Proposed to acquire an 80% stake in an African copper mine and a $857 million debt for $2, what is Jin Chengxin's calculation?

Source of this article: Times Weekly Author: Liang Chunfu

Jin Chengxin (603979. SH) once again extended its downstream value chain to acquire an 80% stake in a copper mine in Africa for only $1.

Jin Chengxin announced on January 21 that the company intends to set up a new wholly-owned overseas subsidiary to acquire 80% of the shares of Lubambe Copper Mine Limited (hereinafter referred to as "LCML") held by Konnoco (B) Inc. (hereinafter referred to as KBI) for US$1. At the same time, it acquired the debt arising from the US$857 million loan provided by Lubambe Copper Holdings Limited ("LCHL") to LCML for US$1.

Source: Jin Chengxin announcement

In terms of the shareholding structure of the target company, private equity firm EMR Capital owns 80% of LCML through LCHL and KBI, and LCML wholly owns the Lubambe copper mine. The copper mine is located in Zambia, Africa, with a tenement valid until April 28, 2033, and an area of 5,813.04 hectares. As of September 30, 2023, the copper resource (proved + controlled + inferred) was 86.6 million tonnes grading 1.95% copper and 0.35% acid-soluble copper.

In other words, if the deal goes through, Kim will be able to take an 80% stake in the mine for just $1. At the same time, it obtained approximately $857 million of LCHL's claims against LCML at a price of US$1.

For Jin Chengxin, the deal seems to be a sure success.

But "you get what you pay for". Judging from the financial indicators disclosed by Jin Chengxin, the target company has poor ability to continue operations, has been losing money year after year, and is seriously insolvent. In order to keep the Lubambe copper mine running, Jin Chengxin also has to invest a large amount of cash.

On the afternoon of January 22, a reporter from the Times Weekly called the representative office of Jin Chengxin Securities as an investor, and the relevant staff said that the investment in the Lubambe copper mine will be invested in stages and will not have much impact on the company's cash flow, "I have not heard that the company has a financing plan." ”

initial The investment is about USD 300 million

According to the announcement, LCML is mainly engaged in the underground mining and beneficiation business of Lubambe copper mine, and its main product is copper concentrate. Since 2017, LCML has been a client of JCX, which provides mine construction and mining operations management services to the Lubambe Copper Mine, with contracts currently being fulfilled from June 1, 2023 to June 30, 2026. This shows that Jin Chengxin has a certain understanding of the resources and operation of the mine.

In fact, LCML's business situation is not optimistic. According to the audit report, in 2022 and from January to September 2023, LCML achieved net profit attributable to the parent company of -58.3234 million yuan and -60.3167 million yuan respectively. As of September 30, 2023, equity attributable to shareholders of the parent company was -1514.HK. 690,000 yuan, current assets of 25.7141 million yuan, current liabilities of 76.2764 million yuan, the company's net assets are negative, and the current risk is high. The Lubambe copper mine is designed to be 2.5 million tonnes per annum, but it has never reached production.

Or based on the above-mentioned reasons, EMR decided to withdraw and Jin Chengxin took over the copper mine.

In order to reverse the current operation status of LCML, Jin Chengxin plans to carry out technical optimization of the Lubambe copper mine, with an initial investment of about US$300 million. According to the company's feasibility study announcement released on the same day, the preliminary estimate is that the investment in the ramp-up period of the project is about US$114 million, the investment in maintaining operations is about US$197 million, and the average cash cost during the production period is US$83.75/ton. Based on the copper price of US$8,300/ton and the production schedule of 14 years, the average annual profit of the project is US$15,881,500, the after-tax profit is US$12,688,200, the after-tax financial net present value (i=10%) is US$84,191,000, the after-tax financial internal rate of return is 17.36%, and the after-tax payback period is 7.40 years.

However, Jin Chengxin also reminded that since the estimation of economic benefits is based on certain preset conditions, the results of sensitivity analysis show that sales revenue, operating costs and construction investment have a greater impact on the economic efficiency of the project.

In addition, pursuant to the proposed acquisition, LCHL will provide a US$40.5 million loan to the buyer, a wholly owned subsidiary of Kim Chengxin, which will be provided by the buyer to LCML through a loan to repay LCML's existing third-party senior commercial loans.

It should be noted that the loan will be repaid in accordance with the repayment agreement signed by the buyer and the seller, and if the repayment obligation agreed in the repayment agreement is not triggered, the buyer does not need to repay the loan to the seller.

At the same time, according to the repayment agreement between the two parties, whether to repay the loan and the proportion of the loan repayment are not only related to LCML's performance, but also depend on the upside of copper prices at that time. If the LME spot settlement price rises much, the subsidiary of Jin Chengxin will need to pay back more.

Source: Jin Chengxin announcement

According to the financial report, as of the end of September 2023, the balance of cash and cash equivalents of Jin Chengxin was 1.688 billion yuan. Jin Chengxin pointed out that the payment involved in this transaction will be paid in stages according to the agreement, and will not cause greater financial pressure on the company in the short term.

"Mining service + resources" walks on two legs

Founded in 1997, Jin Chengxin is a typical family business. The controlling shareholder of the company is Jincheng Chengxin Group Co., Ltd., which directly and indirectly holds 40.28% of the company's equity, and the actual controller is Wang Xiancheng, Wang Cicheng, Wang Youcheng, Wang Yicheng and Wang Yicheng. These five are siblings and have signed a concerted action agreement. Wang Qinghai, the current chairman of Jin Chengxin, is the son of Wang Xiancheng. The company's board of directors is also currently dominated by the Wang family.

At present, the company is mainly engaged in mine development service business, and expands to mine resource development business. Mine development service providers are located in the upstream of the mine resource development industry and provide services for mine resource development enterprises.

Specifically, mine development services cover every link of the mine development industry chain, which refers to the collection of supply and demand formed by mine resource development enterprises outsourcing part or all of the links and operation procedures of mine geological exploration, design and research, engineering construction, mining operation, mineral processing operation and other links to professional service providers. The service provider provides professional services according to the contract, the mine resource development enterprise is the property owner of the mine development project, and the mine resource development enterprise and the service provider agree on their respective rights and obligations through the contract.

In recent years, Jin Chengxin has gradually extended to the downstream of the industrial chain - the next acquisition of mines and construction and production. The acquisition of the Lubambe copper mine is one such example.

According to the 2023 semi-annual report of Jin Chengxin, the company already owns the phosphate mining rights of Guizhou Liangchahe Mining, the mining rights of Dikulushi Copper Mine in the Democratic Republic of the Congo, the mining rights of Lonshi Copper Mine in the Democratic Republic of the Congo (DRC) and 7 surrounding prospecting rights, and participates in Cordoba Mining in Canada. With the successive construction and commissioning of the company's own mine resource projects, the resource development business will gradually cover the mergers and acquisitions, exploration, construction, mining, mineral processing, smelting, product sales and other businesses of mining resources.

Source: Picture Worm Creative

In the first three quarters of 2023, Jin Chengxin achieved an operating income of 5.312 billion yuan, a year-on-year increase of 37.08%, and a net profit of 710 million yuan, a year-on-year increase of 60.7%. At the third-quarter performance briefing, Wang Qinghai, chairman of Jin Chengxin, said that the security situation in the area where the company's resource projects are located is generally stable, and the projects are operating normally. The company has conducted a risk assessment of the project, and formulated corresponding emergency plans, safety management measures, etc., and will continue to pay attention to the relevant situation and respond in a timely manner.

Talking about the impact of the acquisition of Lubambe Copper Mine, Jin Chengxin said that the company has provided mining engineering construction and mining operation management services for Lubambe Copper Mine for many years, and has a certain understanding of the resources and operation of the mine, according to the feasibility study, the follow-up implementation of the project is expected to achieve good benefits, and the acquisition of Lubambe Copper Mine is in line with the company's long-term development plan of "mining service + resources".