Cailian News, September 5th (Reporter: Lu Tingting, Xu Xuecheng) Recently, there have been new developments in the control dispute of South Manganese, the leading company in the manganese industry, and its main operating entity, South Manganese Group Co., Ltd. (hereinafter referred to as 'South Manganese Group'), which has attracted industry attention.

After suspending the positions of Zhang He and Xu Xiang, two executives, in South Manganese Group and submitting a complaint letter and related materials to the Hong Kong Stock Exchange and the China Securities Regulatory Commission, South Manganese Group held a briefing on September 2nd, addressed to multiple media outlets, and released a 'Letter to the Public', stating that the major shareholder was irresponsible for South Manganese, resulting in significant losses for the company. The management and all employees of the company will resolutely protect the interests of state-owned shareholders and minority shareholders in accordance with the law.

On September 4th, South Manganese Group released evidence and clues about the relationship between You Fu Investment, Feng Xiang Investment, Zhang He, Xu Xiang, and Ningxia Tianyuan Manganese Industry on its official WeChat account.

The major shareholder of South Manganese, You Fu Investment, also responded by sending a lawyer's letter, appointing an independent third-party institution to investigate the alleged harm to South Manganese Group's interests and employee rights by the relevant parties, and subsequently requesting that a general meeting of South Manganese be held on September 6th, proposing the removal of Li Weijian and Li Junji from their positions in the listed company.

It is reported that among the four executive directors at the center of the control dispute, Li Weijian and Li Junji represent South Manganese Group, while Zhang He and Xu Xiang represent the largest shareholder, You Fu Investment.

However, the current struggle between the two sides seems to be limited to the expulsion of executives, and there are no more substantial actions on the surface. Regarding the progress of the investigation into the alleged harm to South Manganese Group's interests and employee rights by the relevant parties, as well as the proposal for removal by the major shareholder, Cailian News has sent an interview request to the public email address of South Manganese. However, as of the time of writing, no reply has been received.

New developments continue in the control dispute.

South Manganese Group is an old state-owned enterprise and the main operating entity under South Manganese. South Manganese was listed on the Hong Kong Stock Exchange in 2010, with Youfu Investment and Fengxiang Investment currently holding 29% and 5.39% of its shares, respectively, making them the first and third largest shareholders of the company. Guangxi Da Manganese Industry Group Co., Ltd., the second largest shareholder of the company, holds a 22.64% stake and is a wholly-owned subsidiary controlled by the Guangxi State-owned Assets Supervision and Administration Commission.

The power struggle of South Manganese Group began with a report about an abnormal bulk trading contract of manganese ore.

On September 2nd, Pan Junhong, the operation director of South Manganese Group and the deputy director of the employee rights committee, stated at a briefing that in early August, South Manganese Group received a report from the public involving Youfu Investment, Fengxiang Investment, the executive director of the listed company, Zhang He, the director and deputy general manager of South Manganese Group, Xu Xiang, and an external manganese company and related parties.

"These reports exposed the close relationship between Youfu Investment, Fengxiang Investment, Zhang He, Xu Xiang, and a certain manganese company. Under their influence and manipulation, South Manganese Group's subsidiary companies signed multiple bulk trading contracts related to manganese ore with the subsidiary or affiliated units of this manganese company. These contracts have been seriously delayed in delivery, have not fulfilled the contractually agreed prices, and involve unfair related-party transaction behaviors such as buying at a high price and selling at a low price, which have already caused significant losses to the company and face significant risks of large prepayments made to the overseas subsidiary or affiliated companies of this manganese company without receiving the actual goods." Pan Junhong said.

Evidence and clues released by South Manganese Group show that Youfu Investment and Fengxiang Investment are suspected of having concerted action. Youfu Investment and Fengxiang Investment have a relationship with Ningxia Tianyuan Manganese Industry. Zhang He and Xu Xiang have a relationship with Ningxia Tianyuan Manganese Industry. Previously, some media speculated that Ningxia Tianyuan Manganese Industry is the aforementioned "external manganese company."

"In order to defend the legitimate rights and interests of other shareholders and employees, the company's management and all employees will resolutely protect their rights." In a "Letter to the Public," South Manganese Group also called on minority shareholders to actively participate in the upcoming shareholders' meeting and oppose the four proposals raised by the major shareholder Youfu Investment, including the removal of directors and the election of new directors.

In early August, the South Manganese Group's employee representative congress passed a resolution to suspend the positions of executives Zhang He and Xu Xiang. "Suspending the positions of Zhang He and Xu Xiang within the South Manganese Group timely prevented Zhang He and Xu Xiang from continuing to engage in transactions with manganese-related companies at a price that exceeded the contractual price by about 80%, avoiding further losses to the South Manganese Group," said Wang Pingjie, Deputy Director of the South Manganese Group's Rights Protection Committee and Director of the Audit and Inspection Department.

Subsequently, on August 10 and August 12, the South Manganese Group submitted complaint letters and relevant materials regarding the abnormal related transactions to the Hong Kong Stock Exchange and the China Securities Regulatory Commission respectively.

In response to the allegations against Zhang He and Xu Xiang by the South Manganese Group, Youfu Investment first countered with a lawyer's letter, and then requested that a shareholders' meeting be held by South Manganese on September 6 to propose dismissing Li Weijian and Li Junji from their executive director positions in the listed company and no longer holding any positions in the listed company. Public information shows that Li Weijian is the Chairman and General Manager of the South Manganese Group, and also serves as Chairman of the Board of Directors, Executive Director, and Chief Executive Officer of South Manganese.

In response, the South Manganese Group stated, "As of now, Youfu Investment has not provided any detailed reasons or explanations for the proposal to dismiss, and its purpose and motives are highly suspicious."

Abnormal manganese ore trade

The aforementioned abnormal bulk trade of manganese ore, which refers to the previously mentioned Ghana manganese ore trade mentioned in the company's announcement, may involve more details such as Hong Kong Tianyuan.

According to the announcement by South Manganese on March 30 last year, the audit firm Rödl & Partner raised multiple objections and investigation suggestions regarding South Manganese's Ghana manganese ore trading business, including anomalies and customers found in the confirmation letters provided by suppliers, providing further supporting documents to confirm transactions between suppliers and customers, and the commercial basis of the 540 million yuan prepayment made to suppliers as of December 31, 2022.

Affected by this matter, South Manganese's full-year financial report for 2022 encountered difficulties, followed by a trading halt lasting 10 months.

Manganese resources are one of the important strategic minerals, and China is the world's largest consumer and importer of manganese resources, as well as the largest producer of manganese products. As an important part of China's manganese industry, South Manganese Group ranks second in global electrolytic manganese production capacity and first in global electrolytic manganese dioxide production capacity. Its mining industry spans across Guangxi, Guizhou, Gabon and other regions, with Daxin Manganese Mine being the largest known domestic super-large manganese mine in terms of reserves.

According to insiders close to South Manganese Group, the main revenue of listed company South Manganese Industry comes from South Manganese Group. The official website of South Manganese Industry also lists South Manganese Group as one of the main subsidiaries.

According to South Manganese Industry's annual report for 2023, the company's main business is investment and holding, and the main business of its subsidiary companies includes manganese ore mining, ore processing and downstream processing businesses in China and Gabon, as well as trade in ores, manganese alloys and related raw materials.

In recent years, the performance of listed company South Manganese Industry has shown a declining trend. From 2021 to 2023, the company achieved revenues of HKD 12.83 billion, HKD 16.032 billion, and HKD 17.134 billion respectively, and the attributable net profits to shareholders were HKD 455 million, HKD 336 million, and HKD 64.144 million respectively. In the first half of this year, South Manganese Industry's revenue declined by 25.9% YoY to HKD5.733 billion, with a net loss of approximately HKD 163 million.

According to a person in charge of South Manganese Group, in addition to the decline in manganese prices, the loss in the first half of the year was partly due to 'trade-related' losses.

Regarding trade in manganese ore, South Manganese Group issued a statement on its official website on August 9th this year, stating that the Employee Representative Congress has deliberated on the trade cooperation with Hong Kong Tianyuan and other entities, and it requires the immediate termination of all unequal trade cooperation mentioned above. It also demands the recovery or collection of all funds already paid and corresponding value of ores, as well as the claim for compensation, responsibility for breach of contract, etc., in connection with the trades in Ghana ore and Australian ore.

'Currently, we have sent a letter to the counterparty involved in the relevant ore trade, demanding that they fulfill their contractual obligations or refund the prepayment and bear the liability for damages. Based on the whistleblower's clues and preliminary investigations, we submitted complaints and related materials to the Hong Kong Stock Exchange and the China Securities Regulatory Commission on August 10th and August 12th respectively. The listed company received inquiries from the Stock Exchange on the relevant issues on August 27th.' said Pan Junhong at the briefing.

Regarding the 'certain manganese company' mentioned in the related party transaction, Ningxia's former richest person Jia Tian's Ningxia Tianyuan Manganese Industry Group Co., Ltd. (referred to as 'Tianyuan Manganese Industry') has been the subject of market speculation. Media reports indicate that Hong Kong Tianyuan is an affiliated company of Tianyuan Manganese Industry.

However, Tianyuan Manganese, a globally renowned electrolytic metal manganese producer, filed for bankruptcy reorganization in September 2023 due to its inability to repay maturing debt and obvious lack of solvency. Data shows that as of the end of December 2022, its total assets were 142.884 billion yuan, total liabilities were 118.421 billion yuan, and secured liabilities were 36.143 billion yuan, resulting in insolvency.

According to the relevant person in charge of South Manganese Group, "The parties involved in the related transactions, including Zhang He, Xu Xiang, and an external manganese company, as well as Youfu Investment and Fengxiang Investment, have extremely close relationships. Relevant evidence has been reported to the relevant regulatory authorities. As for whether the manganese company is Ningxia Tianyuan Manganese Group or not, it is not convenient to answer due to information disclosure."

It is worth noting that if the motion to dismiss Li Weijian and Li Jun's positions as directors of the listed company is approved at the special shareholders' meeting tomorrow, the decision-making power of South Manganese Group as a subsidiary at the listed company level will be further weakened.