Source: Market value
Author | Wooden Box
The profitability depends on the steel cycle, the price of rare earth ore and the asset injection of Baotou Steel Group.
On May 13, Baotou Steel (600010. SH) At the general meeting of shareholders, the Proposal on the Implementation of Connected Transactions in 2023 and the Forecast of Daily Connected Transactions in 2024 was rejected, and the negative votes reached 315 million, accounting for about 72.5%.
Subsequently, the Shanghai Stock Exchange quickly issued a supervision letter to Baotou Iron and Steel Co., Ltd., and clarified the supervision requirements on the rejection of related party transactions related proposals of the company.
The shareholders of Baotou Steel voted against it because of the fact that Baotou Steel and Northern Rare Earth (600111. SH).
Can the related party transaction agreement between Baotou Steel and Northern Rare Earth be modified again? Can the price of rare earth in the north be increased? Is Baotou Steel essentially a steel manufacturing company or a resource stock? How much iron ore and rare earth are there?
"Steel+rare earth" dual wheel drive
In 2023, Baotou Steel's operating income will be 70.57 billion yuan, with two main businesses:
(1) The revenue of iron and steel business is 56.7 billion yuan, accounting for 80%. Its products cover pipes, plates, profiles and wire rods;
(2) Revenue from rare earth and other businesses was 13.4 billion yuan, accounting for 19%.
Baotou Steel's dual main business of "steel+rare earth" determines that the performance is cyclical.
From the perspective of Baotou Steel's revenue, the revenue in recent years fluctuated greatly. From 2021 to 2023, the operating revenue was 86.18 billion, 72.17 billion and 70.57 billion respectively, with year-on-year changes of 45.4%, - 16.3% and - 2.2%.
(Source: Market value Fengyun App)
Non net profit deduction also fluctuates greatly: the non net profit deduction from 2020 to 2023 is 460 million, 2.86 billion, - 830 million and 430 million respectively.
(Source: Market value Fengyun App)
2021 is a big year for the bull market of non-ferrous metals (iron and steel belong to ferrous metals and rare earth belong to rare metals). Baotou Steel and Northern Rare Earth have also started to boom since July. This year, the income and profit of Baotou Iron and Steel Co., Ltd. increased sharply year on year.
(Performance in 2021)
So the performance of Baotou Steel is actually based on the prosperity of nonferrous metals.
From 2022 to 2023, the steel and rare earth industries are not very prosperous. At that time, the key words of the whole macro-economy are "demand contraction, supply shock, and weaker expectations":
(1) The iron and steel industry is still oversupply, and the industry is in a situation of "weakening demand, falling prices, high costs, and declining profits";
(2) The supply of rare earth market has increased steadily, the downstream demand growth is less than expected, the demand pull effect is insufficient, and the average price has decreased year-on-year.
Therefore, in 2023, the non net profit deducted will be only 430 million, and in 2022, it will even lose 830 million.
(2021-2023 performance)
According to the performance of Baotou Steel, although the rare earth market is depressed, Baotou Steel sells rare earth mineral resources, which is very profitable. On the contrary, the steel business has dragged down the performance.
(Composition of gross profit from 2019 to 2023)
The loss of the steel business led to the poor performance of Baotou Steel. The shareholders began to be dissatisfied, thinking that the price of Baotou Steel's shares sold to Northern Rare Earth was too cheap.
One of the most intuitive data is that in the first three quarters of 2022, Baotou Iron and Steel Co., Ltd. lost more than 9 billion yuan in net profit after deducting non attributable profits, while Northern Rare Earth made a whopping 4.6 billion yuan.
This dissatisfaction reached its climax in 2022 and has continued to this day.
Baotou Steel Co., Ltd.: has the attribute of resource stock
Baotou Steel Group (Baotou Iron and Steel Group Co., Ltd.) is the controlling shareholder of Baotou Steel Group and Northern Rare Earth, and the actual controller is the Inner Mongolia government. In 2023, Baotou Steel Group will hold 55.24% of the shares of Baotou Steel Group and 36.84% of the shares of Northern Rare Earth.
(Control structure of Baotou Steel, 2023 annual report)
(Control Structure of Northern Rare Earth, 2023 Annual Report)
Among them, Northern Rare Earth also holds 0.58% of Baotou Steel, the fourth largest shareholder.
(Top 4 shareholders in 2023)
According to Baotou Steel Group's positioning of Baotou Steel and Northern Rare Earth:
(1) As a resource-based enterprise, Baotou Steel Group promises that its mineral resources and development projects will be preferentially injected into Baotou Steel Co., Ltd. Baotou Steel Co., Ltd. is the only integrator of Baotou Steel Group's upstream mineral resources such as iron, nonferrous metals, coal and corresponding products;
(2) Northern rare earth positioning is rare earth smelting, separation and deep processing, and its raw materials are from Baotou Steel.
(Reply to the inquiry letter of Baotou Steel on November 25, 2016)
Baotou Steel has repeatedly mentioned in its annual report that the strategy should be transformed from a traditional steel enterprise to a resource-based enterprise. Feng Yunjun believes that the core is the support and asset injection of Baotou Steel Group:
(1) In 2013, a fixed increase of 6 billion was raised to acquire 100% of the equity of Baotou Iron and Steel Group Barun Mining Co., Ltd. and the mining right of Baiyunebo Iron Mine West Mine from Baotou Iron and Steel Group, and the mining right of Baiyunebo Iron Mine West Mine (the iron ore mining right of comprehensive utilization of rare earth) was owned; Then, through its own funds, it completed the acquisition of 100% of the equity of Guyang Mining Co., Ltd. of Baotou Steel Group from Baotou Steel Group, and owned the mining rights of Gongyi Mingiron Mine, Zenglongchang Quartz Mine and Dolomite Mine respectively;
(2) In 2015, Baotou Iron and Steel Co., Ltd. acquired from Baotou Iron and Steel Group the mineral processing related assets, the iron processing related assets of the Baiyunebo Mine Comprehensive Utilization Project and the tailings pond assets with a fixed increase of 29.8 billion yuan, and has rich resources such as iron and rare earth;
(3) In 2017, Baotou Steel Co., Ltd., with its own capital of 710 million yuan, acquired the assets related to rare earth and niobium selection in the Baiyunebo Comprehensive Utilization Project of Baoshan Mining Company.
The resources of Baotou Steel Group are mainly Baiyunebo Mine:
(1) Baiyunebo Mine is a world-famous resource treasure house, with 1.4 billion tons of proven iron ore reserves; The reserves of rare earth oxide are 39 million tons, ranking first in the world; The reserves of fluorite are 130 million tons, ranking second in the world; The reserve of niobium is 6.6 million tons, ranking second in the world;
(2) Baiyunebo Mine is divided into main mine, east mine and west mine. Only west mine is injected into the listed company of Baotou Steel, but the main mine and east mine are completed by Baiyunebo Iron Mine of Baotou Steel Group, and the ore is exclusively supplied to Baotou Steel;
(3) Therefore, there are many related transactions between Baotou Steel and related parties of Baotou Steel Group. For example, in 2023, Baotou Steel will purchase or sell more than 10 billion yuan from related parties of Baotou Steel Group.
(Purchase of Baotou Steel from related parties of Baotou Steel Group, 2023)
Baotou Steel's resources mainly include:
(1) Baiyunebo Ore West Mine, of which iron ore reserves are 670 million tons, and the average grade of rare earth is 1.07%;
(2) The tailings pond of Baiyunebo Mine has a resource reserve of 200 million tons and a rare earth oxide reserve of 13.82 million tons, ranking second in the world. Rare earth is exclusively supplied to the north.
(3) The reserves of fluorite are 43.92 million tons, and fluorite is also exclusively supplied to Jinshi Resources The main body is Inner Mongolia Jinebo Fluorochemical Co., Ltd., with an amount of 580 million in 2023.
(Equity structure of Inner Mongolia Jinebo Fluorochemical Co., Ltd., Tianyan app)
For the gold and stone resources, you can see the previous research report of Feng Yunjun.
(Market value Fengyun APP)
Interest disputes caused by price rise of rare earth
Let's first take a look at the most important rare earth resources, which are concentrated in the Baiyunebo Mine Tailings Pond. Tailings resources are tailings sludge discharged from the concentrator of Baotou Steel Group after beneficiation, which is diverted to each branch pipe through the main pipe and finally discharged into the tailings dam.
The tailings produced from the ore supplied by Baotou Steel Group after beneficiation belong to Baotou Steel Group, where the core rare earth resources are located.
(Resource quantity of tailings pond, Guojin Securities Research report)
From the perspective of upstream and downstream relationship, North Rare Earth is the customer of Baotou Steel. Since 2017, both parties have signed the Rare Earth Concentrate Supply Contract:
The pricing of related party transactions of rare earth concentrate is determined by both parties through consultation based on the price of rare earth oxide, after deducting manufacturing expenses and industry average profits, and taking into account factors such as processing yield and rare earth concentrate quality requirements.
In March 2021, the price was adjusted again. It is proposed to adjust the sales price of rare earth concentrate to 16269 yuan/ton (dry volume, REO=51%) excluding tax from January 1, 2021.
This time, both parties also agreed that the transaction price of rare earth concentrate should be determined quarterly, especially when the price of products in the rare earth market fluctuates greatly, the transaction price of rare earth concentrate should be adjusted accordingly.
Originally, the price of rare earth was stable from 2017 to 2021, but due to the strong demand for new energy in the downstream, the market price of rare earth concentrate began to rise sharply after July 2021. At this time, the market price is much higher than the agreed price.
(Market price of rare earth concentrate and related agreement price of the company, research report of Guojin Securities)
On January 7, 2022, the agreed price of rare earth was adjusted to 26887.20 yuan/ton, up 65%. But what made the market realize that Baotou Steel is the resource side is the price adjustment on June 21, 2022. It is proposed to adjust the price to 39189 yuan/ton excluding tax from July 1, 2022, an increase of 46%.
(The supply of Baotou Steel's rare earth to the north, Huaan Securities ）
The next day, Baotou Iron and Steel Co., Ltd. went up and down, while Northern Rare Earth Co., Ltd. went down. However, this price increase was opposed by the shareholders of North Rare Earth on July 15, 2022, which was not approved by the shareholders' meeting. In the end, Baotou Steel Group had to negotiate the interests of both shareholders, and the price was adjusted to 35313 yuan/ton.
(Announcement in December 2022)
Feng Yunjun's opinion on the rare earth ore transaction between Baotou Steel and Northern Rare Earth is as follows:
(1) This is troublesome, because Baotou Steel and Northern Rare Earth are both listed companies, and shareholders of both sides have interest demands. The interests are opposite, that is, "zero sum game". Any price adjustment will cause dissatisfaction of both sides, and it often happens that their respective shareholders' meetings do not pass related party transactions;
(2) Although Baotou Steel said that it could sell rare earth concentrate through bidding, auction and other means in the open market, in China, rare earth separation is produced by designated companies with indicators, and northern rare earth accounts for 70% of the quota of domestic rare earth separation, so it is difficult to raise the price to the market-oriented price;
(3) Although Baotou Iron and Steel Group finally negotiated the pricing, the fundamental issue of the shareholders' interest dispute must be resolved through integration, the overall listing of the group and other ways.
Baotou Steel has a rare earth production capacity of 450000 tons, but the specific production indicators are actually determined by the national ministries and commissions.
(Performance exchange of the third quarter report on November 10, 2022)
Since 2018, the total index of rare earth mining and smelting has increased every year.
(Rare earth supply index, 2023 annual report)
(Rare earth separation control, data source: Guolian Securities ）
With both quantity and price rising from 2020 to 2022, the amount of rare earth ore sold by Baotou Steel Rare Earth to North Rare Earth is also growing rapidly: 2.11 billion, 4.13 billion and 8.33 billion respectively from 2020 to 2022. In 2023, although the agreed price will decrease, the amount will also increase to 9.1 billion yuan.
(Baotou Steel, 2023 Annual Report)
It can be seen from the annual report data of Northern Rare Earth that the agreed prices of Baotou Steel to sell rare earth concentrate to Northern Rare Earth from 2020 to 2023 are 12600/ton, 16300/ton, 29700/ton and 26200/ton respectively.
(2023 Annual Report of Northern Rare Earth)
(Northern Rare Earth, 2022 Annual Report)
(Northern Rare Earth, 2021 Annual Report)
(Northern Rare Earth, 2020 Annual Report)
Poor profitability of steel business
In 2023, Baotou Iron and Steel Co., Ltd. will consume 22.59 million tons of iron ore, of which 9.35 million tons will be self supplied, accounting for 41%.
（ Baosteel 2023 Annual Report)
This proportion is not low, but the steel business of Baotou Iron and Steel Co., Ltd. is losing money. It is better to sell iron ore directly.
Compared with Baosteel, the non net profit deducted from 2022-2023 is still more than 10 billion yuan.
(Baosteel's profitability, wind)
The gross profit margin of all products (pipes, plates, profiles, wire bars) of Baotou Steel's steel business is low.
(Profitability of Baotou Steel's steel products in 2023)
Feng Yunjun summed up that the gross profit rate of steel products from 2022 to 2023 would be - 3.9% and - 2.7% respectively.
(Profitability of Baotou Steel's steel products in 2023)
Compared with Baosteel's gross profit margin from 2022 to 2023, it is positive, 5.84% and 6.2% respectively.
In the process of asset loading for many years, Baotou Steel has raised more than 46 billion yuan, but the cumulative dividends are only 4.4 billion yuan. The dividends in the last 11 years are also unsatisfactory, and the profits brought by resources have not been reflected.
(Dividends after 2013)
summary
Baotou Iron and Steel Co., Ltd. is a "steel+rare earth" dual main industry, with losses from 2022 to 2023, while the rare earth sector is profitable:
(1) From the supply side, the supply side of the iron and steel industry where Baotou Steel is located has not been improved. The capacity of iron and steel has been increased for many years, but there is still overcapacity. In recent years, the rectification of the rare earth industry has basically taken shape Chinese rare earth China's rare earths are no longer sold at the price of cabbage, as is the pattern of rare earths in the north, south and north;
(2) However, the most direct reason for Baotou Steel's loss is the problem of steel business operation and product competitiveness. After all, the net profit of Baosteel, the leader of steel manufacturing, will exceed 10 billion from 2022 to 2023. What's more, Baotou Steel has iron ore resources, which Baosteel does not have;
(3) From the perspective of resources, Baotou Iron and Steel Co., Ltd. is blessed with rare earth resources. Compared with the northern rare earth resources, Libra's focus is actually biased towards Baotou Iron and Steel Co., Ltd., after all, it is the resource side.
In fact, the profitability improvement of Baotou Steel is also very simple, focusing on three directions:
(1) The cycle reversal of the steel industry, whether supply side reform or demand cycle;
(2) The price increase of rare earth is based on the recovery of demand for new energy, but there is little room for price increase of rare earth in the north. It is still based on the previous pricing formula;
(3) The injection of other asset resources (main mine and Dongkuang) of Baotou Iron and Steel Group, for example, the profit assessment requirements of state-owned enterprises or the solution of related party transactions.
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