Potash giant Salt Lake Co., Ltd. (000792.SZ) announced late at night that it revealed huge sums of money to be paid at sky-high prices.

On the evening of September 18, Salt Lake Co., Ltd. issued an announcement stating that in order to increase the scale of mining licenses and expand mining types, the Qinghai Natural Resources Department commissioned a third party agency to evaluate the mining rights in Biele Beach.

According to the “Evaluation Report”, Salt Lake Co., Ltd. overproduced 29.713,900 tons of potassium chloride and 108,900 tons of lithium carbonate. To achieve the change in mining rights, Salt Lake Co., Ltd. needed to pay 1,897 billion yuan in mining rights concession proceeds.

Salt Lake Co., Ltd. expects that if all proceeds from mining rights concessions paid are not capitalized and are fully included in current costs, the net profit attributable to the parent company for the current period will be reduced by about 1,612 billion yuan (after deducting corporate income tax), accounting for 10.36% of the net profit in 2022. It is not expected to have a significant adverse impact on the financial situation.

From a fundamental point of view, Salt Lake Co., Ltd. recorded a sharp drop in net revenue and profit of more than 40% year-on-year in the first half of this year due to pressure on the prices of potash fertilizer and lithium carbonate, two major businesses of Salt Lake Co., Ltd. Under these circumstances, if a one-time payment is made, the profit performance of Salt Lake Co., Ltd. will be further pressured.

TradeWind01 (ID: TradeWind01) learned from relevant sources of Salt Lake Co., Ltd. that the “Evaluation Report” can only be used as a reference for the Qinghai Provincial Department of Natural Resources. Currently, there is still uncertainty about the actual payment amount and payment method of Salt Lake Co., Ltd. Until now, Salt Lake Co., Ltd. had no precedent of paying such a large amount of money.

The day after the announcement was made, on September 19, Salt Lake Co., Ltd. closed down 1.13% at 17.51 yuan/share, a drop of 22.83% during the year.

Pay off the account for “overproduction”

This $1.9 billion sky-high fee for Salt Lake Co., Ltd. is considered a repayment of its past “overproduction” activities.

According to public information, Salt Lake Co., Ltd. currently holds a total of two “mining licenses”.

First, it can mine potassium salt, sodium chloride, magnesium chloride, and lithium chloride from the Chaerhan salt lake lithium-magnesium salt mine, with a production scale of 600,000 tons/year; second, it can mine potassium salt, sodium chloride, and magnesium chloride from the Qaidam Charkhan potassium-magnesium salt mine in the Bieltan mining area (hereinafter referred to as “Beletan mining area”), with a production scale of 700,000 tons/year.

This time, the mining rights change applied for by Salt Lake Co., Ltd. only involved the Bieletan mining area. The production scale applied for by Salt Lake Co., Ltd. was raised from 700,000 tons/year to 4.4 million tons/year. The mining method was changed from open pit mining to open-top+underground mining, and lithium chloride minerals were added to the mining types.

The Qinghai Department of Natural Resources commissioned Qinghai Jinshi Asset Evaluation and Consulting Co., Ltd. to evaluate the mining concession income of mining rights (some resources) in the Bieletan mining area. According to the “Evaluation Report”, Salt Lake Co., Ltd. “overproduced” 29.713,900 tons of potassium chloride and 108,900 tons of lithium carbonate, respectively. Salt Lake Co., Ltd. was required to pay 1,897 billion yuan in mining rights concession rights.

Salt Lake Co., Ltd. stated that payment of mining concession rights is a necessary condition for the company to process the “mining license” change, which will have a positive impact on the future increase in the development of the resources of Char Khan Salt Lake. However, as of the announcement date, it has not received any notice from the relevant authorities regarding the expropriation of the mining rights concession proceeds.

A relevant person from Salt Lake Co., Ltd. told TradeWind01 (ID: TradeWind01) that the concession equity of 1,897 billion yuan assessed in the “Evaluation Report” can almost be used as a reference for fees collected by the Department of Natural Resources, and the exact amount is currently uncertain.

As for the payment method, the person mentioned above said they would choose according to their own financial situation, such as one-time billing and installment payment.

Salt Lake Co., Ltd. stated in the announcement that assuming that all proceeds from mining rights concessions paid are not capitalized and included in current costs, it is expected to reduce the net profit attributable to the parent company by about 1,612 billion yuan (after deducting corporate income tax) for the current period (after deducting corporate income tax), accounting for about 10.36% of net profit in 2022.

Judging from the balance and liability situation of Salt Lake Co., Ltd. in the first half of this year, there is no pressure to pay this amount.

As of the first half of this year, due to the fact that Salt Lake Co., Ltd. had large acceptance drafts due and disbursed, its monetary capital increased 57.9% year on year to 21,988 billion yuan. Furthermore, Salt Lake Co., Ltd.'s current liabilities are only 7.335 billion yuan, including 2.75 billion yuan of non-current liabilities due within one year. The funds on hand are sufficient to cover short-term debt.

Price pressure

Compared to the cost of paying the proceeds from the sale of mining rights, the fall in the prices of the two core businesses, potassium chloride and lithium carbonate, may put more pressure on Salt Lake Co., Ltd.

Since the cyclicality of non-ferrous commodities cannot be avoided, the prices of potassium chloride and lithium carbonate both entered a downward cycle in the first half of this year.

This is directly reflected in the performance of Salt Lake Co., Ltd., which recorded revenue of 9,956 billion yuan in the first half of the year, a year-on-year decrease of 42.44%; realized net profit of 5.098 billion yuan, a year-on-year decrease of 44.33%.

Salt Lake Co., Ltd. is the largest producer of potash fertilizer in China. Potassium chloride production accounts for about 70% of the total domestic output, and also contributed more than 60% of its revenue in the first half of the year.

In the first half of this year, the volume and price of Salt Lake shares came under pressure at the same time. Sales were 2,137,700 tons, a year-on-year decrease of 27.78%; the average sales price decreased by 19.15% year-on-year to 2,935,000 yuan, driving a decrease of 8.13 percentage points in gross margin to 72.92%.

What is more than a problem is that Salt Lake Co., Ltd.'s other core business, lithium carbonate, which accounts for more than 30% of revenue, is facing the double pressure of insufficient downstream demand and declining prices.

In the first half of this year, Salt Lake Co., Ltd. achieved revenue of 3.353 billion yuan, a year-on-year decrease of 35.1%. While sales volume remained flat at 15,000 tons, the sales price decreased 35% year-on-year to 223,500 yuan. As a result, the gross margin of the lithium carbonate business fell 9.62 percentage points to 83.02%.

As the penetration rate of downstream new energy vehicles continues to increase, the lithium carbonate business is regarded by Salt Lake Co., Ltd. as an important performance growth point.

In an investor survey in September, Salt Lake Co., Ltd. said that the 30,000-ton lithium carbonate project in cooperation with BYD entered the trial production stage of pilot products last year. After verification of the pilot results, specific negotiations were made on the construction of the 30,000 ton lithium carbonate project.

TradeWind01 (ID: TradeWind01) learned from people involved in Salt Lake Co., Ltd. that the cooperation project with BYD has not yet started, and that it is necessary to wait for the technical verification results from BYD. Currently, there is no clear schedule.

However, with regard to the market prices of potassium chloride and lithium carbonate, the person mentioned above said that it is currently fluctuating greatly, and it is not convenient to judge the price trend.

In fact, according to Wind data, since the fourth quarter of last year, the prices of potassium chloride and lithium carbonate began to enter a downward cycle. Among them, the price of lithium carbonate once fell from over 500,000 yuan/ton to less than 200,000 yuan/ton.

Meanwhile, as prices fell, the stock price of Salt Lake Co., Ltd. also entered a downward channel and continued to fall.

By the close of trading on September 19, the stock price of Salt Lake Co., Ltd. had dropped 50% from its high of 35.13 yuan/share in July last year, with a drop of 22.83% during the year.

However, Salt Lake Co., Ltd. was favored by the Shaanxi Coal Industry (601225.SH), whose main business is also a commodity. The latter was dubbed a “stock god” last year because profits exceeded 6.5 billion yuan by investing in Longji Green Energy (601012.SH).

In the fourth quarter of last year, the Shaanxi coal industry first appeared in the top ten shares of Salt Lake Co., Ltd. and purchased 208 million shares, accounting for 3.83%. Immediately after that, it further increased its holdings to 4.9% in the first quarter of this year. It is only one step away from listing, which shows its optimistic attitude.