China Northern Rare Earth Plans to Invest 153 Million to Establish a Joint Venture with Jinlong Rare Earth to Build a 5,000 mt Rare Earth Oxide Separation Production Line Project

SMM January 6 News:

On January 6, the stock price of China Northern Rare Earth rose. As of 10:53 on the 6th, the stock increased by 2.75%, reaching 20.89 yuan/share.

On December 31, China Northern Rare Earth announced that to further enhance its rare earth resource supply capacity and high-quality comprehensive utilisation level, it plans to leverage complementary advantages in technology, market, brand, talent, production operations, and management for coordinated development. The company aims to optimise its product structure, enrich product categories, strengthen its rare earth resource advantages and raw material industry competitiveness, and jointly establish a demonstration line for rare earth separation with a complete range of products and leading process technology. This initiative is expected to enhance the company's high-quality development level and accelerate the construction of the "two rare earth bases." The company intends to invest 153 million yuan of its own funds to establish a joint venture with its associate company, Fujian Jinlong Rare Earth Co., Ltd., named Northern Jinlong (Baotou) Rare Earth Co., Ltd. (tentative name, subject to final approval by the market supervision authority, hereinafter referred to as the new company). The new company will serve as the main entity for constructing a 5,000 mt rare earth oxide separation production line project, which is expected to be completed by the end of 2026. The total investment for the project is estimated at 457.013 million yuan, including 399.9824 million yuan for construction and 48.5737 million yuan for initial working capital.

According to the announcement, the new company will have a registered capital of 300 million yuan, with China Northern Rare Earth holding a 51% stake as the controlling shareholder, and Jinlong Rare Earth holding the remaining 49%. The new company will be included in the consolidated financial statements of China Northern Rare Earth.

Regarding the partner's background, China Northern Rare Earth stated that Jinlong Rare Earth is a subsidiary of Xiamen Tungsten Co., Ltd., primarily engaged in rare earth separation, advanced rare earth processing, and the R&D and application of rare earth functional materials. Its business includes the production, R&D, processing, and sales of rare earth oxides, rare earth metals, luminescent materials, and rare earth magnetic materials. Jinlong Rare Earth has a good credit standing and is not listed as a dishonest entity. China Northern Rare Earth holds a 3% stake in Jinlong Rare Earth, making it an associate company. Jinlong Rare Earth is also a customer of China Northern Rare Earth's products, but there are no other relationships in terms of ownership, business, assets, debts, or personnel.

The economic benefit forecast in the announcement indicates that, based on a 15-year operating period, the project is expected to generate an average annual operating income of 829.3589 million yuan, with average annual total costs of 742.9102 million yuan, resulting in an average annual total profit of 65.0465 million yuan and an average annual net profit of 48.7849 million yuan. The post-tax internal rate of return for this investment is estimated at 12.04%, with a static payback period of 7.73 years and a dynamic payback period of 9.07 years.

Regarding the impact of this investment, China Northern Rare Earth stated that this initiative is a significant step to enhance its control over rare earth resources, improve the supply capacity of rare earth raw material products, accelerate the development of new production capabilities, strengthen and extend the industry chain, and promote high-quality development. By leveraging complementary advantages and comprehensive collaboration, the two parties aim to form a competitive synergy, explore market-competitive business models, and develop profitable products. The new company is expected to become an advanced enterprise with full rare earth element separation capabilities, ensuring high-quality raw material supply for downstream rare earth new materials and applications industries, and maintaining the stability and security of the industry chain and supply chain. This will enhance the company's industry chain competitiveness and value creation capabilities, further strengthening its industry influence and aligning with national industrial policies and the company's strategic plans. The investment is in the overall interest of the company and its shareholders. It will not significantly impact the company's financial position, operating results, or cash flow, and the overall risk is controllable. The new company, being majority-owned by China Northern Rare Earth, will be included in its consolidated financial statements.

China Northern Rare Earth also outlined the main risks and countermeasures for this investment, noting that the primary risk lies in the profitability of the new company. Potential risks include fluctuations in rare earth product prices due to market supply and demand dynamics, macroeconomic volatility, cyclical changes in downstream industries, or raw material price fluctuations, which could affect market demand and profitability. To address these risks, the new company will establish a comprehensive risk management system, conduct risk assessments and early warnings for macroeconomic and market changes, and implement measures such as marketing innovation and benchmarking improvements. It will enhance product and service quality, expand product application fields, and increase market share. Financial structures will be optimised, inventory management improved, and long-term partnerships with suppliers established to mitigate raw material price volatility. These measures aim to overcome unfavourable factors and minimise the impact of risks on the new company.

Additionally, according to the Qichacha app, Northern Zhaobao Magnetic Industry (Inner Mongolia) Co., Ltd. was recently established, with Lian Hua as its legal representative and a registered capital of 100 million yuan. Its business scope includes the production and sales of magnetic materials, manufacturing and wholesale of electronic components, and retail of electronic components. Qichacha's equity penetration shows that the company is jointly owned by China Northern Rare Earth, Xici Technology, and others.

On December 11, China Northern Rare Earth responded on the investor interaction platform:The company produces and sells high-performance rare earth-based hydrogen storage alloy powders, with a market share of approximately 30%, ranking among the top in the domestic industry. The newly developed solid-state hydrogen storage materials and devices, featuring high hydrogen storage density, good safety, and mature production processes, are widely used in stationary hydrogen energy fields such as distributed combined heat and power, on-site hydrogen production storage, and metal hydride compressors, as well as in mobile hydrogen fuel applications such as scooters, forklifts, hydrogen-powered heavy trucks, and ships.

When asked, "The parent company's profit in H1 was 161 million yuan, but the consolidated net profit attributable to the parent was only 45 million yuan. Which subsidiaries incurred significant losses?"China Northern Rare Earth responded on December 11 on the investor interaction platform: In H1, the rare earth industry faced weak supply and demand due to market conditions, leading to losses for most publicly listed firms. The low consolidated net profit attributable to the parent company was mainly due to losses at the parent company level. The parent company's financial statements for H1 showed profits resulting from investment income from subsidiary dividends, but this investment income was offset during consolidation.

China Northern Rare Earth's previously disclosed Q3 2024 report showed that in the first three quarters, the company achieved operating revenue of 21.56 billion yuan, down 13.50% YoY, and net profit attributable to the parent of 405 million yuan, down 70.64% YoY. The decline in net profit was attributed to lower selling prices of major rare earth products during the reporting period, resulting in reduced gross profit. From January to September 2024, the company's production of rare earth smelting and separation products increased by 12.95% YoY, rare earth metal products by 39.46% YoY, and rare earth functional material products by 21.35% YoY, with further improvements in product first-pass yield. During the same period, sales of rare earth products increased YoY, with rare earth smelting and separation products up 20.45%, rare earth metal products up 27.90%, and rare earth functional materials up 19.65%. Compared to H1 2024, Q3 2024 saw steady growth in sales of major rare earth raw material products, functional material products, and terminal rare earth permanent magnet motors.

In the Q3 report, China Northern Rare Earth noted that since 2024, the rare earth market has been generally weak due to lower-than-expected downstream demand growth. Prices of major rare earth products showed a fluctuating downward trend overall, but the market began to recover in Q3, with prices of major rare earth products steadily rebounding. In the first three quarters of 2024, prices of rare earth lanthanum products declined due to oversupply, while cerium product prices stabilised after peaking, driven by demand in the magnetic material sector. Prices of Pr-Nd products fluctuated downward but rebounded and stabilised in Q3 as downstream orders increased and the second batch of rare earth mining and smelting separation quotas for the year was issued. Demand for downstream rare earth magnetic materials, polishing materials, and hydrogen storage materials remained insufficient, with intense market competition and overall weak performance. However, the rare earth permanent magnet motor industry experienced rapid growth, driven by downstream sectors such as NEVs, variable frequency air conditioners, and wind power.

Reviewing the price trends of Pr-Nd alloy in the first three quarters:

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The price trend of Pr-Nd alloy in the first three quarters of this year showed an overall decline. For example, the average price of SMM Pr-Nd alloy was 540,000 yuan/mt on December 29, 2023, and 528,500 yuan/mt on September 30, 2024, representing a decrease of 11,500 yuan/mt, or 2.13%. Comparing the average price of 659,623.63 yuan/mt in the first three quarters of 2023 with 475,038.67 yuan/mt in the same period of 2024, the average price of Pr-Nd alloy this year fell by 184,584.96 yuan/mt, a YoY decrease of 27.98%.

Since January, the rare earth market has been relatively quiet. Upstream suppliers remain reluctant to sell at low prices, while downstream markets show low acceptance of high-priced products, leading to intense price negotiations between upstream and downstream players. Due to low market activity, overall transactions have been mediocre.

Meanwhile, most magnetic material enterprises are expected to halt production and take holidays around January 20, further reducing short-term market momentum to break the current stalemate. As a result, Pr-Nd product prices are likely to remain stable under these conditions. On the other hand, medium-heavy rare earth prices may fluctuate upward due to news of continued disruptions in Myanmar ore transportation. Under the current market backdrop, SMM expects oxide supply to tighten after the holiday, with oxide prices potentially continuing their slight upward trend in early February. However, as separation plants gradually resume operations, rare earth prices are expected to stabilise.

Recommended Reading:

》Rare Earth Market Fluctuations in December: How Will Prices Develop? [SMM Analysis]

》2024 Rare Earth Market Review and Future Outlook [SMM Analysis]