On June 8th, Caixin reported (Reporter Liang Xiangcai) that the "short squeeze" in mid-May brought Luoyang Molybdenum Company's (603993.SH) trading team, IXM, into the spotlight. At the shareholders' meeting held in Luoyang yesterday, the most frequently asked question by investors was still about the trading business sector, and the company's chairman, Yuan Honglin, answered each of them.

"I also understand the concern of the shareholders. I would like to explain on behalf of the board of directors and management. The market has misunderstood this matter. IXM does not engage in unilateral business, and all spot trades need to be hedged through futures to avoid any net exposure to market risks. This strategy is entirely based on the need for hedging, which is different from pure speculation. We always place risk control as our top priority for our trading companies, rather than blindly pursuing revenue and short-term profit." Yuan Honglin said this in response to many shareholders who raised concerns about the "short squeeze".

Regarding the evaluation and risk control, Yuan Honglin said that IXM's team is evaluated based on the quality of its spot trading volume to avoid taking profit as the main consideration, which may pose risks in the short term. In addition, he is also the chairman of IXM's risk management committee, with veto power over specific risk control. at the same time, IXM itself has a very sophisticated risk control mechanism that can effectively resist various risks, including market risk and liquidity risk, which is also one of the key points that Luoyang Molybdenum attached great importance to when it acquired it years ago.

Regarding the incentive plan for IXM, Yuan Honglin said that the core of trading is people, and it requires an effective and scientific incentive mechanism to manage, retain and motivate them. After acquiring IXM, a globally common incentive method is currently being used: after deducting various risk reserves, shareholder returns, etc., the remaining profits are used to provide bonuses to the trading team based on a certain percentage. At the same time, the company will adopt a deferred payment method of 2-4 years according to the amount of bonuses, which can better ensure that the trading team shares both the benefits and risks with the company and will also make relevant adjustments as business develops in the future.

In mid-May, the market rumored that Luoyang Molybdenum's wholly-owned trading subsidiary, IXM, was trapped in a short squeeze due to holding too many short positions at COMEX copper price. On May 16th, Luoyang Molybdenum closed down about 5%, and the company announced emergency clarifications in WeChat official account and A-share market that those short positions were mainly for hedging risks, not for speculation, and the risks were entirely controllable.

At the meeting, some shareholders expressed doubts about the large volume of trading business but not earning much money and asked Yuan Honglin to explain the value of this business in the long run.

He said that except for copper, the company's metal products product line does not have a transparent futures trading market for other small metal varieties. Previously, the company's supply of cobalt, molybdenum, tungsten and other metals ranked among the top in the world but could not deeply participate in their price formation mechanism and was a passive acceptor of prices in the long term. The company hopes to use the introduction of IXM to deeply connect with downstream customers and gradually increase their say in related pricing. In addition, the sales pace is more autonomous, and "one person's good sales performance can earn more than thousands of workers at the mining end in one or two months."

Yuan Honglin added that as a globally renowned non-ferrous metal trader, IXM can help Luoyang Molybdenum better engage with international capital, sit at the "main table" of the international non-ferrous metal industry and expand Luoyang Molybdenum's brand influence globally.

In terms of the performance of mineral trading, the revenue from 2021 to 2023 accounts for about 90% of the company's total revenue, and the overall gross margin is between 1% and 4%, which is far from the gross margin of about 40% in the same period for mining and processing business. A person in charge of Luoyang Molybdenum told Caixin that the lower gross margin is due to the business characteristics of the trading company, but the return on net assets is not low.

It is reported that IXM, as a subsidiary of Luoyang Molybdenum Group, is the third-largest non-ferrous metal trader in the world. Founded in 2005, its headquarters is located in Geneva, Switzerland. Its main business scope is integrated trading of non-ferrous metals and their minerals. In July 2019, Luoyang Molybdenum successfully acquired and completed the delivery of IXM.