EXTRA: RareX And Shenghe Resources (A Non-S.O.E.?)
2021 Rare Earth Feb 10
On February 4 RareX broke the news of a non-binding memorandum of understanding with China’s Shenghe Resources, to establish a joint trading company for rare earth raw material purchase, 51% held by the Chinese state-owned company, the rest with RareX.
Generally, excitment about the non-binding expression of intent was limited, with the headline China rare earth dominance gets boost as RareX signs ties with Shenghe Resourcesmaking the rounds.
While RareX share price rose from their current year low by AU$ 0.02, the bottom fell out under the Shenghe share price, which dropped the daily limit of 10% the following day, more than any other China rare earth stock, and now it is on the rise again (Shenghe will have a boon from mark-to-market of its MP Materials shares).
But actually in China Shenghe has not yet announced the non-binding intention with RareX.
Shenghe Resources CEO Huang Ping at an analyst meeting on January 29, 2021. According to recent market announcement, Huang and his company Woben Resources jointly hold 7.3086% of Shenghe’s shares.
What may be the purpose of Shenghe, to show non-binding intent with a somewhat unlikely partner?
Among all ASX listed junior RE miners with assets in Australia, RareX has the lowest market cap, it is the cheapest. There is also no impending likelihood of a sudden breakout of the share price, given the status of RareX projects. An added plus could be RareX forthcoming purchase of Noble’s Canada Rare Earth shares.
On top of that, Shenghe need to cooperate with someone, who doesn’t mind getting tared, feathered and flogged at Perth’s War Memorial for being unpatriotic.
Australia-China relations are at an all time low. Australia is part of the 5-Eyes Alliance’s crusade against all things China, and China is lashing out at Australia on every opportunity, never mind China’s record imports of Australian iron ore and Australian wheat.
With Canada out of the picture owing to an even lower state of relations, because Canada still holds Huawei’s heiress to the throne on behalf of the US (for a suspected offense, that no individual manager in history has ever been held accountable for, only the offending companies), while China holds 2 Canadian researchers hostage (for equally flimsy reasons), in terms of fastest to market Australia is and remains the most important option for China in rare earth.
And China needs new supplies of rare-earth-bearing ore, a lot of it and that real soon. So they reckon if they explore themselves, without financial constraints and related need for documentation and other shareholder niceties, they can be faster than anyone else out there. Case at hand: Myanmar.
Adding on rare earth to China’s Australia-dependencies may also be a controversial subject in Beijing.
But in a situation, when even Amazonas fish-mongers dig for monazite to feed China’s appetite (seriously, we received such offer), there might not be too many viable alternatives out there for China, as it’s companies like Shenghe are already buying from everyone and sundry everywhere on the planet.
So who is Shenghe Resources?
In a recent interview RareX’s Jeremy Robinson referred to Shenghe as a “non-S.O.E.” (i.e. non state-owned enterprise). We beg to differ.
Hu Zesong 胡泽松, 58, Chairman and Communist Party Secretary of Shenghe Resources, started his career in 1983 at what is today known as China National Institute of Multi-Purpose Utilisation of Mineral Resources (IMUMR) in Sichuan province, a work unit under the Chinese Academy of Geological Sciences, subordinated to the Ministry of Land Resources, but ultimately controlled by China’s Ministry of Finance.
Chinese publications and also Shenghe take the shortcut and state IMUMR is 100% owned by the Ministry of Finance.
Hu served as the deputy director of the Political Department (“party cell”) of IMUMR, as director of the Emeishan pilot test base, as assistant to the director, deputy director and finally as president and party secretary of the whole work unit. (Communist Party cells are mandatory in each China company over 25 persons, whether state-owned or private. If you ever receive a namecard from a company in China that includes the title ‘party secretary’, you are likely talking to the person who calls the shots).
Hu also served as a director of the Chinese Academy of Geological Sciences, the unit that IMUMR is subordinated to, i.e. he was controlling himself.
On July 1, 1998, IMUMR set up the company Leshan Shenghe Resources, a rare earth processing company, together with some private interests and Sichuan Juxing Enterprise Group Co., Ltd, Sichuan’s largest chemical company at that time. IMUMR held 34.4% of the shares, a blocking minority under Chinese law. Actually, this kind of blocking minority by the state basically applies to all stock-listed state-owned enterprises. There are variations and exceptions here and there, but fundamentally this is the concept.
Over time, IMUMR and Shenghe set up a couple of affiliate companies but these are not the subject here.
Taiyuan University Engineering Tiancheng Technology Co., Ltd. (Shanxi province) had been listed on the Shanghai Stock Exchange on May 14, 2003. In the first quarter of 2013 the Shanxi Provincial Administration for Industry and Commerce approved a reverse merger of Tiancheng and Shenghe, so on March 6, 2013 Shenghe Resources Holdings Co., Ltd. got backdoor-listed on the Shanghai Stock Exchange.
Upon listing IMUMR stake in Shenghe was reduced to 20% and following a capital increase the stake was further reduced to 14.04%.
Source: Shenghe Resources website (2019)
That was in accordance with a “hip” model at that time, the state-private “mixed ownership model”. The underlying idea was, private capital participation would enable state projects and keep them efficient. In reality, though, private investors in these mixed ownership projects were being steamrolled by the state, with less than favourable economic results. It ran out of fashion.
Anyway, at the time Shenghe decided to tout itself as a hip “mixed ownership model.”
These are historically the 6 largest Shenghe shareholders:
Source: Shenghe Resources website (2019).
A quick word about Wang Quan Ji: Wang Quan Ji also holds 33.3% of the shares of Leshan Juxing New Materials Co., Ltd. (daugher co of Shenghe’s shareholder Sichuan Juxing) and 20.47% of Leshan Shenghe. He holds directorships of Shenghe and of China Rare Earth (Sichuan) Co., Ltd.
Right after listing, up to that point without mining, Shenghe acquired its main supplier Sichuan Han Xing Mining (remember all these names, they all pop up again).
It also acquired a 40% stake in what was to becomeVietnam Rare Earth and successively built it up to a 90% holding. The sellers were 2 Chinese nationals and 1 Japanese national of Chinese descent:
Source: Shenghe market announcement
And where do China Aluminum fit in?
On April 20, 2014, China Rare Earth (Sichuan) Co., Ltd. was established. Main shareholders:
33.5% China Rare Earth Co., Ltd . (who are 51% owned by state-owned China Aluminium)
30.5% Leshan Shenghe Rare Earth Co., Ltd.
20% Sichuan Han Xing Mining Industry Development Co., Ltd.
15% Grirem Rare Earth New Materials Co., Ltd. (controller: National Engineering Research Center for Rare Earth Materials by the Technology Institute Group Co., Ltd., formerly Beijing Nonferrous Metals Research Institute), daughter company of listed state-owned company Grinm Advanced Materials Co., Ltd.
6.24% Wang Quan Ji
Hu Zesong is director and vice president at China Rare Earth (Sichuan) Co., Ltd.
Recently, Shenghe and China Aluminium announced to share a monazite processing plant in Jiangsu, we reported. Also, there is the trade joint venture in Ningbo with China Nuclear Industry for the import of radioactive materials, e.g. monazite.
Apart from core company Leshan Shenghe Rare Earths Co., Ltd., Sichuan Province, Shenghe's participations (annual report 2019) are:
1. Shandong Weishan Steel Research Rare Earth Co., Ltd., Shandong Province, 4.3% in conjunction with China Aluminium
2. Yuli Rare Earth Co., Ltd., Sichuan Province (rare earth concentrates), 42.35% in conjunction with China Aluminium
3. Chenguang Rare Earth Co., Ltd., Ganzhou, Jiangxi Province, 100%
4. Wensheng New Materials Co., Ltd., Hainan Province, 100%
5. Kebray Co., Ltd., Sichuan Province, 71.43%
6. MP Materials, Mountain Pass, California, 9.99% of shares, but 100% of distribution (share reduced after MP listing)
7. Vietnam Rare Earth Co., Ltd., 90%
8. Greenland Minerals Ltd., 12.5% (diluted after)
9. Thai Xinyuan Ltd., Thailand (established "privately" by a Shenghe board executive, in process of getting formally integrated into Shenghe)
10. Shenghe Resources (Singapore) International Trading Co., Ltd. 100%
11. Shenghe Resources (Singapore) Pte., Ltd. 100%
12. Chengdu Runhe Shengjian Petrochemical Engineering Technology Co., Ltd. 100%
13. Sheng Kangning (Shanghai) Mining Investment Co., Ltd. 100%
14. Shenghe Resources (Dechang) Co., Ltd. 100%
15. Dechang Shenghe New Material Technology Co., Ltd. 100%
16. Sichuan Runhe Catalytic New Materials Co., Ltd. 100%
So, by and large, black on white, it is hard to establish if or not Shenghe are state-owned or only state-controlled, and how they would be considered a China Alumium group company.
Perhaps it becomes easier to understand if you know, that as a private entrepreneur in China you traditionally only get credit from banks against collateral in form of real estate or hard guarantees and perhaps some lending on exchange traded inventory. At a certain point you run out of real estate and guarantors among family, friends and fools, as well as inventory to borrow against. And that is where private entrepreneurship ends and politics begin (China’s largest “private” steel maker started off as a window frame manufacturer).
As regards Shenghe, it’s roots are clearly within realm of the state. No “private” company could pull off what they have created. At best one could follow Shenghe’s own slogan of “mixed ownership company”. But fact is, that no company could achieve any of this without being deeply intertwined with the state and party.
Therefore, in case of Shenghe Resources, we view the term “non-S.O.E.” as an enormous stretch beyond reality.
Since you read until here, you will certainly want to know some more of the Shenghe 2019 annual report (2020 annual report will be out in April 2021):
Total production 2019: 537,100 tons
NdPr metal 7,346 tons,
Terbium oxide/metal 48 tons
Dysprosium oxide/metal 375 tons
Monazite: 9,663 tons
Zircon sand: 76,700 tons
Titanium ore/rutile: 313,100 tons
Operating income: RMB 6,959,518,500 (+11.76%),
Operating profit: RMB 145,608,800 (-58.90%)
Net profit attributable to shareholders: RMB 101,531,700 (-64.55%).
Light rare earth:
Sichuan business sector, with Leshan Shenghe, Kebrui, and Hedi Mining (formerly known as Dechang County Polymetal Mining trial mining and dressing plant) as the main business entity, mainly engaged in light rare earth mining, smelting separation and metal processing business;
(2) Jiangxi business segment, with Chenguang Rare Earth, Quannan New Resources, Bulai Terbium, etc. as the main business The main body is mainly engaged in the separation of medium and heavy rare earth ore, rare earth waste recycling and metal processing;
(3) Hainan business segment, with Hainan Wensheng, Haituo Mining, Fujian Wensheng, Fangchenggang Wensheng, etc. as the main operating entities, mainly engaged in zirconium Seashore placer sorting business such as titanium;
(4) Overseas business segment, with Shenghe Singapore and Singapore trading as the main business entities, mainly engaged in overseas rare earth ore trading business such as Mountain Pass in the United States.
Mountain Pass: The current annual output With more than 30,000 tons of REO, it has become the largest rare earth mine outside of China, and all products are sold by the company to domestic processing.
In order to expand the scale of production capacity and improve the manufacturing level, the company has promoted some investment projects, including: (1) Chenguang Rare Earth’s "12,000 tons of rare earth metal and alloy intelligent technological transformation project", and the original 8,000 tons of rare earth metal production infrastructure On July 17, 2015, the annual production capacity of 4,000 tons of rare earth metals and alloys was increased, and intelligent transformation was implemented;
(2) On July 17, 2015, Kebarui cooperated with the Ebian County Government on the "6000 tons of rare earth metal technology upgrade project investment framework Agreement. Since then, Kebrui and the Ebian County Government have successively carried out land supply, feasibility study, environmental assessment, project approval, site leveling, etc., are now ready for construction. During the reporting period, the company steadily promoted the above investment projects based on market conditions.
During the reporting period, due to industrial policies and other factors, the Thai plant of Xinyuan Rare Earth (Thailand) Co., Ltd. 鑫源稀土（泰国）有限公司 failed to complete and put into production on schedule, and the company failed to complete its acquisition. The company has signed a supplementary agreement with the counterparty to extend the acquisition period and intends to continue the acquisition.
Thanks for reading and have a great start of the Year of the Metal Ox!