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5. PROPERTY, PLANT AND EQUIPMENT, NET
 12 Months Ended
Dec. 31, 2012
Property, Plant and Equipment [Abstract]  
5. PROPERTY, PLANT AND EQUIPMENT, NET

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment, net consist of the following:

 

    As of December 31,  
    2012     2011  
At cost:            
Mineral rights   $ 6,334,277     $ 6,318,750  
Buildings     50,905,337       40,974,528  
Plant and machinery     166,121,329       136,862,383  
Motor vehicles     9,140       7,024  
Furniture, fixtures and office equipment     4,777,044       4,057,356  
Total     228,147,127       188,220,041  
Less: accumulated depreciation and amortization     (62,204,585 )     (41,019,301 )
Net book value   $ 165,942,542     $ 147,200,740  

 

The Company has certain buildings and salt pans erected on parcels of land located in Shouguang, PRC, and such parcels of land are collectively owned by local townships. The Company has not been able to obtain property ownership certificates over these buildings and salt pans as the Company could not obtain land use rights certificates on the underlying parcels of land. The Company could not obtain property ownership certificates covering certain properties of aggregate carrying value of $39,563,438 and $33,108,012 as at December 31, 2012 and 2011, respectively.

 

In the fiscal year 2011, the Company reclassified certain protective shells for crude salt pans with cost of $2,204,600 (RMB14.6 million), previously included in building, into plant and equipment for consistent classification with other similar assets. There is no impact on the statements of income as estimated useful lives of the assets being reclassified was not changed.

 

During the year ended December 31, 2012, depreciation and amortization expense totaled $22,972,873 of which $22,033,952 and $938,920 were recorded as cost of net revenue and administrative expenses, respectively.

 

During the year ended December 31, 2011, depreciation and amortization expense totaled $17,432,382, of which $16,348,509 and $1,083,873 were recorded as cost of net revenue and administrative expenses, respectively.

 

 

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET – Continued

 

In mid-May 2011, the local PRC government requested to take the leased land of original Factory No. 4 for redevelopment and agreed to lease another parcel of land to the Company nearby to the existing Factory No. 4. The total construction cost of the new Factory No. 4 was approximately $6,207,901, which was completed and restarted operations in December 2011. A rental agreement was subsequently signed in February 2012 with the local Township government for the lease of the parcel of land with an annual payment of RMB100,000 (approximately $15,871) up to December 31, 2031.

 

The operations of the original Factory No. 4 were stopped in early July 2011 to cooperate with the demolition of the factory and the relocation of useful plant and machinery to the new factory. For those fixed assets that could not be relocated to the new factory, the Company recognized write-offs of $1,384,443 in the second quarter of 2011 and included the impairment loss in write-off / impairment on property, plant and equipment. A sum of $1,340,026 was received from the local PRC government in the third quarter of 2011 as compensation for the demolition of original Factory No. 4 and included in the income statement as other operating income.

 

Besides the assets acquisition as mentioned in Note 2, the Company carried out the following major enhancement projects to the existing facilities in 2012:

 

(a)In the second quarter of 2012, the Company carried out the second phase enhancement projects to the Company’s existing bromine extraction and crude salt production facilities. In particular, the Company incurred enhancement works in Factories No. 1 to 9 at costs of approximately $12,786,791 to the extraction wells and approximately $8,125,659 to the protective shells to transmission channels and ducts. The above enhancement projects have estimated useful lives of 5 to 8 years and are capitalized as buildings and plant and machinery.

 

(b)In the third quarter of 2012, the company carried out two enhancement projects to its existing bromine and chemical products production facilities, in particular, the company incurred enhancement work to the bromine production facilities in Factory No. 2 at a cost of approximately $1,256,506 and enhancement work to the chemical products production facilities at a cost of approximately $1,498,150. The above enhancement projects have estimated useful lives of 5 to 20 years and are capitalized as plant and machinery.

 

 

Enhancements of protective shells to the crude salt fields, extraction wells and transmission channels and ducts are carried out every 5 to 8 years, depending on the need to do so, that is, when regular repair and maintenance work identifies the replacement needs. The erosion rate of protection shells is affected by different weather conditions and the change in acid components of brine water over time.

 

On September 25, 2012, the Company purchased five stories of a commercial building in the PRC, through SYCI, from Shandong Shouguang Vegetable Seed Industry Group Co., Ltd. at a cost of approximately $5.7 million in cash, in which Mr. Ming Yang, the Chairman of the Company, had a 99% equity interest. The cost of the five stories of the commercial building was valued by an independent appraiser to its fair value and recorded as property, plant and equipment. The Company uses the property as the new headquarters.

 

On October 23, 2012, the Company entered into an agreement with a subcontractor for the renovation of the new office headquarters( the newly acquired five stories of commercial building) at a cost of approximately $1.86 million, which was capitalized as building upon completion.

 

For the years ended December 31, 2012 and 2011, ordinary repair and maintenance expenses were $1,612,720 and $1,078,134, respectively.