China Natural Resources, Inc. 2019 Form 20-F Summary
Business context and reporting period
This is an annual report on Form 20-F for the fiscal year ended December 31, 2019, filed June 12, 2020. The filing provides annual, not separate quarterly, results; therefore, the source does not provide clear 2019 fourth-quarter financial data. Financial statements are prepared under IFRS in Chinese yuan (CNY); U.S. dollar amounts use CNY6.9632 per US$1.00.
CHNR is a British Virgin Islands holding company whose continuing operations are conducted primarily in China through Bayannaoer Mining. The company is exploring for lead, silver and potentially other metals at the Moruogu Tong Mine in Inner Mongolia and began trading copper ore in China during 2019. The mine remains in the exploration stage and has not generated mining revenue.
Key financial metrics
| Metric | 2019 | 2018 | Change/comment |
|---|---|---|---|
| Revenue | CNY12.969 million (US$1.863 million) | Nil | Entirely from copper ore trading |
| Cost of sales | CNY12.752 million | Nil | |
| Gross profit and margin | CNY0.217 million; 1.67% | Nil | Low-margin trading activity |
| Operating loss | CNY5.599 million (US$0.803 million) | CNY6.207 million | Improved with trading gross profit and lower expenses |
| Net loss from continuing operations | CNY5.645 million (US$0.810 million) | CNY6.176 million | Loss per share: CNY0.23 |
| Net cash used in operating activities | CNY3.333 million (US$0.478 million) | CNY7.527 million | Lower cash outflow, primarily from lower professional fees |
| Capital expenditures | CNY5,000 | CNY5,000 | No material capital commitments at year-end |
| Cash and cash equivalents | CNY3.444 million (US$0.495 million) | CNY6.793 million | Decreased CNY3.349 million |
| Total assets | CNY8.298 million | CNY7.743 million | |
| Current liabilities | CNY35.852 million | CNY29.541 million | |
| Working capital | Deficit of CNY28.384 million | Deficit of CNY22.073 million | Current ratio declined to 0.21x from 0.25x |
| Deficiency in assets/equity | CNY27.554 million | CNY21.798 million |
The company had CNY12.174 million of non-interest-bearing, unsecured amounts owed to related-party debtholders at December 31, 2019, consisting primarily of CNY5.077 million owed to Feishang Enterprise and CNY7.097 million owed to Feishang Group. The filing reports no material interest-bearing debt other than CNY803,000 of current lease liabilities.
Material changes versus the prior comparable period
- CHNR generated its first continuing-operation revenue since 2016 through copper ore trading initiated in 2019. Revenue was CNY12.969 million, but the gross margin was only 1.67%.
- Net loss from continuing operations declined 8.6% from CNY6.176 million to CNY5.645 million. Administrative expenses declined from CNY6.207 million to CNY5.814 million.
- Operating cash use declined from CNY7.527 million to CNY3.333 million, but cash fell from CNY6.793 million to CNY3.444 million.
- Current liabilities increased by CNY6.311 million, while the working-capital deficit widened by CNY6.311 million.
- Adoption of IFRS 16 increased 2019 opening assets and liabilities by CNY1.803 million and resulted in CNY1.187 million of right-of-use asset depreciation and CNY60,000 of lease interest expense during 2019.
- Prior-year discontinued operations no longer affected 2019 results. Wuhu Feishang and Double Grow, including the Bolivian copper-smelting business, were disposed of in 2017.
Guidance, outlook, commentary and risks
Management states that current working capital is sufficient for present requirements for the next 12 months, relying on available cash, related-party financing, Cooperation Agreement funding and, if necessary, bank borrowings. Feishang Group and Feishang Enterprise provided letters stating that they will continue financial support, will not demand repayment until the group can settle the amounts without harming liquidity, and that Feishang Enterprise will pay debts on behalf of the group when needed. These support arrangements are important to the going-concern assessment.
The Moruogu Tong exploration permit runs through September 13, 2021. Preliminary work indicates lead and silver, but commercial reserves and economic mineability have not been established. Further exploration, mine development and permitting are expected to require approximately CNY11.40 million. Under the Cooperation Agreement, Bayannaoer Mining generally receives 50% of newly discovered resources from the first 10 cooperative drilling holes and 30% of resources from later drilling, with Jijincheng Mining receiving the balance. Certain terms remain subject to further negotiation.
- Copper ore trading is a new, low-margin business with one current purchaser, no binding supplier agreements and limited operating history.
- Commodity prices, customer demand and profitability may be adversely affected by lead, silver and copper price volatility and COVID-19-related economic disruption.
- COVID-19 restricted employee movement, delayed exploration and disrupted trading, suppliers and customers after year-end; the ultimate financial impact was not quantifiable as of the filing.
- The company depends on related-party financing and has substantial negative working capital and shareholders’ equity deficiency.
- PRC foreign-exchange controls, dividend restrictions, regulatory uncertainty, environmental requirements and the need to obtain future mining rights may limit funding and distributions.
- Mr. Li Feilie beneficially controls approximately 59.33% of the outstanding common shares and also controls major related-party creditors, creating significant concentration and related-party risks.
- The company’s China-based auditor is subject to PCAOB registration but, as discussed in the filing, PCAOB inspection access in China was restricted, creating potential audit oversight and Nasdaq listing risks.
- The company has not determined whether it is or may become a passive foreign investment company for U.S. tax purposes.
Investor verification checklist
- Verify the source, sustainability and collectability of the CNY12.969 million of copper ore revenue, including the single customer, trade receivables and gross-basis revenue presentation.
- Confirm the terms, enforceability, duration and actual availability of related-party financial support and the CNY12.174 million of related-party balances.
- Review the going-concern disclosures, negative working capital, asset deficiency and expected cash requirements over the next 12 months.
- Assess the Moruogu Tong exploration results, reserve methodology, permit renewal status, remaining exploration costs and unresolved Cooperation Agreement terms.
- Monitor COVID-19 effects on copper demand, commodity prices, employee availability, suppliers, customers and access to capital.
- Review PRC currency-control, mining-permit, environmental and dividend-repatriation restrictions.
- Consider control, liquidity and governance risks arising from Mr. Li Feilie’s majority ownership and related-party relationships.
- Confirm that no dividends were declared or paid and that management does not expect distributions from PRC subsidiaries in the foreseeable future.