Financial Services Association, May 19 (Reporter Wang Bin) As competition for rare earth resources intensifies, Shenghe Resources (600392.SH) continues to increase overseas resources and expand the mining industry overseas despite losing performance in Q1 this year, further guaranteeing the company's raw material supply and improving its “sense of security.”

It is worth noting that the target company Strandline Resources UK Limited (“SRUL Company”) had zero revenue last year and a net profit loss of 1,288,800 yuan, but this transaction gave a high premium.

Other than that, the announcement did not mention the performance impact of this investment. On the contrary, Shenghe Resources reminded investors in the announcement that the heavy sand mines involved in this project include resources such as zirconium, titanium, and rare earths. Prices of related products have fluctuated greatly in recent years, and fluctuations in product prices will directly affect the earnings situation after such projects are put into operation.

Last year's revenue was 0, and the value-added rate exceeded 35 times

Tonight, Shenghe Resources announced that its wholly-owned subsidiary Ganzhou Chenguang Rare Earth New Materials Co., Ltd. (“Chenguang Rare Earth”) intends to acquire 100% of the shares of SRUL, a wholly-owned subsidiary of the Australian listed company Strandline Resources Limited (Stock Code: STA, “STA Company”), and then indirectly hold interests in four heavy sand mining projects in Tanzania.

According to the announcement, the acquisition of Chenguang Rare Earths will pay the full transaction price of 43 million Australian dollars (approximately RMB 208 million according to the exchange rate on the day of the announcement), of which 27.1801 million Australian dollars will be used to acquire 100% of SRUL's shares, and the remaining 158.19,900 Australian dollars will be used to cover loans provided by STA for its Tanzania project.

According to the announcement, SRUL holds 84% of the shares in Nyati Mineral Sands Limited (“Niati”) (the other 16% is held by the Tanzanian government and cannot be diluted), and holds four heavy sand mining projects including Fungoni, Tajiri, Sudi, and Bagamoyo in Tanzania through Niati. Among them, the Fungoni and Tajiri projects have obtained mining licenses, while the Sudi and Bagamoyo projects are in the exploration phase.

According to the announcement, the Fungoni project is located about 25 kilometers from Dar es Salaam Port in Tanzania. It has a JORC standard ore resource volume of 22 million tons, an average heavy mineral level of 2.8% (of which 41% was discovered and 59% controlled), an ore reserve of 12.3 million tons, and an average heavy mineral grade of 3.9%; the Tajiri project is located in northern Tanzania and has a JORC standard ore resource volume of 268 million tons and an average grade of heavy minerals 3.3%.

It is worth noting that as of the end of 2023, SRUL's net assets belonging to shareholders of the parent company were 7,515.6 million yuan. Last year, the company's revenue was 0, net profit loss was 1,288,800 yuan, total equity book value of the company's shareholders was 7,515.6 million yuan, assessed value of 277 million yuan, assessed value added of 269 million yuan, and a value-added rate of 3581.37%.

Shenghe Resources said that the implementation of this project will help expand the company's heavy sand ore resource channels, guarantee the company's raw material supply, and optimize the company's global business layout.

Although SRUL's mining resource endowment is good, this acquisition is not without risk.

According to the announcement, the transaction may face transaction review by the host country government supervisory authority, and there is some uncertainty about whether the relevant filing, registration and approval can be successfully obtained; in addition, if the relevant laws and regulations of the host country change in the future that are not conducive to this project, it may affect the implementation and benefits of this project.

At the same time, although two heavy sand mines under SRUL have obtained mining licenses, FungOni and Tajiri, subsequent mining still requires continuous capital injection, which is undoubtedly a challenge for Shenghe Resources, which is already at a loss. According to financial reports, Q1's net operating cash flow this year was -403 million yuan, which is in a state of “blood loss”.

Expansion at a loss

As an important strategic resource, rare earths are widely used in fields such as new energy, new materials, energy saving and environmental protection, aerospace, military industry, electronic information, etc. Major countries around the world are paying more and more attention to the rare earth industry, and the rare earth industry chain has received great attention and the pace of development is accelerating.

Due to the non-renewable scarcity of rare earths, China has implemented mandatory plans for the extraction, smelting and separation of rare earth resources in recent years. According to the “Notice on Total Control Indicators for Rare Earth Mining, Smelting, and Separation in 2024” issued by the Ministry of Industry and Information Technology and the Ministry of Natural Resources, the first batch of rare earth mining and smelting indicators this year were all “flowered” by China Rare Earth Group and Northern Rare Earth (600111.SH) companies. Of these, all medium and heavy rare earth mining indicators were obtained by the China Rare Earth Group.

In this context, Shenghe Resources obtained resources everywhere and focused on “going out to sea.”

In fact, obtaining overseas resources has always been Shenghe Resources' strategy. As a unique mixed ownership listed company in the domestic rare earth industry, it is also one of the few rare earth companies in China integrating the North and South (light and heavy) rare earth businesses. The rare earth resources obtained by Shenghe Resources from overseas are not within the scope of domestic “indicators”. According to reports, currently about 80% of the company's rare earth mines come from overseas.

Shenghe Resources is mainly engaged in rare earth ore mining, smelting and separation, metal processing, rare earth waste recycling, and zirconium-titanium ore beneficiation. The company also entered the zirconium-titanium ore processing business because it is interested in rare earth monazite resources in seaside sand.

At present, Shenghe Resources' rare earth business has formed a relatively complete industrial chain from mineral processing, smelting and separation to deep processing, and has achieved a dual layout at home and abroad. According to the 2023 report, the company has signed long-term rare earth concentrate supply agreements with Sichuan Heji Mining, American Mountain Pass (hereinafter referred to as “MP Company”), and Peak Rare Earth Company, etc., and has established diversified rare earth concentrate supply channels.

In 2017, Shenghe Resources participated in the US Rare Earth Mining MP Company and underwrote major rare earth products such as rare earth concentrates. According to data, the US MP has rare earth ore reserves of 14.65 million tons, and the total amount of REO is about 1.15 million tons. The average grade is 7.8%, and the annual output is 40,000 tons of rare earth concentrate, which is underwritten by Shenghe Resources.

In addition to the 40,000 tons underwritten overseas mentioned above, Shenghe Resources has taken a stake in Mianli Rare Earth and Zhongxu (Shandong) Rare Earth Development Co., Ltd. in China, and the participating mining companies operate according to a market-based approach. In addition, the company also participated in the Australian ETM Company, Peak Rare Earth Company, and Important Metals Company, and became its largest shareholder or important shareholder.

Shenghe Resources once said that in recent years, under the guidance of the national industrial policy, the company has implemented an active industrial merger and acquisition strategy around the upstream and downstream of the rare earth industry chain, and used its superior technology and experience within the rare earth industry to find resources related to rare earths at home and abroad.

However, due to the downturn in the rare earth industry for the past two years, Shenghe Resources, which has been expanding through mergers and acquisitions, has not been able to break out of the independent market. The 2023 financial report shows that the company's net profit fell by about 80% year on year last year; in the first quarter of this year, the company lost 216 million yuan in net profit.