose railway operation is less essential than the existing core infrastructure that we currently own and operate, such as coal preparation plants, coal storages and coal feeders, which all support the underground coal mining operations. In fact, these businesses are operated and managed in a very similar way.

3. Why now?

We were unable to include the railway assets in the international initial public offering in 1998 due to the constraints on, among other things, legal issues, timing, and IPO size. Our management has, in the last few years post listing, been busy consolidating the business demonstrated in particular by two major acquisitions to incorporate Jining II and Jining III coal mines. Following all these, we can now focus our management resources to address this issue. After all, the acquisition of additional high quality core assets continues to be the core growth strategy of the Company.

Our knowledge has improved significantly and our consciousness about minority shareholders interest has never been stronger. We have placed this acquisition on the top of our management priority immediately following the delivery of our promises during the IPO (in particular the acquisition of the two major coal mines).

The timing of this acquisition could not be better. With the commissioning of the Yan-Shi double-track national railway (Yanzhou to Rizhao port) by 8^th November, the bottleneck along the national railway will be completely removed which shall facilitate substantial transportation volume growth in conjunction with the growth of the underlying production and sales.

4. Are you diversifying into non-core business?

We have no intention to diversify into none core operations.

We only invest in high-grade assets which generate incremental value along the value chain including coal production and processing, coal handling logistics, and coal distribution and sales. The core assets continue to comprise the best reserves and coal mines where we could deploy our strength in terms of geological location, sales and distribution network, and advanced technology. We will only invest in value added coal handling and logistics assets if these businesses are essential and integral parts of our coal mine portfolio.

5. What is your competitiveness position post acquisition?

With the acquisition, we can enhance our service quality through much coordinated efforts which will be reflected in both consistent product quality and also timely delivery. All these will strengthen our competitiveness and will eventually be translated into sustainable higher product selling prices and increased market share.

As one of the most critical measure of a coal company’s competitiveness in export markets, our FOB cash cost will decrease significantly. This is caused by the replacement of approximately over RMB 22.4 per tonne tariff to transport the coal to Yan-Shi national railway with the cash payment for direct costs associated with the railway operation. This will significantly enhance our ability to deliver the strategy of expanding our market shares in key export and coastal markets.

6. Why do you always acquire assets from the Parent company?

It just happened that we have a quality Parent company which has the vision to build up and nurture a few sizeable and attractive businesses especially during their early development phase, including the Jining II and Jining III coal mines and the special purpose railway assets. We see no difference whether to acquire assets from the Parent company or any other third parties, as long as they are appropriately structured and priced acquisitions in terms of strategic and commercial perspectives.

With the completion of a few major acquisitions, almost all the core businesses related to coal production and sales in the Parent company have been incorporated into our company, and we have formed an integrated operation combining coal production and handling, and coal transportation and sales. We look forward to more opportunities from outside the Parent company’s territory in the future, including acquisition of additional coal mining assets.

7. What is the financial position of the Parent company?

Yankuang Group, our Parent company, is a profitable major state owned group with assets exceeding RMB20.3 billion. Its gearing (debt to assets) is less than 60%, representing a reasonable level compared with its peers in China. In the past, it has never defaulted any bank loans and has been rated AAA by Da Gong International Credit Rating Limited (direct translation from the Chinese name).

With its significant clout in the local economy, and tracking the strong growth in China, the Parent is provided with enormous business development opportunities supported by the local and central government. The Parent has developed the tenth 5-year business plan to source some of these opportunities and will consider to fund these investments through a combination of debt, equity and investment by strategic investors.

Yankuang is frequently visited by local banks as well as domestic and international investors seeking investment and co-operation. We have full confidence that it will have no liquidity difficulties, and will continue to be a financially solid commercial entity for the foreseeable future.

8. How does the acquisition impact on the company financially?

The railway assets is highly profitable. In 1^st half 2001, it made a profit of RMB66 million for some RMB171 million net sales, representing a net profit margin of 38%.

Based on the proforma that the company pays the acquisition by its own cash, this acquisition would have increased earnings per share for our shareholders by 11.2% in 2000, and by 13% for 1^st half 2001. Return on equity would have increased from 8.77% to 9.75% in 2000. We will be financially more profitable and stronger.

9. Will the earnings of Yanzhou Coal be diluted post acquisition?

The proforma accounts clearly demonstrate that the acquisition would be significantly earnings enhancing. Specifically, if the acquisition were made on 1^st January 2001, it would have enhanced the earnings per share by 13% for the first half 2001 if the acquisition if fully funded by cash, and 8.3% if the acquisition if funded with RMB1,000 million long term loan and the residual in cash.

Assessed on the historical earnings multiples, the acquisition price we will be paying out of our balance sheet represents 5.2 times proforma net profit of the Railway Assets in 2000, and 5.9 times proforma net profit for the first half of 2001, considering that the Railway Assets generates strong cash flow that is more than sufficient to service RMB1,000 million bank borrowings.

Moreover, we have be a significant beneficiary with the transportation volume growth projected over the next few years. We believe that building up a business which balances short-term enhanced earnings combined with long term growth is to the best interest of our shareholders.

10. Why can’t you use your cash better, say, you pay more dividends or buy back some shares?

A soundly managed business balances the interest of shareholders through providing them with income, capital gain, and long-term sustainable growth. We have maintained a consistent dividend policy which distributes to our shareholders comparatively high returns. We also want to enhance the value of the overall business to generate capital gains to our investors. In addition, we want to develop new sources of growth without compromising on our business focus so that our long-term shareholders will be appropriately rewarded.

As a resource company, business scale is also a major strategic influence. A company that is too small will be facing the danger of not been able to survive poorer market conditions or to compete with the majors in the market. This is detrimental to the investors in the long run. Therefore we are extremely cautious in contemplating capital reduction plans.

We believe the acquisition has provided us the best possible option to invest our capital at our current stage of development.

11. Why you did not disclose the intention to acquire the assets earlier?

Like any M&A transaction, one needs to create a willing buyer and a willing seller. Otherwise the transaction would never happen. As part of the negotiation strategy, we have to be very cautious not to talk up the expectation of a seller or the market which might put us in a position that we have no choice but to buy at ANY price.

We also have to follow the regulatory requirements. It is our duty to maintain absolute confidentiality for price sensitive information in order not to create excessive speculation in the market.

12. What would be the profit level of the railway assets in the next few years?

We are constrained by the regulatory and legal requirements to publicize any profit forecast. We are, however, able to provide some useful assistance and information.

The average transportation tariff (after sales tax) is approximately RMB 18-19 per tonne. We expect the transportation volume to hit the targets and eventually reach 32 million tonnes in 2005.

Cost of goods sold (COGS) in 1H 2001 was approximately RMB59 million (proforma). Administrative and general expense (SG&A) was approximately RMB26 million. Over 80% of the COGS and over 90% of the SG&A are fixed costs. In 1H 2001, the railway department transported 9.4 million tonnes of coal products and materials.

Based on these, the earnings potential of the acquisition is substantial.

13. Is the acquisition too expensive?

The price of the acquisition was agreed upon through an arm’s length negotiation between the management of the company and that of the parent company. We have made reference to the valuation prepared by domestic and international valuers, who have assessed the assets value on the basis of replacement cost following the necessary State regulations.

We have appointed N M Rothschild & Sons as our financial advisor to assist in our negotiation and value assessment. Rothschild has developed an in-depth DCF model and has scrutinized the funding structure as well as financial impact to our company following the acquisition.

Based on very conservative assumptions and assuming no major adverse change of trading conditions, the internal rate of return for the acquisition will exceed 20%. At 14% discount rate, the net present value of the investment represents value enhancement of over 70%.

14. Can the Company finance its acquisition? Are banks unwilling to lend to Yanzhou Coal?

We have the highest local credit rating among all the PRC corporate and so far, we have not incurred any bank borrowing thanks to our very strong cash generative businesses. We have been inundated with offers to finance our activities in the past. For the acquisition, we have already secured a Letter of Intent from a domestic bank in China offering to lend to us for up to RMB1,200 million long term loan.

By the end of 1H 2001, we have RMB1.2 billion cash on our balance sheet, which is more than sufficient to cover the remaining two Jining III installments, one of which (approximately RMB623 million) will not be paid until the end of 2002.

We have shareholders equity of over RMB8 billion by the end of 1H 2001. With additional profit and cash generated from 2H 2002 and the contribution from the railway assets in the future, despite the intended financing plan we put together, our gearing level will continue to be among the most conservative of our domestic and international peers.

15. Has Yanzhou Coal diminished its war chest post the acquisition?

This really follows the answer for the last question.

As a mining company, we believe 30% net gearing (net debt to total assets) is an internationally acceptable conservative standard. This implies that we can borrow, when the railway assets are acquired, some RMB3 to 4 billion if we have good investment opportunities. With a cash position of another Rmb 1.2 billion as at 30^th June 2001, we can easily muster a total war chest of some Rmb 5 billion, which dwarfs the RMB2.4 billion that we would pay for the remaining installments of Jining III acquisition and the railway assets acquisition.

In other words, we have a war chest which should at least allow us to make another acquisition at least the scale of Jining III coal mine if the opportunity presents itself.

16. Has Yanzhou Coal run out of ideas and had trouble to identify new coal mines to acquire?

The State government has developed its tenth five-year plan for the coal industry which encourages the consolidation of our industry and improve efficiency and scale of the coal businesses. This presents our company the best opportunity as we are the most profitable and most competitive coal company in China, and has the unique listing status in both domestic and international capital markets.

We have also built up the most experienced mergers and acquisitions team and have successfully completed several acquisitions since our listing. We have the expertise and knowledge of working with domestic and international institutions in closing the most sophisticated M&A transactions in China. No other company in our industry in China can possibly claim the same expertise.

Ever since the IPO, we have improved our management skills and our technology and product reputation are among the best in China. We will be able to improve the performance of coal mines that we acquire, and this represents one of our core strength.

Our team is working diligently on some of the acquisition opportunities and we are confident to make progress in implementing our key strategy, i.e., to continue to create high growth through acquiring high grade coal mining assets.

At the time of the H share listing, we also disclosed that we have the priority to develop the Juye coal reserve in Shandong province. We are closely monitoring the situation and will invest when we believe that market conditions are sufficiently mature to justify a substantial green field investment.

In short, we foresee plenty of business expansion opportunities. However, only when we are confident that we have a very firm view of the timing and structure of a deal, will we be able to announce these specifics to the public and our shareholders.

17. What happened to the share prices when the announcement was made?

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