Business Context and Reporting Period
China Natural Resources, Inc. filed its Form 20-F for the fiscal year ended December 31, 2021. The filing is an annual report rather than a quarterly filing; the supplied period reference to “2021 Q4” corresponds to the year-end reporting period.
CHNR is a British Virgin Islands holding company whose operating subsidiaries are located primarily in mainland China and Hong Kong. Its principal activities are rural wastewater treatment and EPC/PPP services through Shanghai Onway, and lead, silver and other metals exploration in Inner Mongolia. Copper ore trading ceased in the second half of 2020.
Financial statements are prepared under IFRS as issued by the IASB and presented in Chinese yuan. U.S. dollar amounts are convenience translations at CNY6.3559 per US$1.
Key Financial Metrics
| Metric | 2021 | 2020, as adjusted |
|---|---|---|
| Revenue | CNY18.735 million (US$2.948 million) | CNY42.498 million |
| Gross profit | CNY0.241 million | CNY3.283 million |
| Gross margin | Approximately 1.3% | Approximately 7.7% |
| Operating loss | CNY23.733 million (US$3.734 million) | CNY14.712 million |
| Operating margin | Approximately negative 126.7% | Approximately negative 34.6% |
| Loss before tax | CNY52.836 million (US$8.313 million) | Profit of CNY24.179 million |
| Net loss | CNY54.971 million (US$8.649 million) | Net profit of CNY22.921 million |
| Loss attributable to CHNR owners | CNY48.152 million (US$7.576 million) | Profit of CNY24.336 million |
| Basic and diluted loss per share | CNY1.18 loss (US$0.19 loss) | CNY0.78 earnings |
| Operating cash flow | Use of CNY12.068 million | Use of CNY46.526 million |
| Cash and cash equivalents | CNY58.359 million (US$9.182 million) | CNY56.580 million |
| Total assets | CNY333.448 million | CNY530.056 million |
| Total liabilities | CNY151.411 million | CNY238.257 million |
| Total equity | CNY182.037 million | CNY291.799 million |
Revenue consisted of CNY12.203 million from construction contracts, CNY0.183 million from operation and maintenance services, CNY5.953 million from service-concession operation services, and CNY0.396 million from service-concession construction services. No mining or copper-trading revenue was reported in 2021.
Finance income was CNY16.935 million, compared with CNY15.468 million in 2020, while finance costs increased to CNY4.359 million from CNY3.749 million. The 2021 results included a CNY38.349 million net fair-value loss on financial instruments, primarily reflecting the FARL shares and warrants.
Liquidity, Debt and Capital Resources
- Cash increased modestly from CNY56.580 million to CNY58.359 million despite the net loss.
- Cash used in operating activities was CNY12.068 million. Investing activities generated CNY53.352 million, primarily from repayments of related-party loans, while financing activities used CNY38.786 million.
- Interest-bearing bank debt totaled CNY77.000 million at year-end, including CNY3.000 million classified as current and CNY74.000 million as non-current. The loan bears fixed interest of 5.05% and matures through 2038.
- The bank loan is secured by service-concession collection rights, contract assets, intangible assets, trade receivables and an 80% equity interest in Shaoguan Angrui; it is also guaranteed by Shanghai Onway and Feishang Enterprise.
- Contractual undiscounted obligations totaled CNY116.214 million, including CNY113.813 million of long-term debt obligations and CNY2.401 million of lease liabilities.
- Management stated that working capital should be sufficient for current operations over the next 12 months and cited continuing financial support letters from Feishang Group and Feishang Enterprise. This support is related-party support rather than independently committed financing.
Material Changes Versus the Prior Comparable Period
- Revenue declined 55.9% to CNY18.735 million, mainly because the construction phase of the Wujiang Project was completed in January 2021 and copper ore trading had ceased.
- Gross profit fell to CNY0.241 million from CNY3.283 million, and gross margin contracted substantially.
- Administrative expenses rose 21.3% to CNY22.869 million, primarily due to professional fees related to the January 2021 offering and July 2021 PST Technology acquisition.
- Operating loss widened from CNY14.712 million to CNY23.733 million. CHNR reported operating losses in each of 2019, 2020 and 2021.
- The prior-year CNY31.334 million fair-value gain became a CNY38.349 million loss in 2021, causing the company to move from a CNY22.921 million net profit to a CNY54.971 million net loss.
- CHNR acquired PST Technology in July 2021 in a common-control transaction. Consideration included three million restricted CHNR shares, 120 million FARL shares and approximately CNY10.3 million in cash. PST Technology owns 51% of Shanghai Onway.
- Because the acquisition was accounted for using the pooling-of-interests method, prior periods were restated as though PST Technology had been part of the group during those periods.
- CHNR issued 3.96 million common shares in January 2021 at US$1.85 per share and issued warrants exercisable for up to 1.98 million shares at an initial exercise price of US$2.35 per share, creating potential dilution.
- Total assets and total equity declined materially from 2020, partly reflecting the disposal of FARL shares, the related fair-value effects and the year’s comprehensive loss.
Guidance, Outlook, Commentary and Risks
- Management is pursuing rural wastewater treatment and environmental-protection opportunities while continuing exploration at the Moruogu Tong Mine and evaluating potential healthcare and other non-natural-resource investments.
- Shanghai Onway has undertaken 236 EPC projects since inception, with 10 projects in progress as of the filing date. The business is exposed to fixed-price contract overruns, supply-chain disruption, labor costs, delayed government payments and changing environmental standards.
- The Wujiang Project operates under a 30-year service concession. Its construction phase is complete, and the company expects long-term collections and operating revenue, but the associated receivables and contract assets are subject to credit and collection risk.
- The Moruogu Tong Mine remains in the exploration stage and has not produced lead, silver or copper. The current exploration permit runs through September 2026, but a mining permit has not been obtained and commercial production is uncertain.
- Under the exploration cooperation agreement, CHNR’s interest in newly discovered resources is generally 50% for the first 10 drilling holes and 30% for later drilling, with the remaining interest allocated to Jijincheng Mining. Certain allocation and distribution terms remain subject to negotiation.
- Further exploration and mine-permit-related expenditures were estimated at approximately CNY11.38 million for the northern area and approximately CNY2.16 million for planned southern-area drilling.
- The company reported that COVID-19 restrictions in early 2022 disrupted personnel movement, materials transportation, construction projects and market expansion. Management stated that these disruptions would lead to a significant reduction in first-quarter 2022 revenue.
- Major risks include continuing operating losses, dependence on related-party financial support, PRC regulatory and foreign-exchange controls, government policy changes, customer concentration and delayed payments, environmental liabilities, commodity-price volatility, and uncertainty over future mining rights.
- The PCAOB reported that it was unable to inspect or fully investigate the company’s China-based auditor. The filing warned of potential trading restrictions or delisting under the Holding Foreign Companies Accountable Act if inspection restrictions continued.
- The company has not paid dividends and does not expect to pay dividends in the foreseeable future. As of year-end, CNY178.394 million of restricted capital and reserves were unavailable for distribution.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021. The independent auditor was not required to provide a Section 404(b) attestation because CHNR is a non-accelerated filer.
Most Important Facts for Investors to Verify
- Whether Shanghai Onway can restore revenue growth and generate positive operating cash flow after the completion of the Wujiang construction phase.
- The collectability and aging of CNY51.027 million of net trade receivables and CNY106.366 million of net contract assets, including the related expected-credit-loss allowances.
- The availability, duration and enforceability of the promised related-party financial support, and the terms and repayment expectations for related-party balances.
- Compliance with the secured bank loan covenants and the company’s ability to fund annual debt repayments through 2038.
- Progress toward obtaining a mining rights permit, further exploration results and the final economic viability of the Moruogu Tong Mine.
- The impact of COVID-19-related disruptions and other PRC policy changes on 2022 project execution and revenue.
- The potential dilution from warrants exercisable for up to 1.98 million shares and any additional equity financing.
- The status of PCAOB inspection access, HFCAA identification and continued Nasdaq listing eligibility.
- The final terms and economic allocation of resources under the Moruogu Tong cooperation agreement.