The following discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and footnotes in this report and also in conjunction with our fiscal 2011 Annual Report on Form 10-K, for the year ended September 30, 2011 and our subsequent filings with the Securities and Exchange Commission.

We are a U.S. company that manages a portfolio of entities in China and the Americas. We also provide business and financial consulting services to public and private American and Chinese businesses. We operate in three identifiable segments: Magnesium, Basic Materials, and Consulting.

Historically, our Magnesium segment has represented our largest segment by assets and revenues. We manufacture and sell pure magnesium and related by-products sourced and produced in China. We also purchase and resell magnesium products sourced and produced in China by third parties. Magnesium is the lightest and strongest of the structural metals; it is one fourth the weight of steel, two fifths the weight of titanium and two thirds the weight of aluminum. Magnesium is used in a variety of markets and applications due to the physical and mechanical properties of the element and its alloys. Magnesium ingots are the feedstock for the manufacturing process of titanium and aluminum alloying. Magnesium powder and granules are used as a desulphurizer that removes sulfur in the production process of steel. Additionally, various types of magnesium alloys which are produced from the pure magnesium ingots are used in aircraft, automobile parts, and in electronic equipment such as computers, cameras and cellular phones.

Our Basic Materials segment engages in the sale and distribution of basic resources within China and the global purchase and sale of industrial commodities which includes mineral ores and non-ferrous metals. In this segment we also sell and distribute a variety of products in China including industrial grade synthetic chemicals, steel products and nonferrous metals. Additionally, within this segment we hold the rights to mining properties and are considering the partial or full sale of our interest in this business.

Our Consulting segment provides services to public and private American and Chinese entities seeking access to the U.S. and Chinese capital markets. These services include general business consulting, Chinese regulatory advice, translation services, formation of entities in the PRC, coordination of professional resources, mergers and acquisitions, strategic alliances and partnerships, advice on effective means of accessing U.S. capital markets, coordination of Sarbanes-Oxley compliance, and corporate asset evaluations.

Recent Acquisitions and Corporate Name Change

On February 29, 2012 a special meeting of shareholders approved the issuance of our common stock, CD International completed the acquisition of 100% of Golden Trust and 80% of Lingshi Magnesium for an aggregate purchase price of $26.7 million paid by a combination of $6.5 million in cash or assignment of intercompany loans, $15.5 million in shares of our common stock, and $4.7 million by way of transferring our interest in our Excel Rise subsidiary.

Golden Trust and Lingshi Magnesium are both engaged in the production of pure magnesium ingots. We have added approximately 20,000 metric tons of annual production capacity from Golden Trust and approximately 12,000 metric tons of annual production capacity from Lingshi Magnesium, bringing our total magnesium production capacity to approximately 90,000 metric tons. We believe we are now one of the largest magnesium producers in the world. In conjunction with the acquisition of Golden Trust and Lingshi Magnesium, we also entered into a Management Agreement with Yuwei Huang and Kong Tung, members of our Board of Directors, to consolidate and manage the business operations for all of our magnesium production facilities.

In addition, our shareholders approved an amendment to our articles of incorporation to change our corporate name from China Direct Industries, Inc. to CD International Enterprises, Inc.

A significant portion of our business and operations are in China and, accordingly, its national economy plays a significant role in our results of operations. China's gross domestic product growth (GDP) rate slowed to approximately 7.6% in the second calendar quarter of 2012, down from 8.1% in the first quarter, as compared to the same period in calendar 2011, which is the lowest rate since the second calendar quarter of 2009 as the European debt crisis and weaker demand has put the global economic recovery in jeopardy and pushed China's export-driven manufacturing activities to its lowest levels in the past three years. The share of GDP growth from investment for the second quarter of calendar 2012, which includes spending on big ticket infrastructure and property projects, came in at 49.4%, down from 53.2% in the same period in 2011. Furthermore, China's housing market and particularly its real estate construction market experienced a significant correction due to a tighter regulatory environment, bank lending curbs, and slower demand during fiscal 2012. In response to this slowdown, China's Central Bank cut the nation's commercial banks' reserve requirement ratio by 0.5 percentage point, the first such cut since December 2008, and in June 2012 cut the interest rate twice, in order to provide additional liquidity for commercial lending. This represents a significant shift in China's economic policy signaling that China has put economic growth at the top of its agenda, rather than concerns about inflation.

During the third quarter of fiscal 2012, the overall economic environment, particularly in China, showed no improvement, and our Basic Materials segment continued to struggle with slower customer demand due to tightened credit conditions in China impacting customer financing needs to purchase our products. We still face a number of challenges in continuing the growth of our business, which is primarily tied to the overall health of the global economy. During the last quarter of fiscal 2012 and into fiscal 2013, we also intend to realign our investments, and streamline and restructure our operations in China, in our Basic Materials segment, as we shift our business and strategic focus in the Basic Materials segment to the expansion of our industrial commodities sourcing and distribution business in the Americas.

Two additional events during the balance of fiscal 2012 have the ability to adversely impact our overall business and operations. The NASDAQ Stock Market notified us of the delisting of our common stock. Our common stock was delisted on July 11, 2012 and is now quoted in the over-the-counter market on the OTCQB Tier of the OTC Markets. This occurrence will make our ability to raise capital in future periods much more difficult and will adversely impact our shareholders' liquidity in our common stock. The second event is the bankruptcy of our CDII Trading subsidiary which is described in greater detail in our Note18 and in our Liquidity and Capital Resources section later in this section.

Information on trends impacting our reporting segments follows:

Magnesium segment.

According to statistics by the General Administration of Customs in China, as published by China Minor Metals , China's export of magnesium and product, fell by approximately 31,000 metric tons in May of 2012, down 9.6% on a year to year basis. The May figure was 10.6% lower than the volume in April of 2012 and is the third consecutive month to see a decline. During the period January 2012 to May 2012, exports totaled approximately 165,000 metric tons, down 5.5% as compared to the same period in 2011.The May 2012 exports were valued at $96.1 million, down 8.1% from May 2011 and down 8.0% from April 2012.For the first five months of calendar 2012, the value of exports stood at $501.6 million, down 3.41% from the same period in calendar 2011.

Our average magnesium sales price over the third quarter of fiscal 2012 was approximately $2,793 per metric ton compared to an average magnesium sales price of approximately $2,765 per metric ton for the third quarter of fiscal 2011. Magnesium prices incrementally improved over the course of fiscal 2011 reflecting an improved worldwide demand pattern, characterized by a gradual increase in prices driven by an increased demand from the global aerospace, automotive and consumer electronics sectors. This was followed by a softening in overall demand beginning in October 2011, which has continued through the third quarter of fiscal 2012, mostly due to renewed concerns over the European debt crisis, tightening credit availability in China forcing domestic competitors to liquidate inventory to raise cash balances and a general slowdown in China manufacturing activities. As a result, we built additional inventory in the quarter in anticipation of an improvement in demand in the second half of calendar 2012.

Based on the current trends and quoting activities, and indications from the economic activities worldwide, we believe that magnesium demand and prices will begin to increase progressively in the second half of calendar 2012 and into 2013. Further, we believe that the long term industry trends for magnesium are favorable and will allow us to rapidly ramp up our production to capitalize on expected growth during fiscal 2013. We intend to continue with our strategic plan to further streamline and consolidate our own production capacity.

During both the third quarter and first nine months of fiscal 2012, we experienced much lower demand than over the same periods in fiscal 2011 primarily due to tightened credit conditions in China impacting our customers' ability to obtain financing to purchase our products. Furthermore, the overall domestic market for our products in the Basic Material segment continued its downtrend in the third quarter of fiscal 2012, resulting in a weaker business environment in both our specialty chemicals and construction steel related sales. For the third quarter of fiscal 2012, revenues from our specialty chemical sales and gross margins were much lower as compared to the same period in fiscal 2011. As a result of the substantial economic slowdown and lack of new sales in the domestic market in China for our specialty chemicals and steel related products, we are currently evaluating the realignment of our capital in these businesses toward our iron ore sourcing and distributions business in the Americas in order to maximize our revenues and cash flow in this segment in fiscal 2013 and in future years.

In the first quarter of fiscal 2012, we experienced delays in completing a shipment out of Mexico due to a longer than expected timeframe to receive environmental permits needed to process the iron ore to meet our customer's specifications and necessary export approvals. During the second quarter of fiscal 2012, we applied for and received the required environmental permits to process iron ore, however, we are still waiting for the approval to export. We are also exploring opportunities for domestic sales. Our operations in Chile experienced shipping delays due to a longer than expected timeframe to receive port authority approval to export the iron ore. During the third quarter of fiscal 2012 we also worked to establish new relationships with suppliers/exporters. One of our suppliers/exporters received port authority approval for shipment during the quarter and we expect to begin revenue generation during fiscal 2013. In Bolivia, we established new relationships with a supplier and are working with an engineering specialist to further strengthen our sourcing capabilities and a logistics provider to meet our inland transportation needs.

We believe demand for our consulting services will remain strong in fiscal 2013. In September of 2011, we launched a marketing initiative for our new One-Stop China Value™ program in an effort to capitalize on the current environment. This program is designed to implement a broad range of strategies to enhance and maximize shareholder value for China-based U.S. public companies. Other marketing plans include sponsoring trade symposiums, investment forums, and forming strategic alliances with industry and trade associations.

In addition to potential transaction fees, we also anticipate receiving additional client fees generated from our ongoing annual service contracts and the addition of prospective clients during fiscal 2013. We expect that revenues from transactional and activity-based fees from our existing clients and our current pipeline of prospects will be sufficient to support our advisory operations in the U.S. We foresee our Consulting segment will remain an important revenue and earnings driver for our future growth in the years to come.

                             RESULTS of OPERATIONS

Summary of Selected Consolidated Financial Information

The following tables provide certain data on our consolidated results of
operations for the three and nine months ended June 30, 2012 and 2011:

                                               Three Months Ended June 30,
                                            2012                          2011
                                                   % of                          % of         % Increase
 (Dollars in thousands)            Amount         Revenues       Amount        Revenues       (Decrease)
Magnesium segment                 $  26,540             71%     $  25,023            44%                6%
Basic Materials segment              10,649             29%        20,188            35%             (47%)
Consulting segment                       86              0%        11,805            21%             (99%)
Consolidated Revenues             $  37,275            100%     $  57,016           100%             (35%)
Cost of revenues                     36,161             97%        49,458            87%             (27%)
Gross profit                          1,114              3%         7,558            13%             (85%)

Total operating expenses              3,435              9%         3,004             5%               14%
Total operating (loss) income     $ (2,321)            (6%)     $   4,554             8%            (151%)

                                                Nine Months Ended June 30,
                                            2012                          2011
                                                   % of                          % of          % Increase
 (Dollars in thousands)            Amount         Revenues       Amount        Revenues        (Decrease)
Magnesium segment                 $  70,388             61%     $  70,574            49%                 0%
Basic Materials segment              34,874             30%        55,781            38%              (37%)
Consulting segment                   10,866              9%        18,698            13%              (42%)
Consolidated Revenues             $ 116,128            100%     $ 145,053           100%              (20%)
Cost of revenues                    102,862             89%       127,739            88%              (19%)
Gross profit                         13,266             11%        17,314            12%              (23%)
Other operating income                    -               -             -              -
Total operating expenses              9,591              8%         9,360             7%                 2%
Total operating income            $   3,675              3%     $   7,954             5%              (54%)

Analysis of Operating Results by Segment

A summary of our comparative operating results by segment for three months and
nine months ended June 30, 2012 and 2011, follows:

                                       Three months ended           Increase
            Magnesium Segment               June 30,               (Decrease)
            (Dollars in thousands)     2012          2011

            Total revenues            $  26,540     $  25,023     $      1,517
           Cost of revenues              25,705        24,395            1,310
           Gross profit                     835           628              207
           Total operating expenses       1,524           752              772
           Operating (loss)           $   (689)     $   (124)     $      (565)

                                        Nine months ended           Increase
            Magnesium Segment               June 30,               (Decrease)
            (Dollars in thousands)     2012          2011

            Total revenues            $  70,388     $  70,574     $      (186)
           Cost of revenues              68,732        68,914            (182)
           Gross profit                   1,656         1,660              (4)
           Total operating expenses       3,363         2,803              560
           Operating (loss)           $ (1,707)     $ (1,143)     $      (564)



                                         Three months ended        Increase
             Basic Materials Segment          June 30,            (Decrease)
             (Dollars in thousands)      2012          2011

             Total revenues              $ 10,649     $ 20,188     $  (9,539)
             Cost of revenues              10,181       18,972        (8,791)
             Gross profit                     468        1,216          (748)
             Total operating expenses         489        1,001          (512)
             Operating (loss) income     $   (21)     $    215      $   (236)

                                         Nine months ended        Increase
              Basic Materials Segment        June 30,            (Decrease)
             (Dollars in thousands)      2012         2011

             Total revenues             $ 34,874     $ 55,781     $  (20,907)
             Cost of revenues             33,490       52,344        (18,854)
             Gross profit                  1,384        3,437         (2,053)
             Total operating expenses      1,646        2,681         (1,035)
             Operating (loss) income    $  (262)     $    756      $  (1,018)



                                         Three months ended        Increase
              Consulting Segment              June 30,            (Decrease)
             (Dollars in thousands)      2012          2011

              Total revenues            $      86     $ 11,805     $ (11,719)
             Cost of revenues                 275        6,091        (5,816)
             Gross profit                   (189)        5,714        (5,903)
             Total operating expenses       1,423        1,251            172
             Operating (loss) income    $ (1,612)     $  4,463     $  (6,075)



                                         Nine Months ended        Increase
              Consulting Segment             June 30,            (Decrease)
             (Dollars in thousands)      2012         2011

              Total revenues            $ 10,866     $ 18,698      $ (7,832)
             Cost of revenues                640        6,481        (5,841)
             Gross profit                 10,226       12,217        (1,991)
             Total operating expenses      4,582        3,876            706
             Operating income           $  5,644     $  8,341      $ (2,697)

Consolidated Revenues

Revenues in the third quarter of fiscal 2012 decreased by 34.6%, as compared to the same period in fiscal 2011, primarily due to a 47.3% decrease in revenues from the Basic Materials segment resulting from economic slowdown in China and a substantial drop in sales coupled with no revenues from the Consulting segment due to the cyclical nature of the consulting business during the quarter, offset by a 6% increase in revenues from our Magnesium segment. For the first nine months of fiscal 2012, our revenues decreased by 19.9%, as compared to the same period in fiscal 2011 as a result of a decrease in revenues of 37.5% within our Basic Materials segment and a decrease in revenues of 41.9% within our Consulting segment, where our revenues from the addition of two new clients in the first two quarters of fiscal 2012 were approximately half of the revenues earned during the comparable period in fiscal 2011 based on the scope of consulting services rendered, and essentially flat revenues in our Magnesium segment.

Revenues by Segment

Our Magnesium segment sold and distributed approximately 8,894 metric tons of magnesium, including 128 metric tons of magnesium powder, generating revenues of $26.5 million for the third quarter of fiscal 2012, as compared to 9,049 metric tons, including 1,051metric tons of magnesium powder, for revenues of $25.0 million in the same period of fiscal 2011. The average selling price of our magnesium for ingot and powder sales, excluding processing fees, in the third quarter of fiscal 2012 increased by 1.0% while volume decreased by 1.7%, resulting in slightly higher revenues for the quarter. Included in the $26.5 million for the third quarter of fiscal 2012 was approximately $1.7 million in processing fees which is a new source of revenue in this quarter for the Magnesium segment. If we consider the processing fees into the average selling price for our magnesium, our average sales price for the third quarter of fiscal 2012 would have increased by approximately 8.0%. During the quarter we continued to build inventory and reduced trading activity in anticipation of a strengthening in demand and prices for magnesium in second half of calendar 2012. For the first nine months of fiscal 2012, our Magnesium segment sold and distributed approximately 24,568 metric tons of magnesium, generating revenues of $70.4 million, as compared to 27,580 metric tons on revenues of $70.6 million in the same period of fiscal 2011. The average selling price, excluding processing fees, for our Magnesium segment for the first nine months of fiscal 2012 increased by 8.9% while volume decreased by 10.9%, resulting in a decrease of less than 0.3% in sales revenues.

Our Basic Materials segment generated revenues of $10.6 million in the third quarter of fiscal 2012 and $34.9 million for the first nine months of fiscal 2012, as compared to $20.2 million and $55.8 million, respectively, for the same periods in fiscal 2011. The decrease in revenues of $9.5 million and $20.9 million for the third quarter and first nine months of fiscal 2012, respectively, were primarily due to lower sales volumes from our construction steel related products due to reduced demand caused by slower construction expansion and tightened credit conditions in China impacting our customers' ability to obtain financing to purchase our products.

Our Consulting segment revenues primarily consist of consulting and advisory service fees we received from certain publicly traded U.S. companies with their primary business operations located in the PRC, and we receive a fixed number of shares of their marketable securities or fees from those client companies, including both recurring and one-time transaction fees for services we provide to clients. Consulting segment revenues vary from period to period depending upon the timing, nature and scope of services we provide to a particular client. Our Consulting segment generated less than $0.1 million in revenues during the third quarter of fiscal 2012, as compared to $11.8 million in the same period of fiscal 2011, because there were no new client additions during the quarter as opposed to new clients added during the same period in fiscal 2011. Both of our two new clients in fiscal 2012 were added during the first and second quarter of fiscal 2012. For the first nine months of fiscal 2012, our consulting revenues decreased by 41.9%, to $10.9 million, as compared to the same period in fiscal 2011, primarily due to the scope of consulting and transactional services provided to the two new clients when compared with the additional consulting services rendered to new clients during the same period in fiscal 2011.

Consolidated Gross Profit

Our gross profit in the third quarter of fiscal 2012 decreased 85.3% as compared to the same period in fiscal 2011. For the first nine months of fiscal 2012 our gross profit decreased 23.4% as compared to same period in fiscal 2011. Our gross profit margin decreased to 3.0% in the third quarter of fiscal 2012 and to 11.4% for the first nine months of fiscal 2012, as compared to 13.3% and 11.9%, respectively, for the same periods in fiscal 2011. The decrease in gross profit was primarily due to decreases in our sales revenues from our Basic Materials segment.

Gross Profit by Segment

Gross profit in the third quarter of fiscal 2012 for our Magnesium segment increased 33.1% from the comparable period in fiscal 2011, with a gross profit margin of 3.1% as compared to 2.5% for same period in fiscal 2011. The increase in gross profit for the third quarter of fiscal 2012 was primarily due to a 6.1% increase in sales revenue offset by a cost of revenue increase of 5.4%, including lower depreciation expense from a change to units of production method to reflect allocation of costs in the production cycle, as compared to the same period in fiscal 2011. As described in Note 3 to the consolidated financial statements appearing elsewhere in this report, during the second quarter of 2012, we changed our depreciation method in the Magnesium segment from straight-line to units of production to better reflect the allocation of costs to the production cycle given the production capacity available and capital investment committed to this segment. We believe that the resulting change in our gross profit margins in the Magnesium segment will better reflect the economics of our production cycle, and our depreciation expense will be allocated to actual units produced and production costs generated by this segment. Gross profit for the first nine months of fiscal 2012 decreased by 0.2% from the comparable period in fiscal 2011, while gross profit margin remained the same at 2.4%, for both periods in fiscal 2012 and 2011, primarily due to slightly lower sales revenues, as previously discussed.

The gross profit and margins for our Basic Materials segment was negatively impacted during both the third quarter and first nine months of fiscal 2012 by lower sales revenues from our CDI Beijing subsidiary that sells and distributes steel related products, including reinforcing steel bars and other industrial related commodities, primarily due to tightened credit conditions in China impacting our customers' ability to obtain financing to purchase our products.

Gross profit in our Consulting segment for the third quarter of fiscal 2012 was not comparable to the same period in fiscal 2011, primarily due to timing and scope of consulting services derived from additions of new clients and the impact of fees derived from marketable securities received for such services, as discussed above. Gross profit in our Consulting segment for the first nine months of fiscal 2012 decreased 16.3% while the gross margin improved to 94.1%, for an increase of 29.0 percentage points over the same period in fiscal 2011 primarily due to lower cost of revenues for this segment during the first nine months of fiscal 2012.

Total Operating Expenses

Total operating expenses, net of other operating income, increased by $0.4 . . .