China Natural Resources, Inc. — 2020 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2020; the filing is an annual Form 20-F rather than a quarterly filing. Financial statements are prepared under IFRS in Chinese yuan (CNY); U.S. dollar amounts are convenience translations at CNY6.5306 per US$1.
Business context
CHNR is a British Virgin Islands holding company whose current operating activity is exploration for lead, silver and other metals at the Moruogu Tong Mine in Inner Mongolia. The mine remains in the exploration stage and has not produced minerals. The company’s copper ore trading business, its only revenue-generating activity, was discontinued in the second half of 2020 because of copper-price volatility. CHNR is also evaluating strategic investments, including potential opportunities in China’s healthcare sector.
At December 31, 2020, CHNR had 33,988,082 common shares outstanding and was listed on the Nasdaq Capital Market under “CHNR.”
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | CNY6.867 million (US$1.052 million) | CNY12.969 million | Down 47.0% |
| Gross profit | CNY13,591 | CNY217,000 | Material decrease |
| Gross margin | 0.20% | Approximately 1.7% | Down approximately 1.5 percentage points |
| Operating loss | CNY7.129 million (US$1.091 million) | CNY5.599 million | Loss increased |
| Profit/(loss) attributable to shareholders | CNY25.579 million (US$3.918 million) | Loss of CNY5.645 million | Turnaround driven by non-operating items |
| Basic and diluted EPS | CNY0.90 (US$0.14) | Loss per share of CNY0.23 | Turnaround |
| Net cash used in operating activities | CNY4.561 million (US$696,000) | CNY3.333 million | Higher cash outflow |
| Cash and cash equivalents at year-end | CNY2.450 million (US$375,000) | CNY3.444 million | Down CNY994,000 |
- The CNY31.334 million fair-value gain on CHNR’s FARL investment was the primary driver of the reported profit. This gain was non-cash and arose from the acquisition and subsequent revaluation of 120 million FARL shares.
- Income tax benefit was CNY1.416 million, consisting principally of a CNY6.586 million reversal of a prior withholding-tax provision, partly offset by CNY5.170 million of deferred tax expense related to the FARL fair-value increase.
- Administrative expenses increased to CNY7.140 million from CNY5.814 million, primarily because of professional fees related to the FARL transaction.
- Total assets increased to CNY142.428 million from CNY8.298 million, largely reflecting the CNY138.674 million fair value of the FARL shares.
- Total equity improved to CNY101.202 million from an equity deficiency of CNY27.554 million. Accumulated losses remained substantial at CNY1.003 billion.
- The company reported no outstanding interest-bearing borrowings apart from lease liabilities. Year-end lease liabilities totaled CNY1.092 million, while amounts due to related parties and the shareholder totaled CNY9.158 million and CNY7.149 million, respectively.
Liquidity, cash flow and capital resources
CHNR’s current ratio improved to 4.57x from 0.21x, and working capital increased to CNY110.276 million from a deficit of CNY28.384 million. These improvements primarily reflect the FARL investment rather than operating cash generation. Cash declined during 2020 because operating activities consumed CNY4.561 million and capital expenditures consumed CNY8,600; financing activities provided CNY3.283 million.
Management stated that working capital was sufficient to continue current operations for the next 12 months, but the company expects to pursue additional capital raising as it evaluates healthcare opportunities and other strategic alternatives. Continued support is expected from Feishang Group and Feishang Enterprise through interest-free loans and commitments not to demand repayment until repayment would not adversely affect liquidity.
Contractual obligations at year-end consisted principally of CNY1.092 million of lease liabilities, including CNY745,000 due within one year and CNY347,000 due in one to three years. The filing reports no material off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue fell by CNY6.102 million as copper ore trading was curtailed and then discontinued.
- Operating losses widened despite lower revenue because administrative expenses increased.
- Reported net income changed from a CNY5.645 million loss to CNY25.579 million profit, but the improvement was primarily attributable to the FARL fair-value gain and tax benefit rather than operating performance.
- In August 2020, CHNR issued 9,077,166 shares to Feishang Group in exchange for 120 million FARL shares, representing approximately 8.7% of FARL.
- In January 2021, after year-end, CHNR sold 3,960,000 common shares at US$1.85 per share and issued warrants initially exercisable for 1,584,000 shares at US$2.35 per share. Gross proceeds were approximately US$7.3 million before offering expenses.
Outlook, commentary and principal risks
- Mining: The Moruogu Tong exploration program identified lead and silver indications, but commercial viability, recoverable reserves and the ability to obtain a mining permit remain unproven. The exploration permit was scheduled to expire in September 2021 and required renewal.
- Funding: Further exploration and work associated with applying for mining rights was estimated at approximately CNY11.38 million. Funding is expected from the cooperation agreement with Jijincheng Mining, potential new partners and related-party loans.
- Cooperation economics: Under the cooperation agreement, CHNR receives 50% of resources discovered in the first 10 drilling holes and 30% of resources discovered beyond those holes; further allocation and distribution terms remain subject to negotiation.
- Strategic pivot: Management is considering healthcare and other sectors, but the filing provides no committed acquisition target, transaction timetable or financial guidance. Management acknowledges limited experience in healthcare acquisitions.
- COVID-19: Pandemic-related restrictions disrupted employees, exploration activities, suppliers and market demand, and could continue to affect commodity prices, operations and access to capital.
- Investment concentration: Approximately 97% of year-end current assets consisted of the FARL investment, exposing results and liquidity to the market price and liquidity of a single listed equity investment. A 10% change in fair value was estimated to affect net income by approximately CNY11.58 million after tax.
- Related-party dependence and governance: The company relies significantly on financial support from affiliates controlled by its principal shareholder, who beneficially owned approximately 63% of CHNR after the January 2021 offering. Related-party transactions are not required to receive the same independent review applicable to many U.S. issuers.
- Listing and audit risks: The company’s auditor is located in China, where PCAOB inspections were unavailable at the filing date. The filing discusses potential consequences under the Holding Foreign Companies Accountable Act, including possible trading prohibition or delisting if applicable conditions persist.
- Investment-company and tax risks: CHNR stated that it became an inadvertent investment company after acquiring the FARL shares and had until August 17, 2021 to cease being treated as one. The company had not determined whether it was or would become a passive foreign investment company for U.S. tax purposes.
Important facts investors should verify
- Whether the Moruogu Tong exploration permit was renewed and whether the company obtained mining rights or confirmed commercially recoverable reserves.
- Whether CHNR has generated any operating revenue after discontinuing copper ore trading.
- The current market value, liquidity, ownership restrictions and subsequent price performance of the FARL investment.
- The amount and terms of continuing related-party financial support, including whether any amounts became payable or were demanded.
- The use of proceeds and remaining cash from the January 2021 equity and warrant financing, including potential dilution from warrants.
- Whether CHNR resolved its investment-company status by the stated August 17, 2021 deadline and whether any Nasdaq or SEC compliance issues arose.
- The company’s current PFIC status and the applicability of U.S. tax reporting consequences to individual investors.