China Natural Resources, Inc. — Form 20-F Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2018, and was filed April 30, 2019. CHNR is a British Virgin Islands holding company reporting under IFRS in CNY, with operations conducted primarily through PRC subsidiaries. Following the 2017 disposal of its non-ferrous mining and Bolivian copper-smelting businesses, its continuing operations consist principally of exploration for lead, silver and other metals at the Moruogu Tong Mine in Inner Mongolia.
The mine remained in the exploration stage and generated no operating revenue in 2018. The exploration permit covered approximately 10.43 square kilometers and was scheduled to run through September 13, 2019.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | CNY0 | CNY0 |
| Operating loss from continuing operations | CNY6.21 million | CNY6.20 million |
| Loss before tax from continuing operations | CNY6.18 million | CNY6.18 million |
| Net loss | CNY6.18 million, or US$0.90 million | CNY30.00 million |
| Basic and diluted loss per share | CNY0.25 loss | CNY1.20 loss |
| Cash flow from operating activities | Use of CNY7.53 million | Use of CNY14.75 million |
| Cash flow from investing activities | Inflow of CNY9.37 million | Inflow of CNY2.87 million |
| Cash flow from financing activities | Use of CNY13.81 million | Inflow of CNY12.63 million |
| Cash and cash equivalents at year-end | CNY6.79 million, or US$0.99 million | CNY18.88 million |
| Total assets | CNY7.74 million | CNY29.75 million |
| Total liabilities | CNY29.54 million | CNY45.25 million |
| Deficiency in assets | CNY21.80 million | CNY15.51 million |
| Current ratio | 0.25x | 0.65x |
Margins are not meaningful because the Company had no revenue. There were no interest-bearing debts at year-end. However, CHNR owed CNY11.01 million to related parties, including CNY4.04 million to Feishang Enterprise and CNY6.97 million to Feishang Group. These balances were unsecured and non-interest-bearing.
Material changes versus the prior comparable period
- Net loss improved by CNY23.82 million because 2017 included CNY23.82 million of losses from discontinued operations; 2018 contained no discontinued-operation loss.
- Continuing-operation expenses and losses were essentially unchanged, with administrative expenses increasing slightly from CNY6.20 million to CNY6.21 million.
- Cash declined by CNY12.09 million, from CNY18.88 million to CNY6.79 million, primarily because related-party repayments exceeded new advances and operating activities continued to consume cash.
- Current liabilities declined from CNY45.25 million to CNY29.54 million, but current assets declined more sharply from CNY29.41 million to CNY7.47 million, worsening working capital to a deficit of CNY22.07 million.
- Investing cash inflow primarily reflected proceeds from the disposal of Double Grow. A CNY9.38 million receivable from that disposal was collected on January 26, 2019.
- Capital expenditures were only CNY5 thousand in 2018, compared with CNY4.21 million in 2017.
Guidance, outlook, commentary and risks
- Management expects exploration to continue, subject to negotiations with Jijincheng Mining regarding further exploration for potential copper resources. The estimated future exploration budget was approximately CNY11.40 million.
- Management expects funding from related-party loans, payments under the cooperation agreement and, if necessary, bank borrowings. It stated that these sources should be sufficient for anticipated working-capital needs for at least the next 12 months, but this depends materially on continued support.
- Feishang Group and Feishang Enterprise confirmed that they would provide continuing financial support and would not demand repayment of amounts owed until repayment would not adversely affect the Group’s financial resources. This support is central to the going-concern assessment.
- The financial statements disclose substantial net current liabilities and an asset deficiency. The filing states that these conditions create a material liquidity concern, although management prepared the accounts on a going-concern basis.
- Initial exploration indicated a potentially mid-sized lead and silver deposit, but commercial viability, reserve quantities, mining rights and future production remain unconfirmed. No customers have committed to purchase future output.
- The cooperation agreement allocates 50% of newly discovered resources from the first 10 drilling holes to each party and 30% to CHNR versus 70% to Jijincheng for later drilling. Other allocation and distribution terms remained subject to negotiation.
- Key risks include metal-price volatility, exploration failure, inability to renew the exploration permit or obtain a mining license, PRC regulatory and environmental requirements, foreign-exchange controls, reliance on related parties, and limited access to external financing.
- Lead and silver prices declined approximately 6% and 5%, respectively, during 2018 based on the filing’s cited market data.
- IFRS 16 was expected to result in recognition of approximately CNY1.80 million of right-of-use assets and CNY1.80 million of lease liabilities on January 1, 2019.
- Management assessed disclosure controls and internal control over financial reporting as effective as of December 31, 2018. The auditor issued an unqualified opinion on the consolidated financial statements but did not provide an internal-control attestation because CHNR is a non-accelerated filer.
Most important facts for investors to verify
- Whether the Moruogu Tong exploration permit was renewed after September 13, 2019 and whether a mining license was subsequently obtained.
- Whether the exploration results support economically recoverable lead, silver or copper reserves under accepted reserve standards.
- The enforceability and continuing availability of financial support from Feishang Group and Feishang Enterprise.
- The Company’s ability to fund approximately CNY11.40 million of planned exploration and any substantially larger future mine-development costs.
- The status and terms of the unresolved resource-allocation provisions with Jijincheng Mining.
- The collectability of related-party receivables and the repayment terms for CNY11.01 million of related-party obligations.
- The impact of the severe liquidity position, including CNY6.79 million of cash against CNY29.54 million of liabilities and a CNY21.80 million deficiency in assets.
- Related-party governance risks: Mr. Li Feilie beneficially owned approximately 59.33% of the common shares and controlled entities providing financing and entering into transactions with CHNR.