Business Context and Reporting Period
China Natural Resources, Inc. (CHNR) filed its annual Form 20-F for the fiscal year ended December 31, 2022. The filing is not a quarterly report; “2022 Q4” corresponds to the year-end reporting period. CHNR is a British Virgin Islands holding company whose operations are conducted primarily through subsidiaries in mainland China. Its reportable segments are rural wastewater treatment and exploration and mining. The financial statements are prepared under IFRS as issued by the IASB and presented in Chinese yuan (CNY).
Current operations consist principally of wastewater-treatment equipment, engineering, procurement and construction (EPC) services, and operation services through Shanghai Onway, in which CHNR owns 51%, together with exploration activities at the Moruogu Tong Mine in Inner Mongolia. Copper-ore trading was discontinued in 2020.
Financial Highlights
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | CNY20.31 million (US$2.94 million) | CNY18.74 million | Up 8.4% |
| Gross profit | CNY5.82 million | CNY0.24 million | Improved |
| Gross margin | 28.7% | 1.3% | Improved |
| Operating loss | CNY30.72 million (US$4.45 million) | CNY23.73 million | Loss widened 29.5% |
| Loss before tax | CNY16.43 million | CNY52.84 million | Loss narrowed |
| Net loss | CNY22.30 million (US$3.23 million) | CNY54.97 million | Loss narrowed 59.4% |
| Loss attributable to CHNR owners | CNY24.62 million (US$3.57 million) | CNY48.15 million | Loss narrowed |
| Basic and diluted loss per share | CNY3.00 loss (US$0.44 loss) | CNY5.91 loss | Improved |
Revenue was generated entirely by the wastewater-treatment segment in 2022. Construction contract revenue was CNY14.63 million, wastewater-equipment sales were CNY0.16 million, and Wujiang service-concession operation revenue was CNY5.51 million. The exploration and mining segment generated no revenue.
Approximate 2022 margins were a 28.7% gross margin, a negative 151.3% operating margin, and a negative 109.8% net margin. Administrative expenses increased to CNY36.75 million, principally because of CNY16.15 million of share-based compensation associated with options granted to consultants.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents declined from CNY58.36 million at December 31, 2021 to CNY31.70 million at December 31, 2022, or approximately US$4.60 million.
- Operating cash flow was negative CNY12.79 million, compared with negative CNY12.07 million in 2021.
- Investing cash flow was positive CNY7.05 million, primarily reflecting interest received on a loan to Shenzhen Chaopeng.
- Financing cash flow was negative CNY22.83 million, principally reflecting repayments to related parties and repayment of bank debt.
- Total assets were CNY319.99 million, total liabilities were CNY142.54 million, and total equity was CNY177.45 million at year-end.
- Interest-bearing bank debt totaled CNY74.00 million, consisting of a secured and guaranteed Bank of Communications loan at a fixed 5.05% rate. The loan is scheduled to mature in 2038, with CNY3.00 million due in 2023.
- Contractual obligations included CNY106.93 million of undiscounted long-term debt payments and CNY3.32 million of lease payments.
- Trade receivables were CNY57.28 million, including CNY20.47 million aged over three years, net of a CNY13.63 million expected-credit-loss allowance. Contract assets were CNY111.36 million, net of a CNY0.73 million allowance.
- The company reported a 30.24% gearing ratio at December 31, 2022, compared with 30.31% in 2021.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly as progress on construction projects commenced in prior years was recognized, despite COVID-19-related delays and restrictions.
- Gross profit improved substantially because cost of sales declined to CNY14.49 million from CNY18.49 million, while revenue increased.
- Operating loss worsened because administrative expenses increased by CNY13.88 million, mainly due to the consultant option awards.
- Net loss improved primarily because the 2021 CNY38.35 million fair-value loss on financial instruments did not recur; 2022 included a CNY1.01 million fair-value gain.
- Expected-credit-loss accounting shifted from a CNY3.33 million impairment loss in 2021 to a CNY1.07 million net reversal in 2022, although CNY2.75 million of impairment was recognized on other receivables.
- Shanghai Onway Group reported CNY4.80 million of profit in 2022 before consolidation and non-controlling interests, compared with losses in 2021. The 49% non-controlling interest received CNY2.33 million of allocated profit.
- In June 2022, flooding partially destroyed infrastructure associated with the Wujiang service concession. CHNR recorded a CNY0.49 million provision for repairs expected in 2023.
Outlook, Transactions, Risks and Unusual Items
Management expects continuing operating losses and declining availability of internally generated funds because the wastewater business remains loss-making at the consolidated level and the Moruogu Tong Mine remains pre-revenue. Management states that current working capital is sufficient for existing operations for the next 12 months, supported by letters from Feishang Group and Feishang Enterprise committing continuing financial support and deferring repayment of amounts owed to them until liquidity permits.
After year-end, CHNR entered into an agreement to acquire Williams Minerals, which holds the mining permit for a Zimbabwean lithium mine. Maximum consideration is approximately US$1.75 billion, based on an estimated 3.5 million tons of lithium oxide priced at US$500 per ton. The company does not have sufficient cash to fund the purchase consideration and expects to use promissory notes and potentially issue restricted shares. CHNR issued a US$35 million promissory note deposit on April 14, 2023. Closing and regional transfer of legal possession remain conditional on independent technical reports, resource quantities, ownership transfers and full settlement of consideration. The transaction may not close, may close on different terms, or may require substantial dilution and additional financing.
- COVID-19 restrictions delayed projects, disrupted supply chains and limited marketing activities in 2022. The PRC ended its zero-COVID policy in December 2022, but future outbreaks remain a risk.
- The wastewater business depends heavily on local-government budgets, policy support and timely customer payments. Fixed-price EPC contracts expose CHNR to cost overruns, labor shortages, supply disruptions and environmental liabilities.
- The Moruogu Tong Mine remains exploratory. CHNR has not produced lead, silver or copper, may not obtain a mining permit, and its economic resource estimates may not be commercially viable. Under the exploration cooperation agreement, CHNR’s interest in newly discovered northern resources may be limited to 50% for the first 10 holes and 30% thereafter.
- CHNR is exposed to PRC regulatory, foreign-exchange, cybersecurity, data-security and capital-transfer restrictions. PRC subsidiaries may be unable to remit cash or dividends to the BVI parent.
- The company was identified as an HFCAA Commission-Identified Issuer in 2022, but the PCAOB vacated its China and Hong Kong inspection determination in December 2022. Future loss of PCAOB access could again create trading-prohibition or delisting risk.
- Potential dilution is significant. Before the April 2023 share combination, up to 1.98 million shares were issuable under investor and placement-agent warrants and up to 8.10 million shares under consultant options. The five-to-one share combination reduced the adjusted option and warrant quantities and increased exercise prices proportionately.
- CHNR has not paid dividends and does not plan to pay dividends in the foreseeable future. The controlling shareholder, Li Feilie, beneficially owns approximately 65.5% of the post-combination shares and controls the company through share ownership and related-party financing.
Important Facts for Investors to Verify
- Verify the final status, independent technical reports, financing, consideration, dilution and closing conditions of the Zimbabwe lithium acquisition.
- Assess whether the company can fund ongoing losses and the proposed acquisition without relying excessively on related-party support, promissory notes or discounted equity issuance.
- Review the aging and collectability of CNY57.28 million of trade receivables and CNY111.36 million of contract assets, including the material balances owed by government-related customers.
- Reconcile the secured CNY74.00 million bank loan, collateral package, guarantees, repayment schedule and compliance with covenants.
- Evaluate the economic assumptions, repair requirements and long-term cash-collection profile of the 28-year Wujiang service concession.
- Review the terms and fairness of related-party transactions, including financial support, shareholder debt, the PST Technology acquisition and the proposed lithium acquisition.
- Confirm the post-combination share count, public float, outstanding options and warrants, and the resulting potential dilution.
- Monitor PRC regulatory developments, foreign-exchange restrictions, CSRC filing requirements, cybersecurity rules and PCAOB inspection status.